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 June 30, 2020

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)

 

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

 

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

Yes ☑ No

 

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

Yes ☑ No

 

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

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated filer ☐

Smaller reporting company ☑

Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

 

The number of shares of Common Stock outstanding as of August 5, 2020 is 2,843,292.

 
 

 

 

 

TABLE OF CONTENTS

 

  PART 1 FINANCIAL INFORMATION Page
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2020 (unaudited) and DECEMBER 31, 2019 3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE AND SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited) 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited) 5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited) 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 40
Item 4. CONTROLS AND PROCEDURES 42
     
  PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 42
Item 1A. RISK FACTORS 42
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 42
Item 3. DEFAULTS UPON SENIOR SECURITIES 42
Item 4. MINE SAFETY DISCLOSURES 42
Item 5. OTHER INFORMATION 42
Item 6. EXHIBITS 43
SIGNATURES 43

 2 

 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)    June 30, 2020      December 31, 2019  
ASSETS   (unaudited)      
Cash and due from banks  $7,391   $7,406 
Interest bearing demand deposits with other banks   77,104    19,479 
Total cash and cash equivalents   84,495    26,885 
Interest bearing Time Deposits with Financial Institutions   750    750 
Securities          
Available-for-sale at fair value   89,452    91,801 
CRA mutual fund at fair value   912    882 
Federal Home Loan Bank of Boston stock at cost   3,353    3,242 
Loans held-for-sale   5,313    332 
Loans receivable, net (allowance for loan losses: $12,371 and $8,895)   1,040,358    927,413 
Other real estate owned       314 
Bank premises and equipment, net   17,950    17,385 
Goodwill   13,815    13,815 
Intangible assets (net of accumulated amortization: $5,054 and $4,884)   825    995 
Accrued interest receivable   3,988    3,415 
Cash surrender value of life insurance policies   20,846    20,580 
Deferred taxes   1,935    1,249 
Other assets   3,145    3,390 
Total Assets  $1,287,137   $1,112,448 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
Demand (non-interest bearing)  $325,531   $237,852 
Demand (interest bearing)   188,487    153,314 
Money market   251,242    239,504 
Savings and other   170,537    161,112 
Certificates of deposit   149,802    127,724 
Total deposits   1,085,599    919,506 
Repurchase agreements   7,809    8,530 
Federal Home Loan Bank of Boston advances   55,118    50,887 
Subordinated debt   9,871    9,859 
Note payable   228    246 
Finance lease obligations   1,696    1,718 
Accrued interest and other liabilities   8,372    8,047 
Total Liabilities   1,168,693    998,793 
Shareholders' Equity          
Common stock - $0.10 per share par value          
Authorized: 5,000,000          
Issued: 2,843,292 and 2,825,912          
Outstanding: 2,843,292 and 2,825,912   284    283 
Unearned compensation - restricted stock awards   (1,031)   (795)
Paid-in capital   45,096    44,490 
Retained earnings   71,461    68,320 
Accumulated other comprehensive income, net   2,634    1,357 
Total Shareholders' Equity   118,444    113,655 
Total Liabilities and Shareholders' Equity  $1,287,137   $1,112,448 

 

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

 

 3 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

     Three months ended      Six months ended  
Periods ended June 30, (in thousands, except per share amounts)    2020      2019      2020      2019  
Interest and dividend income                    
Interest and fees on loans  $10,313   $9,880   $20,300   $19,814 
Interest on debt securities:                    
Taxable   409    583    864    1,204 
Tax exempt   171    117    356    189 
Other interest and dividends   51    252    142    479 
Total interest and dividend income   10,944    10,832    21,662    21,686 
Interest expense                    
Deposits   988    1,999    2,497    3,795 
Repurchase agreements   4    4    10    7 
Finance lease   35    46    71    92 
Note payable   4    4    7    8 
Subordinated debt   156    156    312    312 
Federal Home Loan Bank of Boston advances   140    279    359    691 
Total interest expense   1,327    2,488    3,256    4,905 
Net interest and dividend income   9,617    8,344    18,406    16,781 
Provision for loan losses   1,806    151    3,512    445 
Net interest and dividend income after provision for loan losses   7,811    8,193    14,894    16,336 
Non-interest income                    
Trust and wealth advisory   1,031    1,044    2,061    1,950 
Service charges and fees   598    1,012    1,503    1,932 
Gains on sales of mortgage loans, net   252    1    313    8 
Mortgage servicing, net   66    80    133    156 
Gains on CRA mutual fund   8    12    22    23 
Gains on available-for-sale securities, net   181    281    182    272 
BOLI income and gains   133    87    266    166 
Other   47    31    80    68 
Total non-interest income   2,316    2,548    4,560    4,575 
Non-interest expense                    
Salaries   2,411    2,959    5,261    5,952 
Employee benefits   1,037    1,042    2,183    2,227 
Premises and equipment   981    1,004    1,891    1,976 
Data processing   557    577    1,098    1,086 
Professional fees   758    583    1,385    1,118 
OREO gains, losses and write-downs, net       270        322 
Collections, OREO, and loan related   79    79    104    209 
FDIC insurance   103    140    208    303 
Marketing and community support   169    151    293    307 
Amortization of core deposit intangibles   83    99    170    203 
Other   611    535    1,133    947 
Total non-interest expense   6,789    7,439    13,726    14,650 
Income before income taxes   3,338    3,302    5,728    6,261 
Income tax provision   604    599    947    1,124 
Net income  $2,734   $2,703   $4,781   $5,137 
Net income allocated to common stock  $2,691   $2,671   $4,704   $5,079 
                     
