SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2015

OR

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

 

FOR THE TRANSITION PERIOD FROM ________ TO ________

 

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Connecticut   06-1514263
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)
     
5 Bissell Street, Lakeville, CT   06039
(Address of principal executive offices)   (Zip code)

(860) 435-9801

(Registrant's telephone number, including area code)

 

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

Yes ☑ No

 

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

Yes No

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

 

The number of shares of Common Stock outstanding as of November 13, 2015 is 2,733,576.

 

 
 

 

TABLE OF CONTENTS

 

 

  PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (unaudited) 3
  CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2015 (unaudited) AND DECEMBER 31, 2014 3
  CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (unaudited) 4
  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (unaudited) 5
  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (unaudited) 5
  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (unaudited) 6
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 33
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 52
Item 4. CONTROLS AND PROCEDURES 54
  PART II. OTHER INFORMATION  
Item 1. LEGAL PROCEEDINGS 54
Item 1A. RISK FACTORS 56
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 56
Item 3.  DEFAULTS UPON SENIOR SECURITIES 56
Item 4.  MINE SAFETY DISCLOSURES 56
Item 5.  OTHER INFORMATION 56
Item 6.  EXHIBITS 57

 
 

 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

  (in thousands, except share data)  September 30, 2015
(unaudited)
  December 31, 2014
ASSETS          
Cash and due from banks  $11,436   $13,280 
Interest bearing demand deposits with other banks   70,259    22,825 
Total cash and cash equivalents   81,695    36,105 
Securities          
Available-for-sale at fair value   80,371    91,312 
Federal Home Loan Bank of Boston stock at cost   3,515    3,515 
Loans held-for-sale   573    568 
Loans receivable, net (allowance for loan losses: $5,659 and $5,358)   687,719    673,330 
Other real estate owned   167    1,002 
Bank premises and equipment, net   14,588    14,431 
Goodwill   12,552    12,552 
Intangible assets (net of accumulated amortization: $2,752 and $2,258)   2,496    2,990 
Accrued interest receivable   2,296    2,334 
Cash surrender value of life insurance policies   13,591    13,314 
Deferred taxes   2,788    2,428 
Other assets   1,882    1,546 
Total Assets  $904,233   $855,427 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
Demand (non-interest bearing)  $194,618   $161,386 
Demand (interest-bearing)   129,779    117,169 
Money market   184,409    174,274 
Savings and other   123,017    121,387 
Certificates of deposit   129,656    141,210 
Total deposits   761,479    715,426 
Repurchase agreements   4,210    4,163 
Federal Home Loan Bank of Boston advances   26,928    28,813 
Note payable   380     
Capital lease liability   422    424 
Accrued interest and other liabilities   5,364    4,780 
Total Liabilities   798,783    753,606 
Shareholders' Equity          
Preferred stock - $.01 per share par value          
Authorized: 25,000; Issued: 16,000 (Series B);          
Liquidation preference: $1,000 per share   16,000    16,000 
Common stock - $.10 per share par value          
Authorized: 5,000,000;          
Issued: 2,733,576 and 2,720,766   273    272 
Paid-in capital   41,362    41,077 
Retained earnings   46,558    42,677 
Unearned compensation - restricted stock awards   (186)   (313)
Accumulated other comprehensive income   1,443    2,108 
Total Shareholders' Equity   105,450    101,821 
Total Liabilities and Shareholders' Equity  $904,233   $855,427 

3
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

  Periods ended September 30,    Three months ended      Nine months ended  
  (in thousands, except per share amounts)    2015      2014      2015      2014  
Interest and dividend income                    
Interest and fees on loans  $7,955   $4,656   $23,727   $13,983 
Interest on debt securities                    
Taxable   286    330    910    1,075 
Tax exempt   351    416    1,098    1,294 
Other interest and dividends   58    42    132    87 
Total interest and dividend income   8,650    5,444    25,867    16,439 
Interest expense                    
Deposits   463    379    1,359    1,079 
Repurchase agreements   2    3    5    5 
Capital lease   18    12    53    29 
Note payable   1        1     
Federal Home Loan Bank of Boston advances   269    296    832    892 
Total interest expense   753    690    2,250    2,005 
Net interest and dividend income   7,897    4,754    23,617    14,434 
Provision for loan losses   655    318    651    969 
Net interest and dividend income after provision for loan losses   7,242    4,436    22,966    13,465 
Non-interest income                    
Trust and wealth advisory   798    791    2,510    2,509 
Service charges and fees   798    639    2,307    1,807 
Gains on sales and calls of available-for-sale securities, net   6        192     
Gains on sales of mortgage loans, net   47        227    43 
Mortgage servicing, net   5    41    (15)   80 
Other   115    82    343    234 
Total non-interest income   1,769    1,553    5,564    4,673 
Non-interest expense                    
Salaries   2,531    1,980    7,520    5,776 
Employee benefits   916    697    2,881    2,176 
Premises and equipment   863    667    2,683    2,080 
Data processing   404    420    1,276    1,166 
Professional fees   398    315    1,642    1,025 
Collections, OREO and loan related   125    85    594    319 
FDIC insurance   163    119    494    340 
Marketing and community support   174    115    465    355 
Amortization of core deposit intangibles   161    75    494    194 
Merger and acquisition related expenses       196        586 
Other   467    439    1,528    1,269 
Total non-interest expense   6,202    5,108    19,577    15,286 
Income before income taxes   2,809    881    8,953    2,852 
Income tax provision   824    113    2,663    567 
Net income  $1,985   $768   $6,290   $2,285 
Net income available to common shareholders  $1,945   $728   $6,170   $2,159 
                     
Basic earnings per common share  $0.71   $0.43   $2.26   $1.26 
Diluted earnings per common share   0.71    0.43    2.25    1.26 
Common dividends per share   0.28    0.28    0.84    0.84 

