Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.14pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
+0.31pp
Lean +
Net-tone change vs last year's 10-K.
MD&A
-0.04pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
closing+6
adverse+3
negative+3
negatively+2
delay+2
Positive rising
satisfaction+1
satisfied+1
opportunities+1
beneficial+1
Risk Factors (Item 1A)
3,940 words
Item 1A.
RISK FACTORS
Salisbury is the registered bank holding company for the Bank, its wholly-owned subsidiary. Salisbury's business and activity are currently limited to the holding of the Bank's outstanding capital stock, and the Bank is Salisbury's primary investment.
An investment in Salisbury common stock entails certain risks, some of which are inherent in the financial services industry and others of which are more specific to the Bank’s business. Salisbury considers the most significant factors of which we are aware affecting risk in Salisbury common stock as those that are set forth below. These are not the only risks to which an investment in Salisbury common stock is subject, and none of the factors set forth below relates to the personal circumstances of individual investors. Investors should read this entire Form 10-K, as well as other documents and exhibits that are incorporated by reference in the 10-K and that have been filed with the SEC, in order to better understand these risks and to evaluate investment in Salisbury common stock.
Changes in interest rates and spreads could have a negative impact on earnings and financial condition.
Salisbury’s earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads, meaning the difference between interest rates earned on loans and investments, and the interest rates paid on deposits and borrowings, could affect Salisbury’s earnings and financial condition. Salisbury cannot predict with certainty or control changes in interest rates. Global, national, regional, and local economic conditions and the policies of regulatory authorities, including monetary policies of the FRB, affect interest income and interest expense. Salisbury has ongoing policies and procedures designed to manage the risks associated with changes in market interest rates.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
losses+2
problem+1
loss+1
slowdown+1
shortages+1
Positive rising
gain+1
best+1
improvement+1
enhancing+1
MD&A (Item 7)
11,169 words
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 ("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 thirteen ATMs located in: Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts and through its internet website (salisburybank.com).
In December 2022, Salisbury announced that it signed a definitive agreement to merge with and into NBT. The transaction is expected to close in second quarter 2023 subject to regulatory and Salisbury shareholder approval. Under the terms of the merger agreement, each outstanding share of Salisbury common stock will be converted into the right to receive 0.7450 shares of NBT common stock upon completion of the merger, which equated to a value of $35.00 per Salisbury share based on NBT’s volume-weighted average closing stock price of $46.98 for the 10-day trading period ending on November 29, 2022. The initial value reflected in the exchange ratio was approximately 187% of Salisbury’s tangible book value at September 30, 2022. The transaction is intended to qualify as a reorganization for federal income tax purposes, and as a result, the receipt of NBT common stock by shareholders of Salisbury is expected to be tax-free.
However, changes in interest rates still may have an adverse effect on Salisbury’s profitability. For example, high interest rates could also affect the volume o f loans that Salisbury originates, because higher rates could cause customers to apply for fewer mortgages, or cause depositors to shift funds from accounts that have a comparatively lower rate, to accounts with a higher rate, or experience customer attrition due to competitor pricing or disintermediation. If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower rates. If Salisbury is not able to reduce its funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then Salisbury’s net interest margin would likely decline.
Financial stress on borrowers could reduce Salisbury’s net income and profitability.
Financial stress on borrowers as a result of job losses, or other factors, could have further adverse effects on borrowers that result in higher delinquencies and greater charge-offs in future periods beyond that which is provided for in Salisbury’s allowance for loan losses, which would adversely affect Salisbury’s financial condition or results of operations.
Fluctuations in economic conditions and collateral values could impact the adequacy of Salisbury’s allowance for loan losses.
Salisbury’s business is subject to periodic fluctuations based on national and local economic conditions. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on Salisbury’s operations and financial condition. For example, declines in housing activity including declines in building permits, housing sales and home prices may make it more difficult for Salisbury’s borrowers to sell their homes or refinance their debt. Slow sales could strain the resources of real estate developers and builders. The ongoing economic uncertainty has affected employment levels and could impact the ability of Salisbury’s borrowers to service their debt. Bank regulatory agencies also periodically review Salisbury’s allowance for loan losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses Salisbury will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on Salisbury’s financial condition and results of operations. Salisbury may suffer higher loan losses as a result of these factors and the resulting impact on its borrowers.
Credit market conditions may impact Salisbury’s investments.
Significant credit market anomalies may impact the valuation and liquidity of Salisbury’s investment securities. Illiquidity could reduce the market value of Salisbury’s investments, even those with no apparent credit exposure. The valuation of Salisbury’s investments requires judgment, and as market conditions change investment values may also change.
Salisbury’s securities portfolio performance in difficult market conditions could have adverse effects on Salisbury’s results of operations.
Under GAAP, Salisbury is required to review Salisbury’s investment portfolio periodically for the presence of other-than-temporary impairment of its securities, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, Salisbury’s ability and intent to hold investments until a recovery of amortized cost, as well as other factors. Adverse developments with respect to one or more of the foregoing factors may require Salisbury to deem particular securities to be other-than-temporarily impaired, with the credit related portion of the reduction in the value recognized as a charge to Salisbury’s earnings. Market volatility may make it extremely difficult to value certain securities of Salisbury. Subsequent valuations, in light of factors prevailing at that time, may result in significant changes in the values of these securities in future periods. Any of these factors could require Salisbury to recognize further impairments in the value of Salisbury’s securities portfolio, which may have an adverse effect on Salisbury’s results of operations in future periods.
If the goodwill that Salisbury has recorded in connection with its acquisitions becomes impaired, it could have a negative impact on Salisbury’s profitability.
Applicable accounting standards require that the acquisition method of accounting be used for all business combinations. Under acquisition accounting, if the purchase price of an acquired company exceeds the fair value of the acquired company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill. At December 31, 2022, Salisbury had $13.8 million of goodwill on its balance sheet. Salisbury must evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to the results of operations in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on Salisbury’s financial condition and results of operations.
Salisbury’s ability to pay dividends substantially depends upon its receipt of dividends from the Bank.
Cash dividends from the Bank and Salisbury’s liquid assets are the principal sources of funds for paying cash dividends on Salisbury’s common stock. Unless Salisbury receives dividends from the Bank or chooses to use its liquid assets, it may not be able to pay dividends. The Bank’s ability to pay dividends to Salisbury is subject to its condition and profitability as well as its regulatory requirements.
Strong competition within Salisbury’s market areas may limit growth and profitability.
Competition in the banking and financial services industry is intense. Salisbury competes with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. As Salisbury grows, it may expand into contiguous market areas where it may not be as well-known as other institutions that have been operating in those areas for some time. In addition, larger banking institutions may become increasingly active in Salisbury’s market areas, may have substantially greater resources and lending limits and may offer certain services that Salisbury does not, or cannot efficiently, provide. Salisbury’s profitability depends upon its continued ability to successfully compete in its market areas. The greater resources and deposit and loan products offered by some competitors may limit its ability to grow profitably.
Salisbury and the Bank are subject to extensive federal and state regulation and supervision.
Salisbury and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect Salisbury’s lending practices, capital structure, investment practices, and dividend policy and growth, among other things. State and federal legislatures and regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect Salisbury in substantial and unpredictable ways. Such changes could subject Salisbury to additional costs, limit the types of financial services and products it may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on Salisbury’s business, financial condition and results of operations. While Salisbury has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned “Regulation and Supervision” in Item 1 of this report for further information.
Salisbury’s stock price may be volatile.
