Attached files

file filename
EX-32 - EXHIBIT 32 - SALISBURY BANCORP INCsal0503form10qexh32.htm
EX-31.2 - EXHIBIT 31.2 - SALISBURY BANCORP INCsal0503form10qexh31_2.htm
EX-31.1 - EXHIBIT 31.1 - SALISBURY BANCORP INCsal0503form10qexh31_1.htm

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2018

OR

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

 

FOR THE TRANSITION PERIOD FROM ________ TO ________

 

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

(860) 435-9801

(Registrant's telephone number, including area code)

 

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

Yes ☑ No

 

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

Yes ☑ No

 

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

 

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

Emerging growth 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 May 10, 2018 is 2,786,566.

 

 
 

 

TABLE OF CONTENTS

 

      Page 
PART I. FINANCIAL INFORMATION    
Item 1.  Financial Statements (unaudited)    
   CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2018 (unaudited) and DECEMBER 31, 2017  3 
   CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (unaudited)  4 
   CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (unaudited)  5 
   CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 ( unaudited)  5 
  

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (unaudited)

 6 
   NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  8 
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  28 
Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  43 
Item 4.  CONTROLS AND PROCEDURES  45 
     
PART II. OTHER INFORMATION   
Item 1.  LEGAL PROCEEDINGS  45 
Item 1A.  RISK FACTORS  45 
Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  45 
Item 3.  DEFAULTS UPON SENIOR SECURITIES  45 
Item 4.  MINE SAFETY DISCLOSURES  46 
Item 5.  OTHER INFORMATION  46 
Item 6.  EXHIBITS  46 
SIGNATURES  46 

 

 
 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)    March 31, 2018      December 31, 2017  
ASSETS         (unaudited)      
Cash and due from banks  $5,781   $9,357 
Interest bearing demand deposits with other banks   39,198    39,129 
Total cash and cash equivalents   44,979    48,486 
Securities          
Available-for-sale at fair value   79,906    78,212 
CRA mutual fund   826    835 
Federal Home Loan Bank of Boston stock at cost   4,146    3,813 
Loans held-for-sale       669 
Loans receivable, net (allowance for loan losses: $7,058 and $6,776)   830,370    801,703 
Other real estate owned   667    719 
Bank premises and equipment, net   18,197    16,401 
Goodwill   13,815    13,815 
Intangible assets (net of accumulated amortization: $4,164 and $4,043)   1,716    1,837 
Accrued interest receivable   2,704    2,665 
Cash surrender value of life insurance policies   14,462    14,381 
Deferred taxes   905    677 
Other assets   2,241    2,771 
Total Assets  $1,014,934   $986,984 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
Demand (non-interest bearing)  $220,796   $220,536 
Demand (interest bearing)   146,312    142,575 
Money market   185,955    190,953 
Savings and other   155,630    144,600 
Certificates of deposit   123,144    116,831 
Total deposits   831,837    815,495 
Repurchase agreements   3,962    1,668 
Federal Home Loan Bank of Boston advances   62,480    54,422 
Subordinated debt   9,817    9,811 
Note payable   305    313 
Capital lease liability   3,179    1,835 
Accrued interest and other liabilities   5,257    5,926 
Total Liabilities   916,837    889,470 
Shareholders' Equity          
Common stock - $0.10 per share par value          
Authorized: 5,000,000;          
Issued: 2,872,578 and 2,872,578          
Outstanding: 2,786,566 and 2,785,216   279    279 
Unearned compensation - restricted stock awards   (493)   (606)
Paid-in capital   43,040    42,998 
Retained earnings   55,883    54,664 
Accumulated other comprehensive (loss) income, net   (612)   179 
Total Shareholders' Equity   98,097    97,514 
Total Liabilities and Shareholders' Equity  $1,014,934   $986,984 

 