Basic earnings per common share  $0.96   $0.96   $1.68   $1.83 
Diluted earnings per common share  $0.96   $0.95   $1.68   $1.82 
Common dividends per share  $0.29   $0.28   $0.58   $0.56 

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

 4 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

     Three months ended      Six months ended  
Periods ended June 30, (in thousands)    2020      2019      2020      2019  
Net income  $2,734   $2,703   $4,781   $5,137 
Other comprehensive income                    
Net unrealized gains on securities available-for-sale   470    1,261    1,799    2,390 
Reclassification of net realized gains in net income (1)   (181)   (281)   (182)   (272)
Unrealized gains on securities available-for-sale   289    980    1,617    2,118 
Income tax (expense)   (61)   (206)   (340)   (444)
Unrealized gains on securities available-for-sale, net of tax   228    774    1,277    1,674 
Comprehensive income  $2,962   $3,477   $6,058   $6,811 


(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive (loss) income and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains on sales and calls 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. The net tax effect for the three months ending June 30, 2020 and 2019 are $38 thousand and $59 thousand, respectively. The net tax effect for the six month periods ending June 30, 2020 and 2019 are $38 thousand and $57 thousand, respectively.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

Three months ended June 30,
(dollars in thousands)

  Common Stock  Paid-in  Retained  Unearned compensation restricted stock  Accumulated other comprehensive  Total shareholders'
   Shares  Amount  Capital  Earnings  awards  (loss) income  equity
Balances at March 31, 2019   2,806,681   $281   $43,765   $61,989   $(606)  $680   $106,109 
Net income               2,703            2,703 
Other comprehensive income, net of tax                       774    774 
Common stock dividends declared               (787)           (787)
Issuance of restricted stock awards   11,530    1    457        (458)        
Stock options exercised   2,025        34                34 
Forfeiture of stock awards   (360)       (16)       16         
Issuance of director's restricted stock awards   3,600        142        (142)        
Stock based compensation-restricted stock awards                   115        115 
Balances at June 30, 2019   2,823,476   $282   $44,382   $63,905   $  (1,075  $1,454   $108,948 
Balances at March 31, 2020   2,829,017   $283   $44,566   $69,547   $(659)  $2,406   $116,143 
Net income               2,734            2,734 
Other comprehensive income, net of tax                       228    228 
Common stock dividends declared               (820)           (820)
Issuance of restricted stock awards   11,775    1    421        (422)        
Stock options exercised                            
Forfeiture of stock awards
   (700)       (29)       29         
Issuance of director's restricted stock awards
   3,200        114        (114)        
Stock based compensation-restricted stock awards           24        135        159 
Balances at June 30, 2020   2,843,292   $284   $45,096   $71,461   $   (1,031  $2,634   $118,444 

 5 

 

Six months ended June 30,
(dollars in thousands)

  Common Stock  Paid-in  Retained  Unearned compensation restricted stock  Accumulated other comprehensive  Total shareholders'
   Shares  Amount  Capital  Earnings  awards  (loss) income  equity
Balances at December 31, 2018   2,806,781   $281   $43,770   $60,339   $(711)  $(220)  $103,459 
Net income               5,137            5,137 
Other comprehensive income, net of tax                       1,674    1,674 
Common stock dividends declared               (1,571)           (1,571)
Issuance of restricted stock awards   11,530    1    457        (458)        
Stock options exercised   2,025        34                34 
Forfeiture of restricted stock awards   (460)       (21)       21         
Issuance of director's restricted stock awards   3,600        142        (142)        
Stock based compensation-restricted stock awards                   215        215 
Balances at June 30, 2019   2,823,476   $282   $44,382   $63,905   $(1,075)  $1,454   $108,948 
Balances at December 31, 2019   2,825,912   $283   $44,490   $68,320   $(795)  $1,357   $113,655 
Net income               4,781            4,781 
Other comprehensive income, net of tax                       1,277    1,277 
Common stock dividends declared               (1,640)           (1,640)
Issuance of restricted stock awards   11,775    1    421        (422)        
Stock options exercised   3,105        53                53 
Forfeiture of restricted stock awards   (700)       (29)       29         
Issuance of director's restricted stock awards   3,200        114        (114)        
Stock based compensation-restricted stock awards           47        271        318 
Balances at June 30, 2020   2,823,292   $284   $45,096   $71,461   $(1,031)  $2,634   $118,444 