Salisbury’s stock is inactively traded and its stock price may fluctuate widely in response to a variety of factors including:
Actual or anticipated variations in quarterly operating results
Recommendations by securities analysts
New technology used, or services offered, by competitors
Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving Salisbury or Salisbury’s competitors
Failure to integrate acquisitions or realize anticipated benefits from acquisitions
Operating and stock price performance of other companies that investors deem comparable to Salisbury
News reports relating to trends, concerns and other issues in the financial services industry
Changes in government regulations
Geopolitical conditions such as acts or threats of terrorism or military conflicts
Changes in the economic environment of the market areas the Bank serves
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations could also cause Salisbury’s stock price to decrease regardless of Salisbury’s operating results. As a result, such change could adversely affect the liquidity of the market for Salisbury’s shares and reduce trading.
Salisbury’s ability to attract and retain skilled personnel may impact its success.
Salisbury’s success depends, in large part, on its ability to attract and retain key people. Competition for people with specialized knowledge and skills can be intense, and Salisbury may not be able to hire people or to retain them. The unexpectedloss of services of one or more of Salisbury’s key personnel could have a material adverse impact on the business because of their skills, knowledge of the market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services as well as the emergence of online bank competitors. The effective use of technology can increase efficiency and enable financial institutions to better serve customers and to reduce costs. However, some new technologies needed to compete effectively result in incremental operating costs. Salisbury’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Many of Salisbury’s competitors have substantially greater resources to invest in technological improvements. Salisbury may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on Salisbury’s business and, in turn, its financial condition and results of operations.
A failure involving controls and procedures may have an adverse effect on Salisbury.
Management regularly reviews and updates Salisbury’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on Salisbury’s business, results of operations and financial condition.
If customer information was to be misappropriated and used fraudulently, due to a breach of our systems, or those of third-party vendors or service providers, including as a result of cyberattacks, Salisbury could be exposed to potential liability and reputation risk as well as increased costs.
Risk of theft of customer information resulting from security breaches by third parties exposes banks to reputation risk and potential monetary loss. Like other financial institutions, Salisbury has exposure to fraudulentmisuse of its customers’ personal information resulting from its general business operations through loss or theft of the information and through misappropriation of information by third parties in connection with customer use of financial instruments, such as debit cards.
In addition, Salisbury relies upon a variety of computing platforms and networks over the internet for the purposes of data processing, communications and information exchange. Despite the safeguards instituted by Salisbury, any system is susceptible to a breach of security. In addition, Salisbury relies on the services of a variety of third-party vendors to meet Salisbury’s data processing and communication needs. The occurrence of any failures, interruptions or security breaches of Salisbury’s information systems or that of its vendors could damage Salisbury’s reputation, result in a loss of customer business or expose Salisbury to civil litigation and possible financial loss. Such costs and/or losses could materially impact Salisbury’s earnings.
Changes in accounting standards can materially impact Salisbury’s financial statements.
Salisbury’s accounting policies and methods are fundamental to how Salisbury records and reports its financial condition and results of operations. From time to time, the Financial Accounting Standards Board or regulatory authorities change the financial accounting and reporting standards that govern the preparation of Salisbury’s financial statements. These changes can be hard to predict and can materially impact how Salisbury records and reports its financial condition and results of operations. In some cases, Salisbury could be required to apply a new or revised standard retroactively, resulting in Salisbury restating prior period financial statements.
Changes and interpretations of tax laws and regulations may adversely impact Salisbury’s financial statements.
Local, state or federal tax authorities may interpret tax laws and regulations differently than Salisbury and challenge tax positions that Salisbury has taken on its tax returns. This may result in the disallowance of deductions or differences in the timing of deductions and result in the payment of additional taxes, interest or penalties that could materially affect Salisbury’s performance.
In addition, changes in tax law may adversely affect Salisbury’s lending business and performance, especially those provisions regarding the deductibility of residential mortgage interest and state property taxes.
Salisbury may be adversely impacted by the discontinuance of LIBOR as a short-term interest rate utilized for certain financing agreements.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company-specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The uncertainty as to the nature of alternative reference rates and the replacement of LIBOR may adversely affect the value of certain loans and investment securities.
The economic impact of the COVID-19 pandemic may continue to have an adverse impact on our business and results of operations.
The COVID-19 pandemic (hereafter referred to as “COVID-19”, “pandemic” or “virus”) has had a substantial adverse impact in the United States, including threats to public health, increased volatility in markets, and significant effects on national and local economies. The ultimate effect of the virus on Salisbury’s and the Bank’s business will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with certainty. Salisbury’s business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. COVID-19, or another highly contagious or infectious disease, could negatively impact the ability of our employees and customers to conduct such transactions and disrupt the business activities and operations of the Bank’s customers in the communities in which the Bank operates. Any sustained disruption to the Bank’s operations is likely to negatively impact Salisbury’s financial condition and results of operations. Notwithstanding Salisbury’s contingency plans and other safeguards against pandemics or other contagious diseases, the spread of COVID-19 could also negatively impact the availability of the Bank’s personnel who are necessary to conduct business operations, as well as potentially impact the business and operations of Salisbury’s third-party service providers who perform critical services for Salisbury. If the response to contain COVID-19, or another highly infectious or contagious disease, is unsuccessful, Salisbury could experience a material adverse effect on its business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on Salisbury’s intangible assets, investments, loans, loan servicing rights, or deferred tax assets.
In addition, Salisbury may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms. These and similar factors and events may have substantial negative effects on the business, financial condition, ability to pay dividends and results of operations of Salisbury, the Bank and its customers.
Salisbury may be adversely affected by new federal legislation.
Legislation enacted by the Biden administration may have an adverse impact on the conduct and profitability of businesses, including companies like Salisbury and the Bank through increased regulation and taxes.
Geopolitical events may trigger fluctuations in economic conditions which could adversely affect our financial condition and results of operations.
Salisbury’s business is subject to periodic fluctuations based on national and local economic conditions. Geopolitical events may trigger fluctuations that are not predictable, cannot be controlled and may have a material adverse impact on Salisbury’s operations and financial condition.
Merger-Related Risks
On December 5, 2022, Salisbury and NBT Bancorp Inc. (“NBT”) announced that they entered into a definitive merger agreement pursuant to which Salisbury will merge with and into NBT, and Salisbury Bank will merge with and into NBT Bank, N.A., in an all-stock transaction.
There is no assurance when or even if the merger will be completed.
Completion of the merger is subject to satisfaction or waiver of a number of conditions. There can be no assurance that the closing conditions, especially those closing conditions not within the parties’ control, will be satisfied or waived.
Failure to complete the merger with NBT could negatively affect Salisbury’s stock price and financial results.
If the pending merger with NBT is not completed for any reason, Salisbury’s ongoing business may be adversely affected and, without realizing any of the benefits of having completed the merger, Salisbury would be subject to a number of risks, including the following: (a) negative reactions from the financial markets, including negative effects on Salisbury’s stock price; (b) negative reactions from our customers and vendors; (c) Salisbury will have incurred substantial expenses and will be required to pay certain costs relating to the merger, including legal, accounting, and other fees, whether or not the merger is completed; and (d) Salisbury’s management team will have devoted substantial time and resources to matters relating to the merger, and would otherwise have devoted their time and resources to other opportunities that may have been beneficial to Salisbury. See Note 2 “Acquisitions and Dispositions” in the accompanying Consolidated Financial Statements for additional information.
Salisbury may be subject to uncertainties while the merger with NBT is pending, which would adversely affect Salisbury’s business.
Uncertainty about the effect of the merger on our employees and customers may have an adverse effect Salisbury’s business. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers and vendors to seek to change their existing business relationships with Salisbury. Employee retention may be particularly challenging during the pendency of the merger, as employees may experience uncertainty about their roles with the surviving corporation following the merger.
The merger agreement may be terminated and the merger with NBT may not be completed.