4
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

     Three months ended      Nine months ended  
  Periods ended September 30, (in thousands)    2015      2014      2015      2014  
Net income  $1,985   $768   $6,290   $2,285 
Other comprehensive income (loss)                    
Net unrealized gains (losses) on securities available-for-sale   116    342    (816)   2,771 
Reclassification of net realized gains in net income (1)   (6)       (192)    
Unrealized gains (losses) on securities available-for-sale   110    342    (1,008)   2,771 
Income tax (expense) benefit   (37)   (116)   343    (942)
Other comprehensive income (loss), net of tax   73    226    (665)   1,829 
Comprehensive income  $2,058   $994   $5,625   $4,114 

(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of other comprehensive income (loss) and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains on sales of available-for-sale securities, net, the tax effect is included in the income tax provision and the after tax amount is included in net income.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

  (dollars in thousands) (unaudited) Common Stock  Preferred stock  Paid-in capital  Retained earnings  Unearned compensation – restricted stock awards 

Accumulated other comp-

rehensive income

 

Total share-

holders' equity

   Shares  Amount                  
Balances at December 31, 2013   1,710,121   $171   $16,000   $13,668   $42,240   $(335)  $1,046   $72,790 
Net income for period                   2,285            2,285 
Other comprehensive income, net of tax                           1,829    1,829 
Common stock dividends declared                   (1,439)           (1,439)
Preferred stock dividends declared                   (126)           (126)
Issuance of restricted common stock   3,000            81        (81)        
Forfeiture of restricted common stock   (2,000)           (50)       50         
Stock based compensation-restricted stock awards                       112        112 
Issuance of common stock for directors   2,160            65                65 
Balances at September 30, 2014   1,713,281   $171   $16,000   $13,764   $42,960   $(254)  $2,875   $75,516 
Balances at December 31, 2014   2,720,766   $272   $16,000   $41,077   $42,677   $(313)  $2,108   $101,821 
Net income for period                   6,290            6,290 
Other comprehensive loss, net of tax                           (665)   (665)
Common stock dividends declared                   (2,289)           (2,289)
Preferred stock dividends declared                   (120)           (120)
Stock options exercised   9,450    1        182                183 
Issuance of common stock for executives   1,000            29                29 
Forfeiture of restricted common stock   (300)           (7)       7         
Issuance of common stock for directors   2,660            81                81 
Stock based compensation-restricted stock awards                       120        120 
Balances at September 30, 2015   2,733,576   $273   $16,000   $41,362  $46,558   $(186)  $1,443   $105,450 

5
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

  Nine months ended September 30, (in thousands)  2015  2014
Operating Activities          
Net income  $6,290   $2,285 
Adjustments to reconcile net income to net cash provided by operating activities:          
(Accretion), amortization and depreciation:          
Securities   178    163 
Bank premises and equipment   917    737 
Core deposit intangible   494    193 
Mortgage servicing rights   282    220 
(Increase) decrease fair value adjustment on loans   (2,031)   24 
(Increase) decrease fair value adjustment on deposits   (355)   53 
(Gains) and losses, including write-downs          
Gain on calls of securities available-for-sale, net   (40)   (39)
Gain on sales of securities available-for-sale, net   (152)    
Gain on sales of loans, excluding capitalized servicing rights   (102)    
Write-downs of other real estate owned   238    4 
      Loss on sale/disposals of premises and equipment   45    5 
Provision for loan losses   651    969 
Proceeds from loans sold   4,897    3,536 
Loans originated for sale   (4,800)   (3,324)
Decrease (increase) in deferred loan origination fees and costs, net   25    (21)
Mortgage servicing rights originated   (125)   (6)
Increase (decrease) in mortgage servicing rights impairment reserve   3    (14)
Decrease (increase) in interest receivable   38    (74)
Deferred tax benefit   (17)   (39)
Increase in prepaid expenses   (409)   (81)
Increase in cash surrender value of life insurance policies   (277)   (173)
Increase in income tax receivable       (329)
Increase in income tax payable   271     
Increase in other assets   (87)   (76)
Decrease in accrued expenses   (11)   (144)
Decrease in interest payable   (45)   (5)
Increase in other liabilities   369    82 
Stock based compensation-restricted stock awards   120    112 
Net cash provided by operating activities   6,367    4,058 
Investing Activities          
Maturity of interest-bearing time deposits with other banks       738 
Redemption of Federal Home Loan Bank of Boston stock       1,825 
Purchases of securities available-for-sale   (9,322)    
Proceeds from sales of securities available-for-sale   3,861     
Proceeds from calls of securities available-for-sale   7,995    4,115 
Proceeds from maturities of securities available-for-sale   7,413    7,539 
Loan originations and principal collections, net   (13,748)   (24,694)
Recoveries of loans previously charged off   613    50 
Proceeds from sales of other real estate owned   698    40 
Premiums paid on bank-owned life insurance       (1,100)
Cash and cash equivalents acquired from Sharon, CT branch office of another institution       17,462 
Capital expenditures   (739)   (1,872)
Net cash (utilized) provided by investing activities   (3,229)   4,103 

6
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Financing Activities          
Increase in deposit transaction accounts, net   57,607    24,527 
(Decrease) increase in time deposits, net   (11,199)   2,174 
Increase in securities sold under agreements to repurchase, net   47    3,946 
Principal payments on Federal Home Loan Bank of Boston advances   (786)   (1,193)
Modification payment on Federal Home Loan Bank of Boston advances   (1,099)     
Decrease in capital lease obligation   (2)   (1)
Stock options exercised   183     
Issuance of shares for director fees   81    65 
Issuance of shares for executives   29     
Common stock dividends paid   (2,289)   (1,439)
Series B preferred stock dividends paid   (120)   (126)
Net cash provided by financing activities   42,452    27,953 
Net increase  in cash and cash equivalents   45,590    36,114 
Cash and cash equivalents, beginning of period   36,105    12,711 
Cash and cash equivalents, end of period  $81,695   $48,825 
Cash paid during period          
Interest  $2,650   $2,010 
Income taxes   2,409    935 
Non-cash investing and financing activities          
Transfer from loans to other real estate owned   101     
Note payable to finance building purchase   380     
Sharon branch acquisition          
Cash and cash equivalents acquired       17,462 
Net loans acquired       63 
Fixed assets acquired       158 
Core deposit intangible       489 
Deposits assumed       18,171 
Accrued interest payable assumed       1 

 

7
 

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

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

The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, expected cash flows from loans acquired in a business combination, other-than-temporary impairment of securities, impairment of goodwill and intangibles and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2014 Annual Report on Form 10-K for the year ended December 31, 2014.