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

 

 6 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Six months ended June 30, (in thousands)    2020      2019  
Operating Activities          
Net income  $4,781   $5,137 
Adjustments to reconcile net income to net cash provided by operating activities          
Amortization(accretion) and depreciation          
Securities   231    137 
Bank premises and equipment   720    813 
Core deposit intangible   170    203 
Modification fees on Federal Home Loan Bank of Boston advances   59    115 
Subordinated debt issuance costs   12    12 
Mortgage servicing rights   28    24 
Fair value adjustment on loans       (64)
Fair value adjustment on deposits   (2)   (4)
Gain on sales and calls of securities available-for-sale, net   (182)   (272)
Gain on CRA mutual fund   (22)   (23)
Gain on sales of loans, excluding capitalized servicing rights   (295)   (7)
OREO losses and write-downs       322 
Provision for loan losses   3,512    445 
Proceeds from loans sold   18,117    458 
Loans originated for sale   (22,803)   (854)
Decrease in deferred loan origination fees and costs, net   2,701    92 
Mortgage servicing rights originated   (143)   (5)
Increase in interest receivable   (573)   (291)
(Increase) decrease in deferred tax benefit   (1,026)   125 
Decrease in prepaid expenses   367    101 
Increase in cash surrender value of life insurance policies   (266)   (167)
Decrease in income tax receivable       13 
(Increase) decrease in other assets   (8)   694 
Increase in income taxes payable   1,728     
Decrease in accrued expenses   (1,556)   (1,072)
Increase in interest payable   109    339 
Increase (decrease) in other liabilities   44    (378)
Stock based compensation-restricted stock awards   318    215 
Net cash provided by operating activities  $6,021   $6,108 
Investing Activities          
Net (purchases) redemptions of Federal Home Loan Bank of Boston stock   (111)   1,657 
Purchases of securities available-for-sale   (15,417)   (41,255)
Proceeds from sales of securities available-for-sale   10,598    28,170 
Proceeds from calls of securities available-for-sale   655    25 
Proceeds from maturities of securities available-for-sale   8,082    6,982 
Reinvestment of CRA mutual fund   (8)   (10)
Loan originations and principal collections, net   (119,192)   (1,813)
Recoveries of loans previously charged off   34    46 
Proceeds from sales of other real estate owned   314    1,087 
Capital expenditures   (1,285)   (247)
Purchase of life insurance policies       (750)
Net cash utilized by investing activities  $(116,330)  $(6,108)


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

 7 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Six months ended June 30, (in thousands)    2020      2019  
Financing Activities          
Increase in deposit transaction accounts, net  $144,015   $13,442 
Increase in time deposits, net   22,080    10,546 
(Decrease) increase in securities sold under agreements to repurchase, net   (721)   2,204 
Federal Home Loan Bank of Boston short-term advances, net change   (20,000)   (9,500)
Advances, (principal payments) on Federal Home Loan Bank of Boston advances   25,000    (25,000)
Principal payments on Amortizing FHLB Advances   (828)    
Principal payments on note payable   (18)   (17)
Decrease in finance lease obligation   (22)   (70)
Stock options exercised   53    34 
Common stock dividends paid   (1,640)   (1,571)
Net cash provided (utilized) by financing activities   167,919    (9,932)
Net increase (decrease) in cash and cash equivalents   57,610    (9,932)
Cash and cash equivalents, beginning of period   26,885    58,445 
Cash and cash equivalents, end of period  $84,495   $48,513 
Cash paid during period          
Interest  $3,078   $4,443 
Income taxes   245    986 
Non-cash transfers          
Finance lease obligation          
Adoption of ASU 2016-02 - Other assets       1,552 
Adoption of ASU 2016-02 – Other Liabilities       (1,552)

 

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


 8 

 

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

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

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairment of securities and impairment of goodwill and intangibles.

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 June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2019 Annual Report on Form 10-K for the year ended December 31, 2019.

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.

Risks and Uncertainties

The outbreak of the COVID-19 pandemic (“virus” or “COVID-19”) has adversely impacted a broad range of industries in which the Bank's customers operate and could impair their ability to fulfill their financial obligations to the Bank. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Bank operates. Salisbury proactively implemented many operational changes in March 2020 to protect its employees and customers, which included the closing of the lobbies of its branches to customers, implementing banking by appointment and requiring employees to work remotely or from different locations. Salisbury has experienced neither a significant interruption in service provided to its customers nor a material decline in business activity as a result of the virus. On July 8, 2020, Salisbury reopened its branches to customers.