The merger agreement is subject to a number of customary closing conditions, including the receipt of regulatory approvals and the requisite approvals of Salisbury’s shareholders. Conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and, accordingly, the merger may be delayed or may not be completed. In addition, Salisbury and/or NBT may elect to terminate the merger agreement under certain circumstances.
Shareholder litigation could prevent or delay the closing of the pending merger with NBT or otherwise negatively affect Salisbury’s business and operations.
Salisbury may incur additional costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the pending merger with NBT. Such litigation could have an adverse effect on Salisbury’s financial condition and results of operations and could prevent or delay the consummation of the merger.
Because the market price of NBT’s common stock may fluctuate, Salisbury shareholders cannot be certain of the precise value of the merger consideration they may receive in the proposed merger with NBT.
At the time the pending merger with NBT is completed, each issued and outstanding share of Salisbury common stock will be converted into the right to receive 0.745 shares of NBT’s common stock. The actual value of the shares of NBT’s common stock received by Salisbury shareholders will depend on the market value of shares of NBT’s common stock at the time the merger is completed. This market value may be less or more than the value used to determine the exchange ratio stated in the merger agreement. The market value of NBT’s common stock may fluctuate between the date that the merger was announced and the closing date due to a variety of factors, including general market and economic conditions, changes in NBT’s businesses, and other factors. Many of these factors are outside of Salisbury’s and NBT’s control. Consequently, at the time that Salisbury shareholders must decide whether to approve the merger, they will not know the actual market value of the shares of NBT’s common stock they will receive when the merger is completed.
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.
Management considers the policies related to the allowance for loan losses as the most critical to the financial statement presentation because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The allowance for loan losses, which is established through a provision for loan losses charged to current earnings, is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for loan losses, the loan portfolio is segregated into pools of homogeneous loans in order to recognize differing risk characteristics among categories, and then further segregated by internal credit risk ratings. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events and current conditions. Adjustments to historical loss information are made to incorporate necessary qualitative adjustments to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. The allowance represents management’s best estimate, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations. Note 1 describes the methodology used to determine the allowance for loan losses. A discussion of the factors driving changes in the amount of the allowance for loan losses is included in the “Provision and Allowance for Loan Losses” section of Management’s Discussion and Analysis.
Climate Change
There have been significant developments in federal and state legislation and regulation and international accords regarding climate change in recent years. Given our size and the nature of our business, the direct impact and expected future direct impact of climate-related regulation is not material to us, and is not expected to be material, to our business, financial condition, or results of operations. Salisbury has not experienced any physical effects of climate change on our operations and results. We recognize that, while not material to our operations, indirect consequences of climate-related regulation may exist as a result of the impact such legislation may have on certain types of customers who engage in activity that could be deemed potentially harmful to the environment. Salisbury notes that the climate change landscape is constantly evolving and at this time, it is not possible for us to know or predict the full universe or extent that these indirect effects will have on the Company's future operations. At this time, Salisbury does not plan to have material future capital expenditures for climate-related projects. Additionally, we have not incurred material compliance costs related to climate change.
The following discussion and analysis of Salisbury's consolidated results of operations should be read in conjunction with the Consolidated Financial Statements and footnotes.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2022 and 2021
Net Interest and Dividend Income
Net interest and dividend income (presented on a tax-equivalent basis) increased $4.5 million, or 10.8%, in 2022 over 2021. The net interest margin increased 15 basis point to 3.16% in 2022 from 3.01% in 2021, mostly due to a 25 basis point increase in the average yield on interest-earning assets, partly offset by a 15 basis point increase in the average cost of interest-bearing liabilities. The net interest margin was affected by changes in the mix of interest-earning assets and funding liabilities, asset and liability growth, and the effects of changes in market interest rates on the pricing and re-pricing of assets and liabilities. Excluding PPP loans, the tax-equivalent net interest margin for 2022 was 3.12% compared with 2.87% for 2021. The following table sets forth the components of Salisbury's net interest income and yields on average interest-earning assets and interest-bearing funds. Income and yields on tax-exempt securities are presented on a fully taxable equivalent basis.
Years ended December 31,
Average Balance
Income / Expense
Average Yield / Rate
(dollars in thousands)
Loans (a)(d)
Securities (c)(d)
FHLBB stock
Short term funds (b)
Total earning assets
Other assets
Total assets
Interest-bearing demand deposits
Money market accounts
Savings and other
Certificates of deposit
Total interest-bearing deposits
Repurchase agreements
Finance lease
Note payable
Subordinated debt (net of issuance costs)
FHLBB advances
Total interest-bearing liabilities
Demand deposits
Other liabilities
Shareholders’ equity
Total liabilities & shareholders’ equity
Net interest income (d)
Spread on interest-bearing funds
Net interest margin (e)
Includes non-accrual loans.
Includes interest-bearing deposits in other banks and federal funds sold.
Average balances of securities are based on amortized cost.
Includes tax exempt income of $0.7 million, $0.7 million and $0.5 million, respectively for 2022, 2021 and 2020 on tax-exempt securities and loans for which income and yields are calculated on a tax-equivalent basis.
Net interest income divided by average interest-earning assets.
The following table sets forth the changes in net interest income (presented on a tax-equivalent basis) due to volume and rate.
Years ended December 31, (in thousands)
2022 versus 2021
2021 versus 2020
Change in interest due to
Volume
Rate
Net
Volume
Rate
Net
Loans
Securities
FHLBB stock
Short term funds
Interest-earning assets
Deposits
Repurchase agreements
Finance lease
Note payable
Subordinated Debt
FHLBB advances
Interest-bearing liabilities
Net change in net interest income
Net interest and dividend income represents the difference between interest and dividends earned on loans and securities and interest expense incurred on deposits and borrowings. The level of net interest income is a function of volume, rates and mix of both earning assets and interest-bearing liabilities. Net interest income can be affected by changes in interest rate levels, changes in the volume of assets and liabilities that are subject to re-pricing within different future time periods, and in the level of non-performing assets.
Interest and Dividend Income
Tax equivalent interest and dividend income of $50.8 million in 2022 increased $6.0 million, or 13.4% in 2022. Loan income increased $3.8 million, or 9.2%, to $45.3 million in 2022. The increase was primarily due to a $83.0 million, or 7.8%, increase in average loans and a 4 basis point increase in average yield.
Tax equivalent interest and dividend income from securities increased $1.6 million, or 52.1%, to $4.5 million in 2022, as a result of a $73.5 million, or 50.7%, increase in average security balances and a 2 basis point increase in average yield. Interest from short term funds increased $620 thousand, or 295.2%, to $830 thousand in 2022, as a result of a 102 basis point increase in average yield, partly offset by a $86.6 million, or 54.5%, decrease in average short-term balances.
Interest Expense
Interest expense increased $1.5 million, or 44.2%, to $5.0 million in 2022. Interest expense on interest bearing deposit accounts increased $1.6 million, or 72.4%, to $3.7 million in 2022, as a result of a 16 basis point increase in the average rate to 0.40% and a $36.7 million, or 4.1%, increase in average interest bearing deposit balances. Interest expense on money market accounts increased $1.0 million, or 184.1%, due to a 32 basis point increase in the average rate, and a $2.8 million, or 0.9% increase in average balances. Interest expense on savings and other accounts increased $391 thousand, or 163.6%, due to a 15 basis point increase in the average rate and a $25.4 million, or 11.8%, increase in average balances. Interest expense on certificates of deposits increased $172 thousand, or 18.3%, due to a 12 basis point increase in the average rate and a $1.3 million, or 1.0% increase in average balance.
Interest expense on FHLBB advances decreased $11 thousand, or 8.8%, to $114 thousand in 2022, due to a $7.5 million, or 75.4%, decrease in average advances, partly offset by a 335 basis point increase in the average borrowing rate to 4.59%.
