Edgar Filing: SALISBURY BANCORP INC

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

☐

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

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

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

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

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

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.

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.

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.

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.

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.

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.

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

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

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		and		90 days			accrual
												over		over		and 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

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		and		90 days			accrual
												over		over		and 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.

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.

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

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

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

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

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

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.

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.

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.

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