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 March 31, (in thousands except per share amounts)    2018      2017  
Interest and dividend income          
Interest and fees on loans  $8,649   $8,221 
Interest on debt securities          
Taxable   460    317 
Tax exempt   32    164 
Other interest and dividends   159    83 
Total interest and dividend income   9,300    8,785 
Interest expense          
Deposits   777    515 
Repurchase agreements   1    1 
Capital lease   35    17 
Note payable   5    2 
Subordinated debt   156    156 
Federal Home Loan Bank of Boston advances   332    262 
Total interest expense   1,306    953 
Net interest and dividend income   7,994    7,832 
Provision for loan losses   326    352 
Net interest and dividend income after provision for loan losses   7,668    7,480 
Non-interest income          
Trust and wealth advisory   894    854 
Service charges and fees   868    962 
Gains on sales of mortgage loans, net   18    49 
Mortgage servicing, net   83    45 
Losses on CRA mutual fund   (13)    
Losses on available-for-sale securities, net   (2)    
Other   126    113 
Total non-interest income   1,974    2,023 
Non-interest expense          
Salaries   2,846    2,769 
Employee benefits   1,159    1,088 
Premises and equipment   1,024    895 
Data processing   486    472 
Professional fees   619    717 
OREO gains, losses and write-downs   52    144 
Collections and other real estate owned   82    157 
FDIC insurance   130    149 
Marketing and community support   242    251 
Amortization of core deposit intangibles   120    126 
Other   422    538 
Total non-interest expense   7,182    7,306 
Income before income taxes   2,460    2,197 
Income tax provision   445    593 
Net income  $2,015   $1,604 
Net income allocated to common stock  $1,995   $1,594 
           
Basic earnings per common share  $0.72   $0.58 
Weighted average common shares outstanding, to calculate basic earnings per share   2,759    2,749 
Diluted earnings per common share  $0.72   $0.58 
Weighted average common shares outstanding, to calculate diluted earnings per share   2,780    2,768 
Common dividends per share  $0.28   $0.28 

 

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 March 31, (in thousands)    2018      2017  
Net income  $2,015   $1,604 
Other comprehensive (loss) income          
Net unrealized (losses) gains on securities available-for-sale   (1,019)   16 
Reclassification of net realized (losses) gains in net income(1)   2     
Unrealized (losses) gains on securities available-for-sale   (1,017)   16 
Income tax benefit (expense)   210    (6)
Unrealized gains (losses) on securities available-for-sale, net of tax   (807)   10 
Comprehensive income  $1,208   $1,614 

(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.

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

(dollars in thousands)  Common Stock Paid-in   Retained  

Unearned compensation

restricted

stock

 

Accumulated other comp-

rehensive

  Total shareholders'
   Shares  Amount  capital   earnings  awards   income    equity
Balances at December 31, 2016   2,758,086   $276   $42,085   $51,521   $(352)  $477   $94,007 
Net income               1,604            1,604 
Other comprehensive loss, net of tax                       10    10 
Common stock dividends declared               (774)           (774)
Stock options exercised   12,150    1    312                313 
Issuance of restricted stock awards   (200)       (3)       3         
Stock based compensation-restricted stock awards                   61        61 
Balances at March 31, 2017   2,770,036   $277   $42,394   $52,351   $(288)  $487   $95,221 
Balances at December 31, 2017   2,785,216   $279   $42,998   $54,664   $(606)  $179   $97,514 
Net income               2,015            2,015 
Adoption of ASU 2016-01               (16)       16     
Other comprehensive loss, net of tax                       (807)   (807)
Common stock dividends declared               (780)           (780)
Stock options exercised   1,350        42                42 
Stock based compensation-restricted stock awards                   113        113 
Balances at March 31, 2018   2,786,566   $279   $43,040   $55,883   $(493)  $(612)  $98,097 

 

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

 

 5 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three months ended March 31, (in thousands)    2018      2017  
Operating Activities          
Net income  $2,015   $1,604 
Adjustments to reconcile net income to net cash provided by operating activities:          
(Accretion), amortization and depreciation:          
Securities   19    42 
Bank premises and equipment   371    327 
Core deposit intangible   121    126 
Modification fees on Federal Home Loan Bank of Boston advances   58    57 
Subordinated debt issuance costs   6    6 
Mortgage servicing rights   11    68 
Fair value adjustment on loans   (285)   (495)
Fair value adjustment on deposits   (11)   (24)
(Gains) and losses, including write-downs          
Loss on CRA mutual fund   13     
Loss on securities available-for-sale, net   2     
Gain on sales of loans, excluding capitalized servicing rights   (10)   (36)
Write-downs of other real estate owned   52    144 
Provision for loan losses   326    352 
Proceeds from loans sold   679    1,881 
Loans originated for sale       (1,898)
(Increase) decrease in deferred loan origination fees and costs, net   (92)   152 
Mortgage servicing rights originated   (6)   (25)
Increase in mortgage servicing rights impairment reserve       2 
Increase in interest receivable   (39)   (7)
Deferred tax benefit   (18)    
Increase in prepaid expenses   (170)   (269)
Increase in cash surrender value of life insurance policies   (81)   (88)
Decrease in income tax receivable   625    293 
Decrease in other assets   70    813 
Decrease in accrued expenses   (821)   (130)
Increase in interest payable   208    149 
Decrease in other liabilities   (56)   (64)
Stock based compensation-restricted stock awards   113    61 
Net cash provided by operating activities   3,100    3,041 
Investing Activities          
Purchase of Federal Home Loan Bank of Boston stock   (333)   (299)
Purchases of securities available-for-sale   (7,999)   (5,016)
Reinvestment of CRA mutual fund   (4)    
Proceeds from calls of securities available-for-sale   500    2,990 
Proceeds from maturities of securities available-for-sale   4,767    4,774 
Loan originations and principal collections, net   (28,630)   (1,777)
Recoveries of loans previously charged off   14    83 
Capital expenditures   (794)   (503)
Net cash (utilized) provided by investing activities   (32,479)   252 