Interest expense on subordinated debt decreased $68 thousand, or 6.8% to $932 thousand in 2022, due to a decrease in the average borrowing rate to 3.80%, partly offset by a $2.0 million, or 8.8%, increase in the average balance. In March 2021, Salisbury issued $25.0 million of fixed to floating rate subordinated debentures at an initial coupon rate of 3.50%. The proceeds from the issuance were used in part to fully redeem the $10 million of its outstanding subordinated debt issued in 2015 at a rate of 6.00%.
Provision and Allowance for Loan Losses
The provision for loan losses was $2.7 million in 2022 compared with a net release of credit reserves of $0.7 million in 2021. The provision for full year 2022 was primarily driven by robust loan growth in the commercial and residential portfolios during the year. Net loan charge-offs were $0.8 million for 2022 compared with $72 thousand in 2021. The increase in charge-offs in 2022 was attributed to the sale of $3.8 million of non-performing and under performing loans in first quarter 2022 as well as the charge off of a discrete commercial loan in second quarter 2022. Net loan charge-offs for the last six months of 2022 were $78 thousand. Management will continue to monitor the impact of macro-economic factors on its borrowers and adjust the allowance as appropriate. An economic slowdown due to rising interest rates, inflation or labor shortages may result in an increase in Salisbury’s provision and allowance for loan losses.
The following table sets forth changes in the allowance for loan losses and other statistical data:
Years ended December 31, (dollars in thousands)
Balance, beginning of period
Acquisition Discount Transfer
Provision for loan losses
Charge –offs
Real estate mortgages
Commercial and industrial
Consumer
Charge-offs
Recoveries
Real estate mortgages
Commercial and industrial
Consumer
Recoveries
Net charge-offs
Balance, end of period
Loans receivable, gross
Non-performing loans
Accruing loans past due 30-89 days
Ratio of allowance for loan losses:
to loans receivable, gross
to non-performing loans
Ratio of non-performing loans
to loans receivable, gross
Ratio of accruing loans past due 30-89 days
to loans receivable, gross
The reserve coverage at December 31, 2022, as measured by the ratio of allowance for loan losses to gross loans, was 1.21%, as compared with 1.20% at December 31, 2021. Excluding loans advanced under the SBA’s Paycheck Protection Program, the ratio of the allowance to gross loans was 1.21% at December 31, 2022 compared with 1.23% at December 31, 2021. Non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $1.5 million to $2.7 million, or 0.22% of gross loans receivable, at December 31, 2022, down from $4.2 million or 0.39% of gross loans receivable at December 31, 2021. Accruing loans past due 30-89 days decreased slightly from $1.3 million, or 0.12%, of gross loans receivable at December 31, 2021 to $1.3 million, or 0.11%, of gross loans receivable at December 31, 2022. See “Overview – Loan Credit Quality” below for further discussion and analysis.
Non-Interest Income
The following table details the principal categories of non-interest income.
Years ended December 31, (dollars in thousands)
Trust and wealth advisory
Service charges and fees
Mortgage banking activities, net
(Losses) gains on CRA mutual fund
(Gains) losses on securities, net
Bank-owned life insurance (“BOLI”) income
Gain on bank-owned life insurance
Gain on sale of assets
Other
Total non-interest income
Non-interest income increased $202 thousand, or 1.8%, in 2022 versus 2021. Trust and Wealth Advisory revenues decreased $83 thousand mainly due to lower asset-based fees. Service charges and fees increased $477 thousand from 2021 primarily due to higher deposit fees and higher loan prepayment fees. Mortgage banking activities, net decreased $444 thousand on lower sales volume. Mortgage loan sales to FHLBB totaled $7.2 million in 2022 versus $34.6 million in 2021. Loans serviced under the FHLBB Mortgage Partnership Finance Program totaled $133.1 million and $140.6 million at December 31, 2022 and 2021 respectively. The twelve-month periods ended December 31, 2022 and 2021 included mortgage servicing amortization of $140 thousand and $235 thousand, respectively. Non-interest income for the twelve-month period ended December 31, 2021 also included a pre-tax gain of $73 thousand primarily from the sale of Salisbury’s operations center in Canaan, Connecticut. Other income primarily includes rental property income.
Non-Interest Expense
The following table details the principal categories of non-interest expense.
Years ended December 31, (dollars in thousands)
Salaries
Employee benefits
Premises and equipment
Write-down of assets
Data processing
Professional fees
Collections, OREO, and loan related
FDIC insurance
Marketing and community support
Amortization of intangibles
Other
Non-interest expense
Non-interest expenses increased $2.5 million, or 7.9%, in 2022 versus 2021. Salaries increased $1.5 million primarily reflecting annual merit increases and incentive accruals. Benefits increased $102 thousand compared to the same period in 2021 primarily due to higher 401K accruals, deferred compensation and payroll taxes. Premises and equipment increased $167 thousand mainly due to higher lease depreciation, facilities related expenses and utilities . The twelve-month period ended December 31, 2021 also included a pre-tax loss of $144 thousand on the sale of the building housing the Bank’s branch in Poughkeepsie, New York, which closed during the first quarter 2022. Data processing increased $354 thousand mainly due to higher ATM fees, core system costs, website expense, and Trust and Wealth data related expenses. The increase in professional fees of $439 thousand versus the twelve-month period 2021 primarily reflected legal and consulting expenses related to the pending merger with NBT, partially offset by lower audit and exam and investment management expenses . Collections, OREO and loan related expense decreased $79 thousand primarily due to lower appraisal, litigation related expenses and mortgage recording costs. FDIC related expense decreased $15 thousand compared to the same period in 2021. Marketing and community support costs decreased $59 thousand compared to the same period in 2021 primarily due to the cost of web site redesign and branding initiatives in 2021. Amortization of intangible assets decreased $65 thousand due to the aging off of expenses related to previous acquisitions. Other expenses increased $323 thousand primarily due to higher charge-offs for fraudlosses as well as higher director fees.
Income Taxes
The effective income tax rates for 2022 and 2021 were 18.2% and 20.6%, respectively. Salisbury’s effective tax rate was less than the 21% federal statutory rate due to tax-exempt income, primarily from municipal bonds, tax advantaged loans and bank-owned life insurance. Fluctuations in the effective tax rate generally result from changes in the mix of taxable and tax-exempt income. For further information on income taxes, see Note 13 of Notes to Consolidated Financial Statements.
Salisbury did not incur Connecticut income tax in 2022, 2021 or 2019, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. Salisbury avails itself of this benefit through its PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum Connecticut state income tax in the foreseeable future unless there is a change in Connecticut tax law.
Comparison of the Years Ended December 31, 2021 and 2020
Net interest and dividend income represents the difference between interest and dividends earned on loans and securities and interest expense incurred on deposits and borrowings. The level of net interest income is a function of volume, rates and mix of both earning assets and interest-bearing liabilities. Net interest income can be affected by changes in interest rate levels, changes in the volume of assets and liabilities that are subject to re-pricing within different future time periods, and in the level of non-performing assets.
Interest and Dividend Income
Tax equivalent interest and dividend income of $44.8 million in 2021 increased $0.7 million, or 1.5% in 2021. Loan income increased $282 thousand, or 0.7%, to $41.5 million in 2021. The increase was primarily due to a $39.7 million, or 3.9%, increase in average loans, which was partly offset by a 13 basis point decrease in average yield.
Tax equivalent interest and dividend income from securities increased $428 thousand, or 16.7%, to $3.0 million in 2021, as a result of a $55.2 million, or 61.9%, increase in average security balances, partly offset by an 80 basis point decrease in average yield. Interest from short term funds increased $56 thousand, or 36.4%, to $210 thousand in 2021, as a result of a $93.0 million, or 141.0%, increase in average short-term balances, partly offset by a 10 basis point decrease in average yield.