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

Impact of New Accounting Pronouncements Issued

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of this ASU is to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. However, in July 2015, the FASB voted to approve deferring the effective date by one year (i.e. interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e. interim and annual reporting periods beginning after December 15, 2016). Salisbury is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

8
 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. Salisbury anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The standard is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The guidance should be applied on a retrospective basis. Salisbury anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. Salisbury anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07:  “Fair Value Measurement (Topic 820) - Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).”  The objective of this update is to address the diversity in practice related to how certain investments measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient.  Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient.  The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.  Salisbury anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16: “Simplifying the Accounting for Measurement-Period Adjustments.” Under the ASU, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation or amortization, or other income effects (if any) as a result of the change to the provisional amounts, calculated as if the accounting had been completed as of the acquisition date, must be recorded in the reporting period in which the adjustment amounts are determined rather than retrospectively. The ASU also requires that the acquirer present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early application is permitted for financial statements that have not been issued. Salisbury anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

9
 

NOTE 2 - SECURITIES

The composition of securities is as follows:

  (in thousands)  Amortized
cost (1)
  Gross un-
realized gains
  Gross un-
realized losses
  Fair value
September 30, 2015                    
Available-for-sale                    
U.S. Treasury notes  $7,498   $67   $   $7,565 
U.S. Government agency notes   498    2        500 
Municipal bonds   32,691    690    (64)   33,317 
Mortgage-backed securities                    
U.S. Government agencies and U.S. Government-sponsored enterprises   26,449    575    (18)   27,006 
Collateralized mortgage obligations                    
U.S. Government agencies   2,136    21        2,157 
  Non-agency   4,834    505    (7)   5,332 
SBA bonds   3,297    53        3,350 
CRA mutual funds   762    7        769 
Preferred stock   20    355        375 
Total securities available-for-sale  $78,185   $2,275   $(89)  $80,371 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,515   $   $   $3,515 

 

  (in thousands)  Amortized
cost (1)
  Gross un-
realized gains
  Gross un-
realized losses
  Fair value
December 31, 2014                    
Available-for-sale                    
U.S. Treasury notes  $2,699   $107   $   $2,806 
U.S. Government agency notes   5,850    24        5,874 
Municipal bonds   38,962    1,455    (65)   40,352 
Mortgage-backed securities                    
U.S. Government agencies and U.S. Government-sponsored enterprises   27,036    688    (15)   27,709 
Collateralized mortgage obligations                    
U.S. Government agencies   2,657    22        2,679 
Non-agency   6,056    552    (12)   6,596 
SBA bonds   4,336    129        4,465 
CRA mutual funds   502    2        504 
Preferred stock   20    307        327 
Total securities available-for-sale  $88,118   $3,286   $(92)  $91,312 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,515   $   $   $3,515 
(1)Net of other-than-temporary impairment write-downs recognized in earnings.

Salisbury sold $3.7 million in securities available-for-sale during the nine month period ended September 30, 2015, and did not sell any securities available-for-sale during the nine month period ended September 30, 2014. Realized gains on sales of securities sold in 2015 are $153,000.

10
 

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

  (in thousands)  Less than 12 Months  12 Months or Longer  Total
   Fair
value
 

Unrealized

losses

  Fair
value
 

Unrealized

losses

  Fair
value
  Unrealized losses
  September 30, 2015                  
Available-for-sale                              
Municipal bonds  $1,267   $(64)  $   $   $1,267   $(64)
Mortgage-backed securities   1,828    (18)           1,828    (18)
Collateralized mortgage obligations:                           
Non-agency   244    (7)           244    (7)
Total temporarily impaired securities   3,339    (89)           3,339    (89)

  (in thousands)  Less than 12 Months  12 Months or Longer  Total
   Fair
value
 

Unrealized

losses

  Fair
value
 

Unrealized

losses

  Fair
value
  Unrealized losses
  December 31, 2014                  
Available-for-sale                              
Municipal bonds  $177   $1  $1,589   $64   $1,766   $65
Mortgage-backed securities   56    1   1,885    14    1,941    15
Collateralized mortgage obligations:                            
Non-agency   441    7   164    5    605    12
Total temporarily impaired securities   674    9   3,638    83    4,312    92

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.

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at September 30, 2015.

U.S. Government agency mortgage-backed securities: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be at maturity, and Salisbury does not intend to sell these securities. Therefore, management does not consider these securities to be OTTI at September 30, 2015.

Municipal bonds: Contractual cash flows are performing as expected. Salisbury’s portfolio is mostly comprised of tax-exempt general obligation bonds or public-purpose revenue bonds for schools, municipal offices, sewer infrastructure and fire houses, for small towns and municipalities across the United States. In the wake of the financial crisis, most monoline bond insurers had their ratings downgraded or withdrawn because of excessive exposure to insurance for collateralized debt obligations. Where appropriate, Salisbury performs credit underwriting reviews of unrated issuers, including some that have had their ratings withdrawn and are insured by insurers that have had their ratings withdrawn, to assess default risk. For all completed reviews, pass credit risk ratings have been assigned. Management expects to recover the entire amortized cost basis of these securities. 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 at maturity, and Salisbury does not intend to sell these securities. Therefore, management does not consider these securities to be OTTI at September 30, 2015.