The Coronavirus Aid, Relief and Economic Security(“CARES”) Act was signed into law on March 27, 2020 as a legislative economic stimulus package. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to small businesses. While the states in the Bank's market area have begun a phased reopening, economic conditions have not returned to pre-COVID-19 levels and many businesses remain closed or are operating at reduced capacity. It is also unknown if the northeast will experience a resurgence of the virus similar to many southern states. Such a resurgence may cause the states in the Bank's market area to close businesses again. If this were to happen, the Bank could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent of the impact that the virus and an economic shutdown will have on Salisbury's operations, Salisbury is disclosing the material items of which it is currently aware.

 9 

 

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. In April 2019, the FASB issued ASU 2019-04 which clarified the treatment of accrued interest when measuring credit losses. Entities may: (1) measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets; (2) make various accounting policy elections regarding the treatment of accrued interest receivable; or (3) elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-04 also clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off. In November 2019, the FASB issued ASU 2019-10, which delayed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies, although early adoption is permitted. Salisbury meets the definition of a smaller reporting company because its public float is less than $250 million. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” which clarified or addressed specific issues about certain aspects of the amendments in ASU 2016-13. The amendments in ASU 2019-11 clarified the following: (1) The allowance for credit losses for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cashflows after acquisition; (2) Transition relief will be provided by permitting entities an accounting policy election to adjust the effective interest rate on existing troubled debt restructurings using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring; (3) Disclosure relief will be extended for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis; (4) An entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero. Upon adoption, Salisbury will apply the standards' provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury anticipates that the adoption of ASU 2016-13 and related updates will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses. Salisbury has engaged a third-party software vendor to model the allowance for loan and losses in conformance with this ASU. Salisbury will continue to refine this model and assess the impact to its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU is intended to allow companies to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The FASB is researching whether similar amendments should be considered for other entities, including public business entities. ASU 2017-04 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019 and interim periods within those years. Entities should apply the guidance prospectively. On January 1, 2020, the Bank adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. On January, 1, 2020, the Bank adopted the new standard, which only revised disclosure requirements and did not have a material impact on Salisbury's Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting or Income Taxes.” The amendments in this Update simplify the accounting for income taxes by removing the following exceptions:1. Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income) 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary 4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this Update also simplify the accounting for income taxes by doing the following: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. 2. Requiring that an entity evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction. 3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority. 4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. 5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years; early adoption is permitted. Salisbury is currently evaluating the provisions of ASU 2019-12 to determine the potential impact the new standard will have on Salisbury's Consolidated Financial Statements.

 10 

 

Other Regulatory Pronouncements

On March 12, 2020 the Securities and Exchange Commission finalized amendments to the definitions of “accelerated” and “large accelerated filer”. The amendments increase the threshold criteria for meeting these categories and are effective on April 27, 2020 and apply to annual reports due on or after such effective date. Prior to these changes, Salisbury was designated as a “smaller reporting company” and an “accelerated” filer as it had more than $75 million in public float but less than $700 million at the end of Salisbury's most recent second quarter. The rule changed the definition of “accelerated filer” and expands the category of “non-accelerated filer” to include entities with public float of less than $700 million and less than $100 million in annual revenues. Salisbury meets the new definition of non-accelerated filer while continuing to qualify as a “smaller reporting company”, and will no longer be considered an accelerated filer. The categorization of “accelerated” or “large accelerated filer” determines the requirement for a public company to obtain an auditor attestation of its internal control over financial reporting. Non-accelerated filers also have additional time to file quarterly and annual reports. All public companies are required to obtain and file annual financial statements audits as well as provide management's assertion on the effectiveness of internal controls over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. As the Bank has total assets exceeding $1.0 billion, it remains subject to the rules of the Federal Deposit Insurance Corporation, which requires an auditor attestation of internal controls over the Bank's regulatory financial reporting. As such, other than additional time provided to file quarterly and annual reports, this amendment to the definition of accelerated filer does not significantly change Salisbury's annual reporting and audit requirements and does not change the auditor's role in the financial statement audit.

NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)   Amortized cost basis (1)    Gross un-realized gains    Gross un-realized losses    Fair value 
June 30, 2020                    
Available-for-sale                    
U.S. Government Agency notes  $4,186   $176   $1   $4,361 
Municipal bonds   24,701    1,207    12    25,896 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government- sponsored enterprises   30,881    1,179    35    32,025 
Collateralized mortgage obligations:                    
U.S. Government agencies   20,349    699        21,048 
Corporate bonds   6,000    147    25    6,122 
Total securities available-for-sale  $86,117   $3,408   $73   $89,452 
CRA mutual fund                 $912 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,353   $   $   $3,353 
(in thousands)   Amortized cost basis (1)    Gross un-realized gains    Gross un-realized losses    Fair value 
December 31, 2019                    
Available-for-sale                    
U.S. Government Agency notes  $4,520   $125   $1   $4,644 
Municipal bonds   26,562    704    73    27,193 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government- sponsored enterprises   28,961    420    24    29,357 
Collateralized mortgage obligations:                    
U.S. Government agencies   25,041    468    10    25,499 
Corporate bonds   5,000    108        5,108 
Total securities available-for-sale  $90,084   $1,825   $108   $91,801 
CRA mutual fund                 $882 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,242   $   $   $3,242 

Salisbury sold $10.6 million of available-for-sale securities during the six month period ended June 30, 2020 realizing a pre-tax gain of $182 thousand and a related tax expense of $38 thousand. Salisbury sold $10.6 million in securities available-for-sale during the three month period ended June 30, 2020 realizing a pre-tax gain of $181 thousand and related tax expense of $38 thousand. Salisbury sold $28.2 million of available-for-sale securities during the six month period ended June 30, 2019 realizing a pre-tax gain of $272 thousand and a related tax expense of $57 thousand. Salisbury sold $27.2 million in securities available-for-sale during the three month period ended June 30, 2019 realizing a pre-tax gain of $281 thousand and related tax expense of $59 thousand.

 11 

 

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

   Less than 12 Months  12 Months or Longer  Total
June 30, 2020 (in thousands)  Fair value  Unrealized losses  Fair value  Unrealized losses  Fair value  Unrealized losses
Available-for-sale                  
U.S. Government Agency notes  $   $   $102   $1   $102   $1 
Municipal bonds   2,074    12            2,074    12 
Mortgage- backed securities:                              
U.S. Government agencies and U.S. Government - sponsored enterprises   4,160    34    105    1    4,265    35 
Corporate bonds   725    25            725    25 
Total temporarily impaired securities  $6,959   $71   $207   $2   $7,166   $73 
                               
   Less than 12 Months  12 Months or Longer  Total
December 31, 2019 (in thousands)  Fair value  Unrealized losses  Fair value  Unrealized losses  Fair value  Unrealized losses
Available-for-sale                              
U.S. Government Agency notes  $   $   $195   $1   $195   $1 
Municipal bonds   6,273    73            6,273    73 
Mortgage- backed securities:                              
U.S. Government agencies and U.S. Government - sponsored enterprises   5,781    22    704    2    6,485    24 
Collateralized mortgage obligations:                              
U.S. Government Agencies   1,438    10            1,438    10 
Total temporarily impaired securities  $13,492   $105   $899   $3   $14,391   $108 

The amortized cost, fair value and tax equivalent yield of securities, by maturity, are as follows:

June 30, 2020 (in thousands)  Maturity  Amortized cost    Fair value     Yield(1)  
U.S. Government Agency notes  After 5 year but within 10 years  $2,496   $2,557    3.48%
   Total   2,496    2,557    3.48 
Municipal bonds  After 5 year but within 10 years   1,720    1,881    3.16 
   After 10 years   22,981    24,015    3.07 
   Total   24,701    25,896    3.08 
Mortgage-backed securities and Collateralized mortgage obligations  U.S. Government agencies   52,920    54,877    2.85 
Corporate bonds  After 5 years but within 10 years   6,000    6,122    5.21 
Securities available-for-sale     $86,117   $89,452    3.17%

(1) Yield is based on amortized cost.

Salisbury evaluates debt 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 June 30, 2020.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Three securities had unrealized losses at June 30, 2020, which approximated 0.95% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. 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 maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2020.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Three securities had unrealized losses at June 30, 2020, which approximated 0.60% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread 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 maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2020.

 12 

 

U.S. Government agency and U.S. Government-sponsored mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Six securities had unrealized losses at June 30, 2020, which approximated 0.81% of their amortized cost. 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 maturity, and does not intend to sell these securities. Therefore, management does not consider these investments to be other-than-temporarily impaired at June 30, 2020.

Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. One security had unrealized losses at June 30, 2020, which approximated 3.29% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread 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 maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2020.

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 June 30, 2020. 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:

(In thousands)    June 30, 2020     December 31, 2019  
Residential 1-4 family  $357,518   $346,299 
Residential 5+ multifamily   38,353    35,455 
Construction of residential 1-4 family   11,041    11,889 
Home equity lines of credit   30,286    33,798 
Residential real estate   437,198    427,441 
Commercial   309,935    289,795 
Construction of commercial   13,699    8,466 
Commercial real estate   323,634    298,261 
Farm land   3,324    3,641 
Vacant land   13,879    7,893 
Real estate secured   778,035    737,236 
Commercial and industrial (1)   247,440    169,411 
Municipal   20,707    21,914 
Consumer   7,886    6,385 
Loans receivable, gross   1,054,068    934,946 
Deferred loan origination (fees) and costs, net   (1,339)   1,362 
Loans receivable, gross  $1,052,729   $936,308 
Allowance for loan losses   (12,371)   (8,895)
Loans receivable, net  $1,040,358   $927,413 
Loans held-for-sale          
Residential 1-4 family  $5,313   $332 

(1) Commercial and industrial balance as of June 30, 2020 includes $98.9 million of Paycheck Protection Program loans.