Interest Expense
Interest expense decreased $1.8 million, or 34.8%, to $3.4 million in 2021. Interest expense on interest bearing deposit accounts decreased $1.7 million, or 44.4%, to $2.2 million in 2021, as a result of a 27 basis point decrease in the average rate to 0.24%, partly offset by a $126.4 million, or 16.6%, increase in average interest bearing deposit balances. Interest expense on money market accounts decreased $598 thousand, or 52.2%, due to a 28 basis point decline in the average rate, partly offset by a $59.1 million, or 23.0% increase in average balances. Interest expense on savings and other accounts decreased $225 thousand, or 48.5%, due to a 15 basis point decline in the average rate, partially offset by a $40.1 million, or 22.9%, increase in average balances. Interest expense on certificates of deposits decreased $901 thousand, or 49.0%, due to 55 basis point decline in the average rate and a $13.6 million, or 9.4% decrease in average balance.
Interest expense on FHLBB advances decreased $480 thousand, or 79.3%, to $125 thousand in 2021, due to a $30.2 million, or 75.2%, decrease in average advances and a 25 basis point decrease in the average borrowing rate to 1.24%.
Interest expense on subordinated debt increased $382 thousand, or 61.8% to $1.0 million in 2021, due to a $12.6 million, or 128.1% increase in average balances, partly offset by a decrease in the average borrowing rate to 4.44%. In March 2021, Salisbury issued $25.0 million of fixed to floating rate subordinated debentures at an initial coupon rate of 3.50%. The proceeds from the issuance were used in part to fully redeem the $10 million of its outstanding subordinated debt issued in 2015 at a rate of 6.00%.
Provision and Allowance for Loan Losses
Net credit reserves of $0.7 million were released in 2021 compared with a provision for loan losses of $5.0 million for 2020. Net loan charge-offs were $72 thousand and $179 thousand, for the respective years. The net release of credit reserves in 2021 primarily reflected the transfer of loans in the discrete COVID-19 pool, which carries a higher level of reserves, back to their pre-pandemic loan pool because the borrowers were paying as agreed and the underlying businesses were substantially operating at pre-pandemic levels. The pay-off of certain commercial loans and internal risk rating changes also contributed to the release of credit reserves, which was substantially offset by loan growth and changes to qualitative factors due to continued uncertainty over the economic impact of COVID-19 and other macro-economic factors. Management will continue to monitor the impact of the virus and other macro-economic factors on its borrowers and adjust the allowance as appropriate. A resurgence of the virus that results in another economic lockdown or an economic slowdown due to rising interest rates, inflation or labor shortages may result in an increase in Salisbury’s provision and allowance for loan losses.
The reserve coverage at December 31, 2021, as measured by the ratio of allowance for loan losses to gross loans, was 1.20%, as compared with 1.32% at December 31, 2020. Excluding loans advanced under the SBA’s Paycheck Protection Program, the ratio of the allowance to gross loans was 1.23% at December 31, 2021 compared with 1.44% at December 31, 2020. Non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $1.4 million to $4.2 million, or 0.39% of gross loans receivable, at December 31, 2021, down from $5.6 million or 0.54% of gross loans receivable at December 31, 2020. Accruing loans past due 30-89 days decreased from $6.8 million, or 0.66%, of gross loans receivable at December 31, 2020 to $1.3 million, or 0.12%, of gross loans receivable at December 31, 2021. See “Overview – Loan Credit Quality” below for further discussion and analysis.
Non-Interest Income
Non-interest income increased $1.2 million, or 11.4%, in 2021 versus 2020. Trust and Wealth Advisory revenues increased $776 thousand mainly due to growth in asset-based fees. Service charges and fees increased $1.8 million from 2020. The increase primarily reflected higher deposit, interchange and loan prepayment fees. In addition, during the twelve-month period ended December 31, 2020, Salisbury waived approximately $754 thousand in various deposit fees, including overdraft and ATM fees, to support customers affected by COVID-19. Mortgage banking activities, net decreased $621 thousand on lower sales volume. Mortgage loan sales to FHLBB totaled $34.6 million in 2021 versus $59.8 million in 2020. Loans serviced under the FHLBB Mortgage Partnership Finance Program totaled $140.7 million and $134.4 million at December 31, 2021 and 2020 respectively. The twelve-month periods ended December 31, 2021 and 2020 included mortgage servicing amortization of $235 thousand and $151 thousand, respectively. In 2020, the Bank recorded a non-taxable gain of $601 thousand related to proceeds received from a BOLI policy due to the death of a covered former employee. Non-interest income for the twelve-month period ended December 31, 2021 also included a pre-tax gain of $73 thousand primarily from the sale of Salisbury’s operations center in Canaan, Connecticut. Other income primarily includes rental property income.
Non-Interest Expense
Non-interest expenses increased $3.1 million, or 10.6%, in 2021 versus 2020. Salaries increased $1.6 million primarily reflecting annual merit increases and higher production and incentive accruals. Benefits increased $490 thousand compared to the same period in 2020 primarily due higher medical insurance costs, 401K accruals and payroll taxes. Premises and equipment increased $95 thousand mainly due to higher building depreciation and facilities related expenses . The twelve-month period ended December 31, 2021 also included a pre-tax loss of $144 thousand on the sale of the building housing the Bank’s branch in Poughkeepsie, New York, which closed during the first quarter 2022. Data processing increased $230 thousand mainly due to higher ATM fees, core system costs and Trust and Wealth data related expenses. The increase in professional fees of $38 thousand versus the twelve-month period 2020 primarily reflected higher legal, audit and exam and investment management expenses partially offset by lower consulting expense . Collections, OREO and loan related expense increased $132 thousand primarily due to higher appraisal and mortgage recording costs. FDIC related expense increased $75 thousand compared to the same period in 2020 reflecting higher deposit balances. Marketing and community support costs increased $308 thousand compared to the same period in 2020 primarily due to Salisbury’s website redesign and branding initiatives as well as costs associated with various marketing events. Amortization of intangible assets decreased $65 thousand due to the aging off of expenses related to previous acquisitions. Other expenses increased $30 thousand and primarily reflected higher employee related expenses, postage and telephone expense.
Income Taxes
The effective income tax rates for 2021 and 2020 were 20.6% and 17.0%, respectively. Salisbury’s effective tax rate was less than the 21% federal statutory rate due to tax-exempt income, primarily from municipal bonds, tax advantaged loans and bank-owned life insurance. Fluctuations in the effective tax rate generally result from changes in the mix of taxable and tax-exempt income. For further information on income taxes, see Note 13 of Notes to Consolidated Financial Statements.
Salisbury did not incur Connecticut income tax in 2021, 2020 or 2019, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. Salisbury avails itself of this benefit through its PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum Connecticut state income tax in the foreseeable future unless there is a change in Connecticut tax law.
Overview
Assets
During 2022, Salisbury’s assets increased by $12.4 million, or 0.8%, to $1.54 billion at December 31, 2022. This increase was driven by robust net loan growth of $146.9 million, or 13.8%, which was mostly offset by a decline in cash and cash equivalent balances of $124.8 million, or 71.1%, as Salisbury deployed excess liquidity into loans. In addition, the balance of Salisbury’s available-for-sale (“AFS”) investment portfolio decreased $15.0 million, or 7.4%, during 2022. At December 31, 2022, Salisbury’s tangible book value and book value per common share were $19.71 and $22.13, respectively. At December 31, 2022, the Bank’s Tier 1 leverage and total risk-based capital ratios were 9.99% and 13.43%, respectively, and the Bank was categorized as "well capitalized" according to regulatory guidelines.