 

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) (Continued)

Three months ended March 31, (in thousands)    2018      2017  
Financing Activities          
Increase (decrease) in deposit transaction accounts, net   10,029   (6,920) 
Increase (decrease) in time deposits, net   6,324   (2,410)
Increase (decrease) in securities sold under agreements to repurchase, net   2,294   (3,185)
Federal Home Loan Bank of Boston advances   35,000    15,500 
Principal payments on Federal Home Loan Bank of Boston advances   (27,000)   
Principal payments on note payable   (8)   (9)
Decrease in capital lease obligation   (29)   (1)
Stock options exercised   42    313 
Common stock dividends paid   (780)   (774)
Net cash provided by financing activities   25,872    2,514
Net (decrease) increase in cash and cash equivalents   (3,507)    5,807
Cash and cash equivalents, beginning of period   48,486    35,485 
Cash and cash equivalents, end of period  $44,979   $41,292 
Cash paid (received) during period          
Interest  $1,045   $765 
Income taxes   (162)    300 
Non-cash investing and financing activities        
Capital lease obligation  1,373     
Transfer from loans to other real estate owned       204 
Adoption of ASU 2016-01   16     

 

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

 7 

 

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Salisbury and the 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. 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 statement of condition, 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 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 March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2017 Annual Report on Form 10-K for the year ended December 31, 2017.

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, August 2015, May 2016, and December 2016, respectively, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, 2015-14, 2016-12, and 2016-20, “Revenue from Contracts with Customers (Topic 606).” The objective of ASU 2014-09 is to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Bank completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, and merchant income. Salisbury’s revenue recognition policies conformed to Topic 606. As a result, no changes were required to prior period financial statements due to the adoption of this ASU and no changes in revenue recognition were required in the three month period ending March 31, 2018.

 8 

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – overall (subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Adoption of this ASU did not have a material impact on Salisbury’s financial statements. In accordance with (1) above, the Bank now presents its investments in equity securities separate from available-for-sale securities on the balance sheet with changes in fair value recognized in the statement of income ($13 thousand loss for the three month period ended March 31, 2018). In accordance with (5) above, Salisbury measured the fair value of its loan portfolio as of March 31, 2018 using an exit price notion (see note 10 Fair Value of Assets and Liabilities).

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)”. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. Salisbury does not expect ASU 2016-02 to have a material impact on its consolidated financial statements.

 9 

 

In March 2016, the FASB issued ASU 2016-09, “Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. Salisbury has opted to recognize forfeitures as they occur as the impact is not expected to be material. Salisbury adopted ASU 2016-09 as of January 1, 2017. Adoption contributed a $105 thousand benefit to the tax provision in the second quarter 2017 and did not have a material effect on the financial results for the twelve month period ended December 31, 2017.

In June 2016, the FASB issued 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. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods with those fiscal years beginning after December 15, 2019. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Salisbury is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on Salisbury’s Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments." This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those years. Entities are required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. Salisbury adopted ASU 2016-15 on January 1, 2018. ASU 2016-15 did not have a material impact on Salisbury’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business." This ASU is intended to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide a screen to determine when a set of inputs, processes, and outputs is not a business. ASU 2017-01 is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance, or for transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. Entities should apply the guidance prospectively on or after the effective date. Salisbury adopted ASU 2017-01 on January 1, 2018. ASU 2017-01 did not impact Salisbury’s Consolidated Financial Statements.