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

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

At June 30, 2020 and December 31, 2019, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $61.9 million and $67.0 million, respectively.

 13 

 

Concentrations of Credit Risk

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

Salisbury's commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges from the economic downturn caused by the COVID-19 virus pandemic (“virus”). Approximately 35% of the Bank's commercial gross loans receivable are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 15% of the Bank's gross commercial loan receivables is to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 8% of gross commercial loan receivables is to educational institutions and approximately 5% of Salisbury's gross commercial loan receivables is to entertainment and recreation related businesses, which include a ski resort, bowling alleys and amusement parks. Salisbury's commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration (“SBA”) guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors. The duration of the economic shutdown and the time required for businesses to recover may adversely affect the ability of some borrowers to make timely loan payments. During such economic shutdown and recovery, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

Credit Quality

Salisbury uses credit risk ratings as part of its determination of the allowance for loan losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. The rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are pass ratings and 5 through 8 are criticized as defined by the regulatory agencies. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.

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

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

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

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

Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank's loan portfolio is examined periodically by its regulatory agencies, the Federal Deposit Insurance Corporation (“FDIC”) and the Connecticut Department of Banking (“CTDOB”).

 14 

 

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

(in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
June 30, 2020                              
Residential 1-4 family  $350,494   $3,357   $3,667   $   $   $357,518 
Residential 5+ multifamily   36,539    96    1,718            38,353 
Construction of residential 1-4 family   11,041                    11,041 
Home equity lines of credit   29,689    332    265            30,286 
Residential real estate   427,763    3,785    5,650            437,198 
Commercial   292,546    3,081    14,237    71        309,935 
Construction of commercial   13,464        235            13,699 
Commercial real estate   306,010    3,081    14,472    71        323,634 
Farm land   1,637        1,687            3,324 
Vacant land   13,785    55    39            13,879 
Real estate secured   749,195    6,921    21,848    71        778,035 
Commercial and industrial   245,768    581    731    360        247,440 
Municipal   20,707                    20,707 
Consumer   7,851    3    32            7,886 
Loans receivable, gross  $1,023,521   $7,505   $22,611   $431   $   $1,054,068 
(in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2019                              
Residential 1-4 family  $337,302   $4,278   $4,719   $   $   $346,299 
Residential 5+ multifamily   33,619    99    1,737            35,455 
Construction of residential 1-4 family   11,889                    11,889 
Home equity lines of credit   33,381    312    105            33,798 
Residential real estate   416,191    4,689    6,561            427,441 
Commercial   271,708    10,964    7,052    71        289,795 
Construction of commercial   8,225        241            8,466 
Commercial real estate   279,933    10,964    7,293    71        298,261 
Farm land   1,934        1,707            3,641 
Vacant land   7,834    59                7,893 
Real estate secured   705,892    15,712    15,561    71        737,236 
Commercial and industrial   167,458    443    1,510            169,411 
Municipal   21,914                    21,914 
Consumer   6,344    3    38            6,385 
Loans receivable, gross  $901,608   $16,158   $17,109   $71   $   $934,946 

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

      Past due   
                         
               180  30  Accruing   
(in thousands)          days  days  90 days 
      30-59  60-89  90-179  and  and  and  Non-
    Current  days  days  days  over  over  over  accrual
June 30, 2020                        
Residential 1-4 family  $356,297   $349   $618   $217   $37   $1,221   $   $1,410 
Residential 5+ multifamily   37,492                861    861        861 
Construction of residential 1-4 family   11,041                             
Home equity lines of credit   29,825    62    159    73    167    461        265 
Residential real estate   434,655    411    777    290    1,065    2,543        2,536 
Commercial   308,473    954        437    71    1,462        1,281 
Construction of commercial   13,699                             
Commercial real estate   322,172    954        437    71    1,462        1,281 
Farm land   3,155        169            169        174 
Vacant land   13,879                            39 
Real estate secured   773,861    1,365    946    727    1,136    4,174        4,030 
Commercial and industrial   246,535    781            124    905    11    774 
Municipal   20,707                             
Consumer   7,853    3    30            33         
Loans receivable, gross  $1,048,956   $2,149   $976   $727   $1,260   $5,112   $11   $4,804 