Securities and Short-Term Funds
During 2022, securities decreased $14.1 million, or 6.8%, to $190.6 million primarily due to unrealized losses of $27.3 million, which reflected the significant increases in market interest rates during 2022. Short-term funds (cash and due from banks and interest-bearing deposits with other banks) decreased $124.8, or 71.2%, million to $50.5 million in 2022 reflecting the funding of loans as well as a normalization of deposit balances back to pre-pandemic levels. The carrying values of securities are as follows:
December 31, (dollars in thousands)
Available-for-Sale
U.S. Treasury
U.S. Government agency notes
Municipal bonds
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises
Collateralized mortgage obligations:
U.S. Government agencies
Corporate bonds
Mutual fund
Non-Marketable
FHLBB stock
Total Securities
Salisbury evaluates securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers whether it has the intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI.
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 these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management does not consider any of its securities to be OTTI at December 31, 2022. It is possible that future loss assumptions could change, necessitating Salisbury to recognize future OTTI.
Accumulated other comprehensive income at December 31, 2022 reflected net unrealized losses, net of tax, of $20.7 million in Salisbury’s AFS securities portfolio compared to an unrealized gain of $0.9 million at year end 2021. The unrealized losses, which reflected the significant increase in market interest rates experienced in 2022, do not affect Salisbury’s regulatory capital ratios.
Loans
During 2022, net loans receivable increased $146.9 million, or 13.8%, to $1.214 billion at December 31, 2022. Excluding PPP loans, net loans increased by $172.2 million, or 16.5%, in 2022. Salisbury’s retail lending department originates residential mortgage, home equity loans and lines of credit, and consumer loans for the portfolio. During 2022, Salisbury originated $118.1 million of residential mortgage loans and $15.9 million of home equity loans for the portfolio, compared with $165.9 million and $11.8 million, respectively, in 2021. During 2022, total residential mortgage and home equity loans receivable increased $88.7 million, or 18.9%, to $557.1 million at December 31, 2022, and represented 45.4% of gross loans receivable. During 2022, Salisbury’s residential mortgage lending department also originated and sold $7.2 million of residential mortgage loans, compared with $34.6 million during 2021. All such sold loans were sold through the FHLBB Mortgage Partnership Finance Program with servicing retained by Salisbury. Consumer loans, amounted to $20.5 million at December 31, 2022, representing 1.7% of gross loans receivable.
Salisbury’s commercial lending department specializes in lending to small and mid-size companies, businesses and municipalities. More specifically, we meet our clients’ credit needs by providing short-term and long-term financing, construction loans, commercial mortgages, equipment, working capital, property improvement loans and municipal financing. The department also works with both the Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) Government Guaranteed Lending Programs; however, such loans represent a very small percent of the commercial loan portfolio. Excluding PPP loans, total commercial loans, which include commercial real estate, commercial and industrial and municipal loans, increased $75.2 million, or 13.5%, to $631.0 million at December 31, 2022, and represent 51.4% of gross loans receivable. At December 31, 2022 approximately $0.3 million of PPP loans remained on Salisbury’s balance sheet. These loans are reported as a separate component of “commercial and industrial” loans in the table below.
The principal categories of loans receivable and loans held-for-sale are as follows:
December 31, (in thousands)
Residential 1-4 family
Residential 5+ multifamily
Construction of residential 1-4 family
Home equity lines of credit
Residential real estate
Commercial
Construction of commercial
Commercial real estate
Farm land
Vacant land
Real estate secured
Commercial and industrial ex PPP loans
PPP loans
Commercial & industrial – Total
Municipal
Consumer
Loans receivable, gross
Deferred loan origination fees and costs, net
Allowance for loan losses
Loans receivable, net
Loans receivable, net ex PPP loans
Loans Held-for-sale
Residential 1-4 family
The composition of loans receivable by forecasted maturity distribution is as follows:
December 31, 2022 (in thousands)
Within 1 year
Within 2-5 years
After 5 years
Total
Residential
Home equity lines of credit
Commercial
Construction of commercial
Land
Real estate secured
Commercial and industrial
Municipal
Consumer
Loans receivable, gross
The composition of loans receivable with either fixed, variable or adjustable interest rates is as follows:
December 31, 2022 (in thousands)
Fixed interest rates
Variable or adjustable interest rates
Total Loans
Residential
Home equity lines of credit
Commercial
Construction of commercial
Land
Real estate secured
Commercial and industrial
Municipal
Consumer
Loans receivable, gross
Percentage of Total
Loan Credit Quality
Salisbury has cooperative relationships with the vast majority of its non-performing loan customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral. Salisbury pursues the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, Salisbury will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.
Past Due Loans
Loans past due 30 days or more decreased $1.2 million during 2022 to $1.5 million, or 0.12% of gross loans receivable at December 31, 2022, compared with $2.6 million, or 0.24% of gross loans receivable at December 31, 2021. The decline in past due loans from year end 2021 primarily reflected the sale and charge-off of certain loans during the twelve-month period ending December 31, 2022.
The components of loans past due 30 days or greater are as follows:
(in thousands)
Past due 30-59 days
Past due 60-89 days
Past due 90-179 days
Past due 180 days and over
Accruing loans
Past due 30-59 days
Past due 60-89 days
Past due 90-179 days
Past due 180 days and over
Non-accrual loans
Total loans past due 30 days and over
Credit Quality Segments
Salisbury categorizes loans receivable into the following credit quality segments.
Impaired loans consist of all non-accrual loans and troubled debt restructured loans, and represent loans for which it is probable that Salisbury will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreements.
Non-accrual loans, a sub-set of impaired loans, are loans for which the accrual of interest has been discontinued because, in the opinion of management, full collection of principal or interest is unlikely.
Non-performing loans consist of non-accrual loans, and accruing loans past due 90 days and over that are well collateralized, in the process of collection and where full collection of principal and interest is reasonably assured. Non-performing assets consist of non-performing loans plus real estate acquired in settlement of loans.
Troubled debt restructured loans are loans for which concessions such as reduction of interest rates, other than normal market rate adjustments, or deferral of principal or interest payments, extension of maturity dates, or reduction of principal balance or accrued interest, have been granted due to a borrower’s financial condition. Loan restructuring is employed when management believes the granting of a concession will increase the probability of the full or partial collection of principal and interest.
Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired.
Non-Performing Assets
Non-performing assets decreased $1.5 million to $2.7 million at December 31, 2022, or 0.17% of assets, from $4.2 million or 0.27% of assets at December 31, 2021. The decrease in non-performing assets resulted primarily from the sale and charge-off of $2.0 million of non-performing loans and $0.4 million of loan payments, which were partially offset by the downgrade of $0.9 million of loans during 2022.
The components of non-performing assets are as follows:
December 31, (in thousands)
Residential 1-4 family
Residential 5+ multifamily
Home equity lines of credit
Commercial
Farm land
Vacant land
Real estate secured
Commercial and industrial
Consumer
Non-accrual loans
Accruing loans past due 90 days and over
Non-performing loans
Foreclosed assets
Non-performing assets
Reductions in interest income associated with non-accrual loans are as follows:
Years ended December 31, (in thousands)
Income in accordance with original terms
Income recognized
Reduction in interest income
The past due status of non-performing loans is as follows:
December 31, (in thousands)
Current
Past due 30-59 days
Past due 60-89 days
Past due 90-179 days
Past due 180 days and over
Total non-performing loans
At December 31, 2022, 93.50% of non-performing loans were current with respect to loan payments, compared with 69.02% at December 31, 2021. Loans past due 180 days and over are substantially all mortgage loans in the process of foreclosure or litigation.
Salisbury endeavors to work constructively to resolve its non-performing loan issues with customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral.