 10 

 

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. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Entities should apply the guidance prospectively. Salisbury is currently evaluating the provisions of ASU 2017-04 to determine the potential impact the new standard will have on Salisbury’s Consolidated Financial Statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This ASU will amend the amortization period for certain purchased callable debt securities held at a premium. The Board is shortening the amortization period for the premium to the earliest call date. Under current generally accepted accounting principles, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. Entities should apply the guidance on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Salisbury is currently evaluating the provisions of ASU 2017-08 and does not expect that the adoption of the new standard will have a material impact on Salisbury’s Consolidated Financial Statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU provides clarity in the accounting guidance regarding a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Entities should apply the guidance prospectively to an award modified on or after the adoption date. Salisbury adopted ASU 2017-09 on January 1, 2018. ASU 2017-09 did not impact Salisbury’s Consolidated Financial Statements.

 11 

 

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 
March 31, 2018                    
Available-for-sale                    
Municipal bonds  $2,972   $6   $   $2,978 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government- sponsored enterprises   44,315    65    643    43,737 
Collateralized mortgage obligations:                    
U.S. Government agencies   10,160    10    288    9,882 
Non-agency   1,714    365    13    2,066 
SBA bonds   18,020        256    17,764 
Corporate bonds   3,500    58    79    3,479 
Total securities available-for-sale  $80,681   $504   $1,279   $79,906 
CRA mutual fund  $826            826 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $4,146   $   $   $4,146 
(in thousands)

Amortized

cost basis (1)

 

Gross un-

realized gains

 

Gross un-

realized losses

 Fair Value 
December 31, 2017                    
Available-for-sale                    
Municipal bonds  $3,476   $11   $1   $3,486 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government- sponsored enterprises   45,983    152    267    45,868 
Collateralized mortgage obligations:                    
U.S. Government agencies   10,462    2    87    10,377 
Non-agency   2,271    410    17    2,664 
SBA bonds   12,278    9    20    12,267 
Corporate bonds   3,500    59    9    3,550 
Total securities available-for-sale  $77,970   $643   $401   $78,212 
CRA mutual fund  $835            835 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,813   $   $   $3,813 

(1)Net of other-than-temporary impairment write-downs recognized in earnings.

Salisbury did not sell any available-for-sale securities during the three month periods ended March 31, 2018 and March 31, 2017.

 

 12 

 

The following table summarizes, for all available-for-sale securities in an unrealized loss position, including debt securities for which a portion of other-than-temporary impairment (OTTI) has been recognized in other comprehensive loss, the aggregate fair value and gross unrealized loss of securities that have been in a continuous unrealized loss position as of the date presented:

March 31, 2018 (in thousands)  Less than 12 Months  12 Months or Longer  Total
   Fair
value
 

Unrealized

losses

  Fair
value
 

Unrealized

losses

  Fair
value
  Unrealized losses
Available-for-sale                              
Mortgage-backed securities  $22,537   $303   $16,091   $340   $38,628   $643 
Collateralized mortgage obligations:                              
U.S. Government Agencies   8,860    288            8,860    288 
SBA bonds   15,652    256            15,652    256 
Corporate bonds   1,421    79            1,421    79 
Total -temporarily impaired securities  $48,470   $926   $16,091   $340   $64,561   $1,266 
Other-than-temporarily impaired securities                              
Collateralized mortgage obligations                              
Non-agency   93    13            93    13 
Total temporarily impaired and other-than-temporarily impaired securities  $48,563   $939   $16,091   $340   $64,654   $1,279 

  Less than 12 Months  12 Months or Longer  Total
December 31, 2017 (in thousands)  Fair
value
 

Unrealized

losses

  Fair
value
 

Unrealized

losses

  Fair
value
  Unrealized losses
Available-for-sale                              
Municipal bonds  $479   $1   $   $   $479   $1 
Mortgage-backed securities   15,914    99    17,892    168    33,806    267 
Collateralized mortgage obligations                              
U.S. Government Agencies   9,317    87            9,317    87 
Non-agency           77    3    77    3 
SBA bonds   8,519    20            8,519    20 
Corporate bonds   1,491    9            1,491    9 
Total temporarily impaired securities   35,720    216    17,969    171    53,689    387 
Other-than-temporarily impaired securities                              
Collateralized mortgage obligations                              
Non-agency   101    14            101    14 
Total temporarily impaired and other-than-temporarily impaired securities  $35,821   $230   $17,969   $171   $53,790   $401 