11
 

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at September 30, 2015, to assess whether any of the securities were OTTI. Salisbury uses cash flow forecasts for each security based on a variety of market driven assumptions and securitization terms, including prepayment speed, default or delinquency rate, and default severity for losses including interest, legal fees, property repairs, expenses and realtor fees, that, together with the loan amount are subtracted from collateral sales proceeds to determine severity. In 2009, Salisbury determined that five non-agency CMO securities reflected OTTI and recognized losses for deterioration in credit quality of $1,128,000. Salisbury judged the four remaining securities not to have additional OTTI and all other CMO securities not to be OTTI as of September 30, 2015. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI for further deterioration in credit quality. Salisbury evaluates these securities for strategic fit and depending upon such factor could reduce its position in these securities, although it has no present intention to do so, and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis.

The following table presents activity related to credit losses recognized into earnings on the non-agency CMOs held by Salisbury for which a portion of an OTTI charge was recognized in accumulated other comprehensive income:

  Nine months ended September 30 (in thousands)    2015      2014  
Balance, beginning of period  $1,128   $1,128 
Credit component on debt securities in which OTTI was not previously recognized        
Balance, end of period  $1,128   $1,128 

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank’s FHLBB stock as of September 30, 2015. Deterioration of the FHLBB’s capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

12
 

NOTE 3 – LOANS

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

   September 30, 2015  December 31, 2014
  (In thousands)  Business Activities  Loans 

Acquired

Loans

  Total  Business Activities  Loans 

Acquired

Loans

  Total
Residential 1-4 family  $260,912   $8,026   $268,938   $252,258   $9,223   $261,481 
Residential 5+ multifamily   6,192    6,228    12,420    5,556    8,735    14,291 
Construction of residential 1-4 family   6,193        6,193    2,004        2,004 
Home equity credit   33,880        33,880    34,627        34,627 
Residential real estate   307,177    14,254    321,431    294,445    17,958    312,403 
Commercial   110,955    91,467    202,422    98,498    97,899    196,397 
Construction of commercial   12,987    4,862    17,849    18,602    9,045    27,647 
Commercial real estate   123,942    96,329    220,271    117,100    106,944    224,044 
Farm land   3,485        3,485    3,239        3,239 
Vacant land   9,446        9,446    9,342        9,342 
Real estate secured   444,050    110,583    554,633    424,126    124,902    549,028 
Commercial and industrial   70,858    53,928    124,786    49,204    68,714    117,918 
Municipal   6,947        6,947    6,083        6,083 
Consumer   5,760    74    5,834    4,334    122    4,456 
Loans receivable, gross   527,615    164,585    692,200    483,747    193,738    677,485 
Deferred loan origination fees and costs, net   1,178        1,178    1,203        1,203 
Allowance for loan losses   (5,386)   (273)   (5,659)   (5,337)   (21)   (5,358)
Loans receivable, net  $523,407   $164,312   $687,719   $479,613   $193,717   $673,330 
Loans held-for-sale                              
Residential 1-4 family  $573   $   $573   $568   $   $568 

 

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in Litchfield County, Connecticut; Dutchess, Orange and Columbia Counties, New York; and Berkshire County, Massachusetts, which constitute Salisbury's service area.

Salisbury offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, equipment loans, and a variety of consumer loans, including home equity lines of credit, and installment and collateral loans. Residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in Salisbury’s market area.

13
 

Loan Credit Quality

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

Business Activities Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
September 30, 2015                              
Residential 1-4 family  $246,872   $7,053   $6,895   $92   $   $260,912 
Residential 5+ multifamily   4,180    1,048    964            6,192 
Construction of residential 1-4 family   6,193                    6,193 
Home equity credit   32,331    469    1,080            33,880 
Residential real estate   289,576    8,570    8,939    92        307,177 
Commercial   99,165    4,984    6,806            110,955 
Construction of commercial   12,416        571            12,987 
Commercial real estate   111,581    4,984    7,377            123,942 
Farm land   2,449        1,036            3,485 
Vacant land   6,446    71    2,929            9,446 
Real estate secured   410,052    13,625    20,281    92        444,050 
Commercial and industrial   69,007    1,230    621            70,858 
Municipal   6,947                    6,947 
Consumer   5,742    11    7            5,760 
Loans receivable, gross  $491,748   $14,866   $20,909   $92   $   $527,615 

Acquired Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
September 30, 2015                              
Residential 1-4 family  $7,168   $91   $767   $   $   $8,026 
Residential 5+ multifamily   6,228                    6,228 
Construction of residential 1-4 family                        
Home equity credit                        
Residential real estate   13,396    91    767            14,254 
Commercial   83,657    3,052    4,758            91,467 
Construction of commercial   4,590        272            4,862 
Commercial real estate   88,247    3,052    5,030            96,329 
Farm land                        
Vacant land                        
Real estate secured   101,643    3,143    5,797            110,583 
Commercial and industrial   52,051    1,192    603    82        53,928 
Municipal                        
Consumer   50    7        17        74 
Loans receivable, gross  $153,744   $4,342   $6,400   $99   $   $164,585 

 

14
 

Business Activities Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2014                              
Residential 1-4 family  $232,628   $12,350   $7,187   $93   $   $252,258 
Residential 5+ multifamily   3,420    1,072    1,064            5,556 
Construction of residential 1-4 family   2,004                    2,004 
Home equity credit   32,639    807    1,181            34,627 
Residential real estate   270,691    14,229    9,432    93        294,445 
Commercial   79,975    10,728    7,795            98,498 
Construction of commercial   18,024        578            18,602 
Commercial real estate   97,999    10,728    8,373            117,100 
Farm land   772    1,361    1,106            3,239 
Vacant land   6,039    140    3,163            9,342 
Real estate secured   375,501    26,458    22,074    93        424,126 
Commercial and industrial   44,903    3,527    774            49,204 
Municipal   6,083                    6,083 
Consumer   4,271    53    10            4,334 
Loans receivable, gross  $430,758   $30,038   $22,858   $93   $   $483,747 