Troubled Debt Restructured Loans
Troubled debt restructured loans decreased $2.2 million in 2022 to $2.7 million, or 0.22% of gross loans receivable, from $5.0 million, or 0.46% of gross loans receivable at December 31, 2021. The reduction in loan balance from year end 2021 primarily reflected the sale and charge-off of certain loans and loan payments during the twelve month period ended December 31, 2022. The components of troubled debt restructured loans are as follows:
December 31, (in thousands)
Residential 1-4 family
Residential 5+ multifamily
Commercial
Real estate secured
Commercial and industrial
Accruing troubled debt restructured loans
Residential 1-4 family
Residential 5+ multifamily
Vacant land
Commercial
Real estate secured
Commercial and Industrial
Non-accrual troubled debt restructured loans
Troubled debt restructured loans
The past due status of troubled debt restructured loans is as follows:
December 31, (in thousands)
Current
Past due 30-59 days
Past due 60-89 days
Accruing troubled debt restructured loans
Current
Past due 30-59 days
Past due 180 days and over
Non-accrual troubled debt restructured loans
Total troubled debt restructured loans
At December 31, 2022, 97.55% of troubled debt restructured loans were current with respect to loan payments, as compared with 79.73% at December 31, 2021. As of December 31, 2022 and 2021, there were specific reserves on troubled debt restructured loans amounting to $22 thousand and $31 thousand, respectively.
Potential Problem Loans
Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired. Potential problem loans decreased $18.9 million during 2022 to $6.1 million, or 0.49% of gross loans receivable at December 31, 2022, compared with $25.0 million, or 2.32% of gross loans receivable at December 31, 2021. The decrease primarily reflected internal credit risk rating upgrades on loans to businesses primarily in the hospitality, health care and entertainment and recreation industries which were previously downgraded due to concerns over the impact of COVID-19. These businesses have demonstrated a return to pre-pandemic levels of activity and liquidity, warranting the improvement in risk rating. The decrease in potential problem loans also reflected the sale of certain loans during 2022. The components of potential problem loans were as follows:
December 31, (in thousands)
Residential 1-4 family
Residential 5+ multifamily
Home equity lines of credit
Residential real estate
Commercial
Construction of commercial
Commercial real estate
Farm land
Real estate secured
Commercial and industrial
Consumer
Total potential problem loans
The past due status of potential problem loans was as follows:
December 31, (in thousands)
Current
Past due 30-59 days
Past due 60-89 days
Past due 90-179 days
Total potential problem loans
At December 31, 2022, 99.67% of potential problem loans were current with respect to loan payments, as compared with 99.84% at December 31, 2021. Management cannot predict the extent to which economic or other factors may impact such borrowers’ future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.
Deposits and Borrowings
Deposits increased $22.2 million, or 1.7%, during 2022, to $1.36 billion at December 31, 2022, compared with $1.34 billion at December 31, 2021. Deposit balances at year end 2022 included $40.0 million from an independent third party and are held in a business money market account. These funds, similar to other deposits, were utilized by Salisbury to fund loan growth. Retail repurchase agreements decreased $4.2 million, or 36.8%, to $7.2 million at December 31, 2022, compared with $11.4 million at December 31, 2021.
The distribution of average total deposits by account type was as follows:
December 31, 2022
December 31, 2021
(in thousands)
Average Balance
Percent
Weighted Average
Average Balance
Percent
Weighted Average
Demand deposits
Interest-bearing checking accounts
Regular savings accounts
Money market savings
Certificates of deposit
Total deposits
The total deposit accounts greater than the federally insured limit of $250,000 amounted to $567million and $531 million as of December 31, 2022 and 2021, respectively.
The classification of certificates of deposit by interest rates was as follows:
At December 31,
Interest rates
Less than 1.00%
Total
The distribution of certificates of deposit by interest rate and maturity was as follows:
At December 31, 2022
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%
Total
Scheduled maturities of time certificates of deposit in denominations of $100 thousand or more were as follows:
December 31, 2022 (in thousands)
Within
3 months
Within
3-6 months
Within
6-12 months
Over
1 year
Total
Certificates of deposit $100,000 and over
FHLBB advances increased $2.3 million during 2022 to $10.0 million at December 31, 2022, compared with $7.7 million at December 31, 2021. The increase primarily reflected a purchase of an advance offset by the maturities and principal payments on amortizing advances. Salisbury also 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 year end 2022 and 2021, Salisbury had $20.0 million of outstanding letters of credit with FHLBB. At December 31, 2022, Salisbury’s excess borrowing capacity at the FHLBB was $241.3 million compared with $250.9 million at December 31, 2021.
The following table sets forth certain information concerning short-term FHLBB advances:
December 31, (dollars in thousands)
Highest month-end balance during period
Ending balance
Average balance during period
Subordinated Debentures
Subordinated debentures totaled $24.5 million at December 31, 2022, which includes $469 thousand of remaining unamortized debt issuance costs. The debt issuance costs are being amortized to maturity. The effective interest rate of the subordinated debentures is 3.80%.
MATERIAL CASH REQUIREMENTS FROM CONTRACTUAL CASH OBLIGATIONS
In the normal course of business, Salisbury enters into various contractual obligations that may require future cash payments. Contractual obligations at December 31, 2022 include operating leases, capital leases, contractual purchases and certain other benefit plans. For further discussion regarding leases see Note 5 to the Consolidated Financial Statements.
The accompanying table summarizes Salisbury’s off-balance sheet lending-related financial instruments and significant cash obligations, by remaining maturity, at December 31, 2022. Salisbury’s lending-related financial instruments include commitments that have maturities over one year. Contractual purchases include commitments for future cash expenditures, primarily for services and contracts that reflect the minimum contractual obligation under legally enforceable contracts with contract terms that are both fixed and determinable. Excluded from the following table are a number of obligations to be settled in cash, primarily in under one year. These obligations are reflected in Salisbury’s Consolidated Balance Sheets and include deposits, FHLBB advances and repurchase agreements that settle within standard market timeframes.
December 31, 2022 (in thousands)
Within
Within
Within
After
By Remaining Maturity
1 year
1-3 years
4-5 years
5 years
Total
Residential
Home equity lines of credit
Commercial
Land
Real estate secured
Commercial and industrial
Municipal
Consumer
Unadvanced portions of loans
Commitments to originate loans
Standby letters of credit
Total
LIQUIDITY
Salisbury manages its liquidity position to ensure it has sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury’s primary source of liquidity is deposits and though its preferred funding strategy is to attract and retain low cost deposits, its ability to do so is affected by competitive interest rates and terms in its marketplace, and other financial market conditions. Other sources of funding include cash flows from loan and securities principal payments and maturities, funds provided by operations, and discretionary use of national market certificates of deposit and FHLBB advances. Liquidity can also be provided through sales of securities and loans. 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 2022 provided net cash of $27.4 million. Investing activities utilized net cash of $168.7 million, principally from purchases of securities of $54.2 million, net loan originations and principal collections of $152.2 million, an investment of $2.5 million in BOLI, capital expenditures of $0.8 million and the investment and reinvestment in mutual funds of $1.2 million, offset by sales, calls, and maturities of securities of $41.3 million, proceeds from the redemption of FHLBB stock of $0.1 million, and proceeds from insurance policies of $0.7 million. Financing activities provided net cash of $16.5 million, principally from a net increase in deposits of $22.2 million, short term FHLB advances of $10.0 million and proceeds from the exercising of stock options of $0.2 million, partly off-set by a decrease of $4.2 million in securities sold under agreements to repurchase, payments of $1.7 million on FHLBB amortizing long-term advances, repayment of long-term FHLBB advances of $6.0 million, common stock dividends of $3.7 million and other activity of $0.2 million.