 

 13 

 

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

March 31, 2018 (in thousands)  Maturity  Amortized cost  Fair value  Yield(1)
Municipal bonds  Within 1 year  $529   $530    5.01%
   After 1 year but within 5 years   259    260    3.84 
   After 10 years but within 15 years   2,184    2,188    6.09 
   After 15 years            
   Total   2,972    2,978    5.70 
Mortgage-backed securities  U.S. Government agency and U.S. Government-sponsored enterprises   44,315    43,737    2.38 
Collateralized mortgage obligations  U.S. Government agency and U.S. Government-sponsored enterprises   10,160    9,882    2.80 
   Non-agency   1,714    2,066    3.58 
SBA bonds      18,020    17,764    3.00 
                   
Corporate bonds  After 5 years but within 10 years   3,500    3,479    5.57 
Securities available-for-sale     $80,681   $79,906    2.85%

(1)    Yield is based on amortized cost.

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 March 31, 2018.

U.S. Government agency mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Forty-three securities had unrealized losses at March 31, 2018, which approximated 1.95% 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. 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 March 31, 2018.

SBA bonds: The contractual cash flows are guaranteed by the U.S. government. Eleven securities had unrealized losses at March 31, 2018, which approximated 1.61% 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 March 31, 2018.

Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. Two securities had unrealized losses at March 31, 2018, which approximated 5.24% 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 March 31, 2018.

 14 

 

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at March 31, 2018, to assess whether any of the securities were OTTI. One security had unrealized losses at March 31, 2018, which approximated 12.16% of its amortized cost. 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 other non-agency CMO securities not to have additional OTTI and all other CMO securities not to be OTTI as of March 31, 2018. 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:

  Three months ended March 31 (in thousands)    2018      2017  
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 March 31, 2018. 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.

 15 

 

NOTE 3 – LOANS

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

    March 31, 2018    December 31, 2017 
(In thousands)   Total Loans    Total Loans 
Residential 1-4 family  $323,425   $317,639 
Residential 5+ multifamily   23,557    18,108 
Construction of residential 1-4 family   11,451    11,197 
Home equity lines of credit   33,162    33,771 
Residential real estate   391,595    380,715 
Commercial   261,600    249,311 
Construction of commercial   10,737    9,988 
Commercial real estate   272,337    259,299 
Farm land   4,366    4,274 
Vacant land   7,945    7,883 
Real estate secured   676,243    652,171 
Commercial and industrial   137,291    132,731 
Municipal   17,994    17,494 
Consumer   4,519    4,794 
Loans receivable, gross   836,047    807,190 
Deferred loan origination fees and costs, net   1,381    1,289 
Allowance for loan losses   (7,058)   (6,776)
Loans receivable, net  $830,370   $801,703 
Loans held-for-sale          
Residential 1-4 family  $   $669 

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in Litchfield County, Connecticut, Dutchess, Ulster and Orange 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.

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" 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" 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.

 16 

 

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

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

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

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
  March 31, 2018                              
  Residential 1-4 family  $313,049   $5,956   $4,420   $   $   $323,425 
  Residential 5+ multifamily   21,610    933    1,014            23,557 
  Construction of residential 1-4 family   11,451                    11,451 
  Home equity lines of credit   32,298    339    525            33,162 
  Residential real estate   378,408    7,228    5,959            391,595 
  Commercial   246,598    4,257    10,745            261,600 
  Construction of commercial   10,373        364            10,737 
  Commercial real estate   256,971    4,257    11,109            272,337 
  Farm land   4,125        241            4,366 
  Vacant land   7,870    75                7,945 
  Real estate secured   647,374    11,560    17,309            676,243 
  Commercial and industrial   134,025    2,525    741            137,291 
  Municipal   17,994                    17,994 
  Consumer   4,486    33                4,519 
  Loans receivable, gross  $803,879   $14,118   $18,050   $   $   $836,047 

 

 

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
  December 31, 2017                              
  Residential 1-4 family  $307,240   $6,452   $3,947   $   $   $317,639 
  Residential 5+ multifamily   16,129    957    1,022            18,108 
  Construction of residential 1-4 family   11,197                    11,197 
  Home equity lines of credit   32,891    710    170            33,771 
  Residential real estate   367,457    8,119    5,139            380,715 
  Commercial   232,492    4,456    12,363            249,311 
  Construction of commercial   9,622        366            9,988 
  Commercial real estate   242,114    4,456    12,729            259,299 
  Farm land   4,024        250            4,274 
  Vacant land   7,806    77                7,883 
  Real estate secured   621,401    12,652    18,118            652,171 
  Commercial and industrial   129,219    2,536    976            132,731 
  Municipal   17,494                    17,494 
  Consumer   4,744    50                4,794 
  Loans receivable, gross  $772,858   $15,238   $19,094   $   $   $807,190 