Acquired Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2014                              
Residential 1-4 family  $8,661   $   $562   $   $   $9,223 
Residential 5+ multifamily   8,735                    8,735 
Construction of residential 1-4 family                        
Home equity credit                        
Residential real estate   17,396        562            17,958 
Commercial   89,820    3,830    3,723    526        97,899 
Construction of commercial   9,045                    9,045 
Commercial real estate   98,865    3,830    3,723    526        106,944 
Farm land                        
Vacant land                        
Real estate secured   116,261    3,830    4,285    526        124,902 
Commercial and industrial   66,098    1,675    941            68,714 
Municipal                        
Consumer   96    7    19            122 
Loans receivable, gross  $182,455   $5,512   $5,245   $526   $   $193,738 

 

 

15
 

The composition of loans receivable by delinquency status is as follows:

 

Business Activities Loans

    Past due   
                  180  30      
  (in thousands)  Current  1-29  30-59  60-89  90-179  days  days  Accruing  Non-
      days  days  days  days  and  and90 days accrual
                  over  overand over  
  September 30, 2015                           
Residential 1-4 family  $252,773   $3,454   $332   $426   $93   $3,834   $4,685   $   $5,770 
Residential 5+ multifamily   6,032    71                89    89        89 
Construction of residential 1-4 family   6,193                                 
Home equity credit   32,733    424    291        422    10    723        494 
Residential real estate   297,731    3,949    623    426    515    3,933    5,497        6,353 
Commercial   106,638    1,708    1,569    240    119    681    2,609        2,423 
Construction of commercial   12,539            448            448         
Commercial real estate   119,177    1,708    1,569    688    119    681    3,057        2,423 
Farm land   2,762                    723    723        1,036 
Vacant land   5,504    1,119                2,823    2,823        2,857 
Real estate secured   425,174    6,776    2,192    1,114    634    8,160    12,100        12,669 
Commercial and industrial   69,459    840    139    397    5    18    559    5    419 
Municipal   6,947                                 
Consumer   5,653    92    14    1            15         
Loans receivable, gross  $507,233   $7,708   $2,345   $1,512   $639   $8,178   $12,674   $5   $13,088 

Acquired Loans

  September 30, 2015                           
Residential 1-4 family  $6,977   $190   $   $   $269   $590   $859   $91   $767 
Residential 5+ multifamily   6,228                                 
Construction of residential 1-4 family                                    
Home equity credit                                    
Residential real estate   13,205    190            269    590    859    91    767 
Commercial   86,852    1,982        461    102    2,070    2,633        2,172 
Construction of commercial   4,590                    272    272        272 
Commercial real estate   91,442    1,982        461    102    2,342    2,905        2,444 
Farm land                                    
Vacant land                                    
Real estate secured   104,647    2,172        461    371    2,932    3,764    91    3,211 
Commercial and industrial   53,116    561    191    20    40        251        40 
Municipal                                    
Consumer   70        4                4         
Loans receivable, gross  $157,833   $2,733   $195   $481   $411   $2,932   $4,019   $91   $3,251 

  

16
 

Business Activities Loans

    Past due   
                  180  30      
  (in thousands)  Current  1-29  30-59  60-89  90-179  days  days  Accruing  Non-
      days  days  days  days  and  and90 days accrual
                  over  overand over  
  December 31, 2014                           
Residential 1-4 family  $241,567   $7,299   $1,250   $555   $976   $611   $3,392   $   $2,445 
Residential 5+ multifamily   5,467                89        89        89 
Construction of residential 1-4 family   2,004                                 
Home equity credit   33,488    387    122    528    39    63    752        348 
Residential real estate   282,526    7,686    1,372    1,083    1,104    674    4,233        2,882 
Commercial   94,598    2,079    602            1,219    1,821        1,219 
Construction of commercial   18,602                                 
Commercial real estate   113,200    2,079    602            1,219    1,821        1,219 
Farm land   2,119        13    723        384    1,120        384 
Vacant land   6,422    51    7        39    2,823    2,869        2,862 
Real estate secured   404,267    9,816    1,994    1,806    1,143    5,100    10,043        7,347 
Commercial and industrial   48,478    582    91    17    36        144    17    33 
Municipal   6,083                                 
Consumer   4,274    47    8    5            13         
Loans receivable, gross  $463,102   $10,445   $2,093   $1,828   $1,179   $5,100   $10,200   $17   $7,380 
                                              

Acquired Loans

  December 31, 2014                        
Residential 1-4 family  $8,661   $   $   $   $   $562   $562   $   $562 
Residential 5+ multifamily   8,735                                 
Construction of residential 1-4 family                                    
Home equity credit                                    
Residential real estate   17,396                    562    562        562 
Commercial   95,695    1,109    167        285    643    1,095        1,931 
Construction of commercial   9,045                                 
Commercial real estate   104,740    1,109    167        285    643    1,095        1,931 
Farm land                                    
Vacant land                                    
Real estate secured   122,136    1,109    167        285    1,205    1,657        2,493 
Commercial and industrial   67,665    740    89    220            309         
Municipal                                    
Consumer   117    5                             
Loans receivable, gross  $189,918   $1,854   $256   $220   $285   $1,205   $1,966   $   $2,493 
                                              

Interest on impaired loans that would have been recorded as additional interest income for the nine months ended September 30, 2015 and 2014 had the loans been current in accordance with their original terms totaled $609,000 and $410,000, respectively, disregarding the impact of purchased accounting on these loans.