 15 

 

      Past due   
                         
               180  30  Accruing   
(in thousands)          days  days  90 days 
      30-59  60-89  90-179  and  and  and  Non-
    Current  days  days  days  over  over  over  accrual
December 31, 2019                        
Residential 1-4 family  $344,085   $971   $351   $200   $692   $2,214   $   $1,551 
Residential 5+ multifamily   34,594                861    861        861 
Construction of residential 1-4 family   11,889                             
Home equity lines of credit   33,522    152    46        78    276        105 
Residential real estate   424,090    1,123    397    200    1,631    3,351        2,517 
Commercial   289,103    336    141    71    144    692        914 
Construction of commercial   8,466                             
Commercial real estate   297,569    336    141    71    144    692        914 
Farm land   3,461    180                180        186 
Vacant land   7,852        41            41         
Real estate secured   732,972    1,639    579    271    1,775    4,264        3,617 
Commercial and industrial   169,262    2    146    1        149    1     
Municipal   21,914                             
Consumer   6,382        1    2        3    2     
Loans receivable, gross  $930,530   $1,641   $726   $274   $1,775   $4,416   $3   $3,617 

 

Troubled Debt Restructurings (TDRs)

Troubled debt restructurings are as follows:

   For the three months ending June 30, 2020  For the three months ending June 30, 2019
(in thousands)  Quantity  Pre-modification balance  Post-modification balance  Quantity  Pre-modification balance  Post-modification balance
Residential real estate      $   $    2   $623   $623 
Commercial real estate                        
Consumer               1    42    42 
Troubled debt restructurings      $   $    3   $665   $665 
Interest only payments to sell property      $   $       $   $ 
Rate reduction               3    665    665 
Modification and Rate reduction                        
Workout refinance. Extension of new funds to pay outstanding taxes                        
Modification and term extension                        
Troubled debt restructurings      $   $    3   $665   $665 

 

   For the six months ending June 30, 2020  For the six months ending June 30, 2019
(in thousands)  Quantity  Pre-modification balance  Post-modification balance  Quantity  Pre-modification balance  Post-modification balance
Residential real estate      $   $    2   $623   $623 
Commercial real estate   1    133    133             
Consumer               1    42    42 
Troubled debt restructurings   1   $133   $133    3   $665   $665 
Interest only payments to sell property      $   $       $   $ 
Rate reduction               3    665    665 
Modification and Rate reduction                        
Workout refinance. Extension of new funds to pay outstanding taxes   1    133    133             
Modification and term extension                        
Troubled debt restructurings   1   $133   $133    3   $665   $665 

For the second quarter 2020, there were no troubled debt restructurings, and for the same period in 2019, two residential loans with a combined loan balance of $623 thousand and one consumer loan of $42 thousand were modified in troubled debt restructurings for rate reductions. For the six months ended June 2020, one troubled debt restructuring of $133 thousand was modified to extend new funds to pay outstanding taxes and for the same period in 2019, three troubled debt restructurings with a combined loan balance of $665 thousand were modified for a rate reduction.

 16 

 

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

  Three months ended June 30, 2020  Three months ended June 30, 2019
(in thousands)  Beginning balance  Provision (Benefit)  Charge-offs  Reco-veries  Ending balance  Beginning balance  Provision (Benefit)  Charge-offs  Reco-veries  Ending balance
Residential 1-4 family  $2,706   $342   $   $   $3,048   $1,980   $95   ($1)  $   $2,074 
Residential 5+ multifamily   508    122    (41)       589    466    29            495 
Construction of residential 1-4 family   87                87    77    2            79 
Home equity lines of credit   278    5            283    209    15            224 
Residential real estate   3,579    469    (41)       4,007    2,732    141    (1)       2,872 
Commercial   4,519    645    (4)       5,160    3,803    (13)   (14)   1    3,777 
Construction of commercial   126    79            205    143    (16)           127 
Commercial real estate   4,645    724    (4)       5,365    3,946    (29)   (14)   1    3,904 
Farm land   52    8            60    47                47 
Vacant land   144    38            182    89                89 
Real estate secured   8,420    1,239    (45)       9,614    6,814    112    (15)   1    6,912 
Commercial and industrial   1,071    444            1,515    1,233    (67)   (19)   29    1,176 
Municipal   53    (17)           36    14    16            30 
Consumer   102    (20)   (13)   5    74    51    40    (18)   8    81 
Unallocated   972    160            1,132    638    50            688 
Totals  $10,618   $1,806   ($58)  $5   $12,371   $8,750   $151   ($52)  $38   $8,887 

In first quarter 2019 Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan loss reserves. As a result of this transfer, which is reflected in the table below as the “acquisition discount transfer”, gross loans receivable and the allowance for loan losses increased by $663 thousand. The balance of net loans receivable did not change as a result of this transfer.