Operating activities for 2021 provided net cash of $18.1 million. Investing activities utilized net cash of $153.2 million, principally from purchases of securities of $145.3 million, net loan originations and principal collections of $37.8 million, an investment of $6.0 million in BOLI and capital expenditures of $2.3 million, offset by sales, calls, and maturities of securities of $37.5 million, proceeds from sale of assets of $0.2, proceeds from the redemption of FHLBB stock of $0.3 million and other activity of $0.2 million. Financing activities provided net cash of $217.3 million, principally from a net increase in deposits of $207.1 million, net proceeds of $24.4 million from the issuance of subordinated debt, an increase of $4.3 million in securities sold under agreements to repurchase, partly offset by the redemption of $10.0 million of subordinated debt issued by Salisbury in 2015, payments of $5.0 million on FHLBB advances, common stock dividends of $3.5 million and other activity of $0.1 million.
Operating activities for 2020 provided net cash of $13.8 million. Investing activities utilized net cash of $114.0 million, principally from purchases of securities of $37.4 million, net loan originations and principal collections of $107.4 million, a $3.5 million investment in BOLI and capital expenditures of $4.4 million, offset by sales, calls, and maturities of securities of $32.5 million, BOLI proceeds of $4.0 million and proceeds from the redemption of FHLBB stock of $1.5 million. Financing activities provided net cash of $166.5 million, principally from a net deposit increase of $209.5 million and advances from FHLBB for $16.0 million, partly offset by FHLBB advances payments of $54.3 million, and common stock dividends of $3.3 million, and a decrease of $1.4 million in securities sold under agreements to repurchase.
CAPITAL RESOURCES
Shareholders’ Equity
Shareholders’ equity decreased $8.2 million, or 6.0%, in 2022 to $128.4 million at December 31, 2022. The decline was driven by unrealized losses in Salisbury’s AFS portfolio of $21.6 million, due to the significant increase in market interest rates during 2022, and common stock dividends declared of $3.7 million, partially offset by net income of $15.9 million and other activity of $1.2 million. The unrealized losses in the AFS portfolio do not affect the Bank’s regulatory capital ratios.
Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Under current regulatory definitions, the Bank meets all capital adequacy requirements to which it is subject and the Bank is considered to be well-capitalized. As a result, the Bank pays lower federal deposit insurance premiums than those banks that are not “well capitalized.” Requirements for classification as a well-capitalized institution and for minimum capital adequacy along with the Bank's regulatory capital ratios are as follows at December 31, 2022 and 2021 under the regulatory capital rules then in effect:
Minimum Capital Adequacy Requirement
Minimum Ratios to be
Well Capitalized
Actual Bank Ratios
Total Capital (to risk-weighted assets)
Common Equity Tier 1 Capital
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
A well-capitalized institution, which is the highest capital category for an institution as defined by the Prompt Corrective Action regulations issued by the FDIC and the FRB, is one which maintains a Total Risk-Based ratio of 10% or above, a Tier 1 Risk-Based ratio of 8% or above, a Common Equity Tier 1 ratio of 6.5% or above, and a Leverage ratio of 5% or above, and is not subject to any written order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level. Maintaining strong capital is essential to Salisbury and the Bank’s safety and soundness. However, the effective management of capital resources requires generating attractive returns on equity to build value for shareholders while maintaining appropriate levels of capital to fund growth, meet regulatory requirements and be consistent with prudent industry practices.
The FRB’s final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for bank holding companies and their bank subsidiaries include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.
As of December 31, 2022, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s category.
On September 17, 2019, the Office of the Comptroller of the Currency, the FRB and the FDIC published its final rule establishing a “Community Bank Leverage Ratio” (“CBLR”) that simplifies capital requirements for certain community banking organizations with less than $10 billion in total consolidated assets (such as the Bank). Under the final rule, depository institutions and their holding companies that meet certain criteria (generally, those with limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets, and temporary difference deferred tax assets) (“qualifying community banking organizations”) may elect to report the components of its Tier 1 leverage ratio as a measure of capital adequacy. A qualifying community banking organization with a CBLR of greater than 9% that “elects to use the CBLR framework” will not be subject to other risk-based and leverage capital requirements and will be considered to have met the “well-capitalized” ratio requirements for purposes of the agencies’ Prompt Corrective Action (“PCA”) framework. Under the final rule, if a bank that has opted to use the CBLR framework subsequently fails to satisfy one or more of the qualifying criteria but continues to report a leverage ratio of greater than 8%, the bank may continue to use the framework and will be deemed “well capitalized” for a grace period of up to two quarters. A qualifying community banking organization will be required to comply with the generally applicable capital rule and file the relevant regulatory reports if the banking organization: (1) is unable to restore compliance with all qualifying criteria during the two-quarter grace period (including achieving compliance with the greater than 9% leverage ratio requirement); (2) reports a leverage ratio of 8% or less; or (3) ceases to satisfy the qualifying criteria due to consummation of a merger transaction. The final rule became effective on January 1, 2020. The Bank would qualify for the CBLR methodology and would also be considered to be well capitalized if it elected to utilize such methodology. The Bank continues to evaluate the benefits of transitioning to this simplified methodology for assessing capital adequacy.
Stock Repurchase Plan
On March 23, 2022 Salisbury announced that its Board of Directors renewed its share repurchase program that was established in March 2021. The share repurchase program provides for the potential repurchase of Salisbury’s common stock in amounts up to an aggregate of five percent (5%) of the outstanding shares of Salisbury’s common stock from time to time over a period of the next twelve (12) months through privately negotiated transactions and/or market purchases at appropriate prices, subject to price and market conditions on terms determined to be in the best interests of Salisbury. However, there is no assurance that Salisbury will complete repurchases of 5% of its outstanding shares over the next twelve (12) months. Salisbury did not repurchase any shares during the twelve-month period ended December 31, 2022.
Stock Split
At Salisbury’s annual shareholder meeting on May 18, 2022, shareholders approved a recommendation by Salisbury’s Board of Directors to amend Salisbury’s Certificate of Incorporation to increase Salisbury’s authorized shares of Common Stock from 5,000,000 to 10,000,000 shares. On June 30, 2022, Salisbury’s Board implemented a two for one forward split of the shares of the Company’s Common Stock as a means of enhancing the liquidity and marketability of the Company’s securities in the best interests of shareholders.
Dividends
During 2022 Salisbury declared and paid four quarterly common stock dividends of $0.16 per common share each quarter totaling $3.7 million. In 2021, Salisbury declared and paid quarterly common stock dividends of $0.14 in first quarter, $0.15 in second quarter, and $0.16 in third and fourth quarter, respectively, totaling $3.5 million. On January 25, 2023, the Board of Directors of Salisbury declared a common stock dividend of $0.16 per common share payable on February 24, 2023 to shareholders of record on February 10, 2023. Common stock dividends, when declared, will generally be paid the last business day of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.
Salisbury's ability to pay cash dividends is dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.
FRB Supervisory Letter SR 09-4, February 24, 2009, revised March 30, 2009, states that, as a general matter, the Board of Directors of a Bank Holding Company (“BHC”) should inform the Federal Reserve and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital position.
Salisbury believes that the payment of common stock cash dividends is appropriate, provided that such payment considers Salisbury's capital needs, asset quality, and overall financial condition and does not adversely affect the financial stability of Salisbury or the Bank. The continued payment of common stock cash dividends by Salisbury will be dependent on Salisbury's future core earnings, financial condition and capital needs, regulatory restrictions, and other factors deemed relevant by the Board of Directors of Salisbury.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on Salisbury’s consolidated financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
Salisbury’s consolidated financial statements and related notes thereto presented elsewhere in this Form 10-K are prepared in conformity with GAAP, which require the measurement of financial condition and operating results in terms of historical dollars without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike some other types of companies, the financial nature of Salisbury’s consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect Salisbury to some extent because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. There is no precise method, however, to measure the effects of inflation on the Company’s consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation. Although not a material factor in recent years, inflation could impact earnings in future periods.