 

17
 

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

Business Activities Loans  Nine months ended
   September 30, 2015  September 30, 2014
  (in thousands)  Quantity 

Pre-

modification balance

 

Post-

modification balance

  Quantity 

Pre-

modification balance

 

Post-

modification balance

Residential real estate   2   $923   $923    2   $237   $237 
Commercial real estate   2    478    478    3    846    846 
Construction of commercial               1    131    131 
Home equity credit   1    35    35    2    72    72 
Troubled debt restructurings   5   $1,436   $1,436    8   $1,286   $1,286 
Rate reduction and term extension   2   $478   $478             
Interest only and term extension               1    48    48 
Term extension and amortization               2    338    338 
Interest only               2    54    54 
Debt consolidation, rate reduction, term extension               1    399    399 
Debt consolidation and term extension               2    447    447 
Note bifurcation   1    48    48             
Term extension   2    910    910             
Troubled debt restructurings   5   $1,436   $1,436    8   $1,286   $1,286 

Five loans were modified in troubled debt restructurings during 2015, one of which was past due at September 30, 2015.

There was one acquired loan modified in a troubled debt restructuring during the nine months ended September 30, 2015.

As of September 30, 2015, the Bank had $4.3 million in loans collateralized by residential real estate property in the process of foreclosure.

 

18
 

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

   Business Activities Loans  Acquired Loans
  (in thousands)  Three months ended September 30, 2015  Three months ended September 30, 2015
   Beginning balance 

Provision

(benefit)

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

(benefit)

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,147   $632   $(92)  $111   $2,798   $15   $55   $   $   $70 
Commercial   1,339    (102)   (10)       1,227    77    81        5    163 
Land   182    168    (72)       278                     
Real estate   3,668    698    (174)   111    4,303    92    136        5    233 
Commercial and industrial   691    (197)       4    498    52    (22)       10    40 
Municipal   64    (16)           48                     
Consumer   123    1   (17)   6    113                     
Unallocated   369    55            424                     
Totals  $4,915   $541   $(191)  $121   $5,386   $144   $114   $   $15   $273 
   Business Activities Loans  Acquired Loans
  (in thousands)  Nine months ended September 30, 2015  Nine months ended September 30, 2015
   Beginning balance 

Provision

(benefit)

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

(benefit)

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,306   $952   $(573)  $113   $2,798   $   $70   $   $   $70 
Commercial   1,697    (256)   (214)       1,227    7    151        5    163 
Land   164    186    (72)       278                     
Real estate   4,167    882    (859)   113    4,303    7    221        5    233 
Commercial and industrial   583    (484)   (56)   455    498    14            26    40 
Municipal   61    (13)           48                     
Consumer   117    30    (47)   13    113                     
Unallocated   409    15            424                     
Totals  $5,337   $430   $(962)  $581   $5,386   $21   $221   $   $31   $273 
  (in thousands)  Three months ended September 30, 2014  Nine months ended September 30, 2014
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $1,974   $357   $(46)  $16   $2,301   $1,938   $494   $(149)  $18   $2,301 
Commercial   1,622    89           1,711    1,385    378    (52)       1,711 
Land   184    (17)   (6)       161    226    33    (98)       161 
Real estate   3,780    429    (52)   16    4,173    3,549    905    (299)   18    4,173 
Commercial and industrial   584    (68)      1    517    561    (57)   (1)   14    517 
Municipal   44    18            62    43    19            62 
Consumer   49    11    (3)   2    59    105    (46)   (18)   18    59 
Unallocated   645    (72)           573    425    148            573 
Totals  $5,102   $318   $(55)  $19   $5,384   $4,683   $969   $(318)  $50   $5,384 

 

19
 

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

Business Activities Loans

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
September 30, 2015                              
Residential 1-4 family  $252,454   $1,603   $8,458   $724   $260,912   $2,327 
Residential 5+ multifamily   4,315    37    1,877        6,192    37 
Construction of residential 1-4 family   6,193    52            6,193    52 
Home equity credit   33,230    345    650    37    33,880    382 
Residential real estate   296,192    2,037    10,985    761    307,177    2,798 
Commercial   106,573    937    4,382    170    110,955    1,107 
Construction of commercial   12,864    120    123        12,987    120 
Commercial real estate   119,437    1,057    4,505    170    123,942    1,227 
Farm land   2,449    19    1,036    1    3,485    20 
Vacant land   6,364    234    3,082    24    9,446    258 
Real estate secured   424,442    3,347    19,608    956    444,050    4,303 
Commercial and industrial   70,372    494    486    4    70,858    498 
Municipal   6,947    48            6,947    48 
Consumer   5,760    113            5,760    113 
Unallocated allowance       424                424 
Totals  $507,521   $4,426   $20,094   $960   $527,615   $5,386 

Acquired Loans

(in thousands)  Collectively evaluated  Individually evaluated  ASC 310-30 loans   Total portfolio 
    Loans    Allowance    Loans    Allowance    Loans    Allowance    Loans    Allowance 
September 30, 2015                                        
Residential 1-4 family  $7,259   $   $767   $70   $   $   $8,026   $70 
Residential 5+ multifamily   6,228                        6,228     
Construction of residential 1-4 family                                
Home equity credit                                
Residential real estate   13,487        767    70            14,254    70 
Commercial   83,257    13    2,920    145    5,290    2    91,467    160 
Construction of commercial   4,590    3    272                4,862    3 
Commercial real estate   87,847    16    3,192    145    5,290    2    96,329    163 
Farm land                                
Vacant land                                
Real estate secured   101,334    16    3,959    215    5,290    2    110,583    233 
Commercial and industrial   52,587    40    40        1,301        53,928    40 
Municipal                                
Consumer   57                17        74     
Unallocated allowance                                
Totals  $153,978   $56   $3,999   $215   $6,608   $2   $164,585   $273 
20
 