   Six months ended June 30, 2020  Six months ended June 30, 2019
(in thousands)  Beginning balance  Provision  Charge- offs  Reco- veries  Ending balance  Beginning balance  Acquisition Discount Transfer  Provision  Charge- offs  Reco- veries  Ending balance
Residential 1-4 family  $2,393   $647   $   $8   $3,048   $2,149   $10   ($85)  $(1)  $1   $2,074 
Residential 5+ multifamily   446    185    (42)       589    413        82            495 
Construction of residential 1-4 family   75    12            87    83        (4)           79 
Home equity lines of credit   197    86            283    219    1    4            224 
Residential real estate   3,111    930    (42)   8    4,007    2,864    11    (3)   (1)   1    2,872 
Commercial   3,742    1,402    (3)   19    5,160    3,048    488    262    (23)   2    3,777 
Construction of commercial   104    101            205    122        5            127 
Commercial real estate   3,846    1,503    (3)   19    5,365    3,170    488    267    (23)   2    3,904 
Farm land   47    13            60    33        14            47 
Vacant land   71    111            182    100        (11)           89 
Real estate secured   7,075    2,557    (45)   27    9,614    6,167    499    267    (24)   3    6,912 
Commercial and industrial   1,145    370            1,515    1,158    164    (127)   (50)   31    1,176 
Municipal   46    (10)           36    12        18            30 
Consumer   60    32    (25)   7    74    56        37    (24)   12    81 
Unallocated   569    563            1,132    438        250            688 
Totals  $8,895   $3,512   ($70)  $34   $12,371   $7,831   $663   $445   ($98)  $46   $8,887 

 

 17 

 

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

  (in thousands)  Collectively evaluated 1  Individually evaluated 1  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
June 30, 2020                              
Residential 1-4 family  $352,590   $2,642   $4,928   $406   $357,518   $3,048 
Residential 5+ multifamily   37,382    589    971        38,353    589 
Construction of residential 1-4 family   11,041    87            11,041    87 
Home equity lines of credit   30,021    263    265    20    30,286    283 
Residential real estate   431,034    3,581    6,164    426    437,198    4,007 
Commercial   305,393    4,836    4,542    324    309,935    5,160 
Construction of commercial   13,699    205            13,699    205 
Commercial real estate   319,092    5,041    4,542    324    323,634    5,365 
Farm land   3,150    60    174        3,324    60 
Vacant land   13,705    179    174    3    13,879    182 
Real estate secured   766,981    8,861    11,054    753    778,035    9,614 
Commercial and industrial   246,544    1,139    896    376    247,440    1,515 
Municipal   20,707    36            20,707    36 
Consumer   7,855    55    31    19    7,886    74 
Unallocated allowance       1,132                1,132 
Totals  $1,042,087   $11,223   $11,981   $1,148   $1,054,068   $12,371 

 

 

  (in thousands)  Collectively evaluated 1  Individually evaluated 1  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2019                              
Residential 1-4 family  $340,847   $2,117   $5,452   $276   $346,299   $2,393 
Residential 5+ multifamily   34,478    446    977        35,455    446 
Construction of residential 1-4 family   11,889    75            11,889    75 
Home equity lines of credit   33,693    197    105        33,798    197 
Residential real estate   420,907    2,835    6,534    276    427,441    3,111 
Commercial   285,462    3,333    4,333    409    289,795    3,742 
Construction of commercial   8,466    104            8,466    104 
Commercial real estate   293,928    3,437    4,333    409    298,261    3,846 
Farm land   3,455    47    186        3,641    47 
Vacant land   7,713    66    180    5    7,893    71 
Real estate secured   726,003    6,385    11,233    690    737,236    7,075 
Commercial and industrial   169,285    1,143    126    2    169,411    1,145 
Municipal   21,914    46            21,914    46 
Consumer   6,349    59    36    1    6,385    60 
Unallocated allowance       569                569 
Totals  $923,551   $8,202   $11,395   $693   $934,946   $8,895 

1 For a further discussion of the allowance for loan losses, see “Provision and allowance for loan losses” in Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

 

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

June 30, 2020 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $1,027,217   $9,157   $   $   $1,027,217   $9,157 
Potential problem loans 1   14,870    934            14,870    934 
Impaired loans           11,981    1,148    11,981    1,148 
Unallocated allowance       1,132                1,132 
Totals  $1,042,087   $11,223   $11,981   $1,148   $1,054,068   $12,371 

 

 

December 31, 2019 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $913,648   $7,251   $   $   $913,648   $7,251 
Potential problem loans 1   9,903    382            9,903    382 
Impaired loans           11,395    693    11,395    693 
Unallocated allowance       569                569 
Totals  $923,551   $8,202   $11,395   $693   $934,946   $8,895 

1 Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired.

 18 

 

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