Business Activities Loans

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2014                              
Residential 1-4 family  $245,997   $1,316   $6,261   $549   $252,258   $1,865 
Residential 5+ multifamily   4,536    66    1,020    3    5,556    69 
Construction of residential 1-4 family   2,004    13            2,004    13 
Home equity credit   34,231    350    396    9    34,627    359 
Residential real estate   286,768    1,745    7,677    561    294,445    2,306 
Commercial   93,784    1,018    4,714    486    98,498    1,504 
Construction of commercial   18,474    193    128        18,602    193 
Commercial real estate   112,258    1,211    4,842    486    117,100    1,697 
Farm land   2,855    59    384        3,239    59 
Vacant land   6,245    67    3,097    38    9,342    105 
Real estate secured   408,126    3,082    16,000    1,085    424,126    4,167 
Commercial and industrial   48,635    532    569    51    49,204    583 
Municipal   6,083    61            6,083    61 
Consumer   4,334    117            4,334    117 
Unallocated allowance       409                409 
Totals  $467,178   $4,201   $16,569   $1,136   $483,747   $5,337 

Acquired Loans

  (in thousands)  Collectively evaluated  Individually evaluated  ASC 310-30 loans  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2014                                        
Residential 1-4 family  $8,661   $   $562   $   $   $   $9,223   $ 
Residential 5+ multifamily   8,735                        8,735     
Construction of residential 1-4 family                                
Home equity credit                                
Residential real estate   17,396        562                17,958     
Commercial   89,820        2,502        5,577        97,899     
Construction of commercial   9,045    7                    9,045    7 
Commercial real estate   98,865    7    2,502        5,577        106,944    7 
Farm land                                
Vacant land                                
Real estate secured   116,261    7    3,064        5,577        124,902    7 
Commercial and industrial   66,874    14            1,840        68,714    14 
Municipal                                
Consumer   103                19        122     
Unallocated allowance                                
Totals  $183,238   $21   $3,064   $   $7,436   $   $193,738   $21 
21
 

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

Business Activities Loans

  September 30, 2015 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
Performing loans  $503,052   $3,935   $   $   $503,052   $3,935 
Potential problem loans   4,469    67            4,469    67 
Impaired loans           20,094    960    20,094    960 
Unallocated allowance       424                424 
Totals  $507,521   $4,426   $20,094   $960   $527,615   $5,386 

Acquired Loans

  September 30, 2015 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
Performing loans  $158,144   $56   $   $   $158,144   $56 
Potential problem loans   2,442    2            2,442    2 
Impaired loans           3,999    215    3,999    215 
Unallocated allowance                        
Totals  $160,586   $58   $3,999   $215   $164,585   $273 

Business Activities Loans

  December 31, 2014 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
  Performing loans  $457,744   $3,283   $   $   $457,744   $3,283 
  Potential problem loans   9,423    509    11        9,434    509 
  Impaired loans           16,569    1,136    16,569    1,136 
  Unallocated allowance       409                409 
  Totals  $467,167   $4,201   $16,580   $1,136   $483,747   $5,337 

Acquired Loans

  December 31, 2014 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
  Performing loans  $187,966   $21   $   $   $187,966   $21 
  Potential problem loans   2,708                2,708     
  Impaired loans           3,064        3,064     
  Unallocated allowance                        
  Totals  $190,674   $21   $3,064   $   $193,738   $21 

  

22
 

A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the present value of expected cash flows or collateral, in accordance with the most likely means of recovery. Certain data with respect to loans individually evaluated for impairment is as follows:

Business Activities Loans

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
September 30, 2015                                         
Residential 1-4 family  $7,170   $7,703   $6,213   $724   $109   $3,165   $3,314   $3,043   $82 
Home equity credit   543    557    176    37    6    107    122    611    2 
Residential real estate   7,713    8,260    6,389    761    115    3,272    3,436    3,654    84 
Commercial   3,864    4,309    2,629    170    113    518    548    2,130    12 
Construction of commercial                       123    129    127    6 
Farm land   11    13    445    1        1,025    1,100    270    15 
Vacant land   2,870    3,789    3,058    24    2    212    244    5    7 
Real estate secured   14,458    16,371    12,521    956    230    5,150    5,457    6,186    124 
Commercial and industrial   247    255    120    4    8    239    272    464    7 
Consumer                                    
Totals  $14,705   $16,626   $12,641   $960   $238   $5,389   $5,729   $6,650   $131 

 

Acquired Loans

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
September 30, 2015                                         
Residential 1-4 family  $590   $716   $176   $70   $   $177   $177   $436   $4 
Home equity credit                                    
Residential real estate   590    716    176    70        177    177    436    4 
Commercial   2,146    2,897    557    145    61    774    1,091    2,097    10 
Construction of commercial                       272    278    138    16 
Farm land                                    
Vacant land                                    
Real estate secured   2,736    3,613    733    215    61    1,223    1,546    2,671    30 
Commercial and industrial   40    70    4        1                 
Consumer                                    
Totals  $2,776   $3,683   $737   $215   $62   $1,223   $1,546   $2,671   $30 

 

23
 

Business Activities Loans

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
  December 31, 2014           
Residential 1-4 family  $5,008   $5,157   $4,547   $552   $128   $2,273   $2,395   $2,703   $57 
Home equity credit   9    24    91    9        387    405    441    4 
Residential real estate   5,017    5,181    4,638    561    128    2,660    2,800    3,144    61 
Commercial   3,383    3,563    3,262    486    108    1,331    1,520    1,468    54 
Construction of commercial                       128    134    123     
Farm land                       384    384    384     
Vacant land   3,097    3,996    3,090    38    12                 
Real estate secured   11,497    12,740    10,990    1,085    248    4,503    4,838    5,119    115 
Commercial and industrial   102    161    106    51    2    467    469    516    30 
Consumer                               19     
Totals  $11,599   $12,901   $11,096   $1,136   $250   $4,970   $5,307   $5,654   $145 

Acquired Loans

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
  December 31, 2014                       
Residential 1-4 family  $   $   $   $   $   $562   $716   $562   $3 
Home equity credit                                    
Residential real estate                       562    716    562    3 
Commercial                       2,502    4,014    2,502    12 
Construction of commercial                                    
Farm land                                    
Vacant land                                    
Real estate secured                       3,064    4,730    3,064    15 
Commercial and industrial                           4         
Consumer                                    
Totals  $   $   $   $   $   $3,064   $4,734   $3,064   $15 

Acquired Loans

Loans that Salisbury acquired through business combinations are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest.

24
 

For loans that meet the criteria stipulated in ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” Salisbury recognizes the accretable yield, which is defined as the excess of all cash flows expected to be collected at acquisition over the initial fair value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. The excess of the loan’s contractually required payments over the cash flows expected to be collected is the nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss accrual, or a valuation allowance. Going forward, Salisbury continues to evaluate whether the timing and the amount of cash to be collected are reasonably expected. Subsequent significant increases in cash flows Salisbury expects to collect will first reduce any previously recognized valuation allowance and then be reflected prospectively as an increase to the level yield. Subsequent decreases in expected cash flows may result in the loan being considered impaired. Interest income is not recognized to the extent that the net investment in the loan would increase to an amount greater than the estimated payoff amount.

For ASC 310-30 loans, the expected cash flows reflect anticipated prepayments, determined on a loan by loan basis according to the anticipated collection plan of these loans. The expected prepayments used to determine the accretable yield are consistent between the cash flows expected to be collected and projections of contractual cash flows so as to not affect the nonaccretable difference. For ASC 310-30 loans, prepayments result in the recognition of the nonaccretable balance as current period yield. Changes in prepayment assumptions may change the amount of interest income and principal expected to be collected.

The carrying amount of the acquired loans at September 30, 2015 totaled $165 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $9.8 million (and a note balance of $12.2 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows.

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under ASC-310-30:

   Three months  Nine months
  Periods ended September 30, (in thousands)    2015      2014      2015      2014  
Balance at beginning of period  $1,604   $   $1,242   $ 
Acquisitions                
Sales                
Reclassification from nonaccretable difference for loans with improved cash flows   379        1,157     
Change in cash flows that do not affect nonaccretable difference                
Accretion   (297)       (713)    
Balance at end of period  $1,686   $   $1,686   $ 

For loans that do not meet the ASC 310-30 criteria, Salisbury accretes interest income on a level yield basis using the contractually required cash flows. Salisbury subjects loans that do not meet the ASC 310-30 criteria to ASC Topic 450, “Contingencies” by collectively evaluating these loans for an allowance for loan losses.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if Salisbury can reasonably estimate the timing and amount of the expected cash flows on such loans and if Salisbury expects to fully collect the new carrying value of the loans. As such, Salisbury may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield.

NOTE 4 - MORTGAGE SERVICING RIGHTS

  (in thousands)    September 30, 2015      December 31, 2014  
Residential mortgage loans serviced for others  $132,201   $138,106 
Fair value of mortgage servicing rights   1,429    1,568 

Changes in mortgage servicing rights are as follows:

   Three months  Nine months
  Periods ended September 30, (in thousands)   2015      2014      2015      2014  
Mortgage Servicing Rights                    
Balance, beginning of period  $599   $838   $694   $980 
Originated   22    (17)   124    5 
Amortization (1)   (85)   (56)   (282)   (220)
Balance, end of period   536    765    536    765 
Valuation Allowance                    
Balance, beginning of period   (2)   (1)   1    (15)
Decrease (increase) in impairment reserve (1)   1    1    (2)   15 
Balance, end of period   (1)       (1)    
Loan servicing rights, net  $535   $765   $535   $765 
(1)Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

NOTE 5 - PLEDGED ASSETS

  (in thousands)    September 30, 2015      December 31, 2014  
Securities available-for-sale (at fair value)  $68,569   $69,055 
Loans receivable   159,436    157,581 
Total pledged assets  $228,005   $226,636 

At September 30, 2015, securities were pledged as follows: $60.4 million to secure public deposits, $8.1 million to secure repurchase agreements and $0.1 million to secure FHLBB advances. In addition to securities, loans receivable were pledged to secure FHLBB advances and credit facilities.

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NOTE 6 – EARNINGS PER SHARE

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

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

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

     Three months    Nine months
  Periods ended September 30, (in thousands)   2015      2014      2015      2014  
Net income  $1,985   $768   $6,290   $2,285 
Less: Preferred stock dividends declared   (40)   (40)   (120)   (126)
Net income available to common shareholders   1,945    728    6,170    2,159 
Less: Undistributed earnings allocated to participating securities   (17)   (8)   (54)   (26)
Net income allocated to common stock  $1,928   $720   $6,116   $2,133 
Common shares issued   2,731    1,713    2,728    1,713 
Less: Unvested restricted stock awards   (24)   (20)   (24)   (21)
Common shares outstanding used to calculate basic earnings per common share   2,707    1,693    2,704    1,692 
Add: Dilutive effect of stock options   17        17     
Common shares outstanding used to calculate diluted earnings per common share   2,724    1,693    2,721    1,692 
Earnings per common share (basic)  $0.71   $0.43   $2.26   $1.26 
Earnings per common share (diluted)  $0.71   $0.43   $2.25   $1.26 

NOTE 7 – SHAREHOLDERS’ EQUITY

Capital Requirements

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

Quantitative measures established by regulation to ensure capital adequacy require Salisbury and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined) to average assets (as defined) and total, Common Equity Tier 1 and Tier 1 capital (as defined) to risk-weighted assets (as defined). Management believes, as of September 30, 2015, that Salisbury and the Bank meet all of the capital adequacy requirements to which they are subject.

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In July 2013, the Federal Reserve Bank (FRB) approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for bank holding companies and their bank subsidiaries. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. On April 8, 2014, the FDIC adopted as final its interim final rule, which is identical in substance to the final rules issued by the FRB in July 2013. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Bank and Company. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

The phase-in period for the final rules began for Salisbury and the Bank on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule and should be fully phased-in by January 1, 2019.

The Bank was classified, as of its most recent notification, as "well capitalized." The Bank's actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" are as follows:

                      To be Well Capitalized
   Actual  For Capital Adequacy Purposes  Under Prompt Corrective Action Provisions
  (dollars in thousands)  Amount