 

 17 

 

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
March 31, 2018                        
Residential 1-4 family  $320,999   $622   $716   $   $1,088   $2,426   $   $2,001 
Residential 5+ multifamily   23,557                            147 
Construction of residential 1-4 family   11,451                             
Home equity lines of credit   33,015    71    42    34        147    34    63 
Residential real estate   389,022    693    758    34    1,088    2,573    34    2,211 
Commercial   257,734    1,434    548    1,088    796    3,866        1,884 
Construction of commercial   10,480                257    257        257 
Commercial real estate   268,214    1,434    548    1,088    1,053    4,123        2,141 
Farm land   4,366                            241 
Vacant land   7,945                             
Real estate secured   669,547    2,127    1,306    1,122    2,141    6,696    34    4,593 
Commercial and industrial   136,640    240    51        360    651        467 
Municipal   17,994                             
Consumer   4,513    6                6         
Loans receivable, gross  $828,694   $2,373   $1,357   $1,122   $2,501   $7,353   $34   $5,060 

 

 

 

      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, 2017                        
Residential 1-4 family  $314,798   $1,410   $165   $156   $1,110   $2,841   $   $2,045 
Residential 5+ multifamily   18,108                            151 
Construction of residential 1-4 family   11,197                             
Home equity lines of credit   33,219    75    477            552        66 
Residential real estate   377,322    1,485    642    156    1,110    3,393        2,262 
Commercial   244,869    1,888    758        1,796    4,442        3,364 
Construction of commercial   9,730                258    258        258 
Commercial real estate   254,599    1,888    758        2,054    4,700        3,622 
Farm land   4,032    242                242        250 
Vacant land   7,883                             
Real estate secured   643,836    3,615    1,400    156    3,164    8,335        6,134 
Commercial and industrial   131,991    131    218    391        740    31    470 
Municipal   17,494                             
Consumer   4,752    34    8            42         
Loans receivable, gross  $798,073   $3,780   $1,626   $547   $3,164   $9,117   $31   $6,604 

 

There were no troubled debt restructurings in the first quarter of 2018 or 2017.

 18 

 

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

  Three months ended March 31, 2018  Three months ended March 31, 2017
  (in thousands)   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential 1-4 family  $1,862   $129   $(10)  $1   $1,982   $1,925   $107   $(43)  $1   $1,990 
Residential 5+ multifamily   155    61            216    62    22            84 
Construction of residential 1-4 family   75    (1)           74    91    (14)           77 
Home equity lines of credit   236    (3)           233    348    (19)       1    330 
Residential real estate   2,328    186    (10)   1    2,505    2,426    96    (43)   2    2,481 
Commercial   2,547    119            2,666    1,919    230    (188)   28    1,989 
Construction of commercial   80    13            93    38    (5)           33 
Commercial real estate   2,627    132            2,759    1,957    225    (188)   28    2,022 
Farm land   32    1            33    28    26    (15)       39 
Vacant land   131                131    170    (20)           150 
Real estate secured   5,118    319    (10)   1    5,428    4,581    327    (246)   30    4,692 
Commercial and industrial   984    (42)   (9)   5    938    1,080    (208)   (1)   45    916 
Municipal   30                30    53    1            54 
Consumer   81    12    (40)   8    61    76    39    (30)   8    93 
Unallocated   563    38            601    337    193            530 
Totals  $6,776   $327   $(59)  $14   $7,058   $6,127   $352   $(277)  $83   $6,285 

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

  (in thousands)  Collectively evaluated 1  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
March 31, 2018                              
Residential 1-4 family  $318,121   $1,820   $5,304   $162   $323,425   $1,982 
Residential 5+ multifamily   21,868    216    1,689        23,557    216 
Construction of residential 1-4 family   11,451    74            11,451    74 
Home equity lines of credit   33,051    232    111    1    33,162    233 
Residential real estate   384,491    2,343    7,104    163    391,595    2,505 
Commercial   257,398    2,566    4,202    100    261,600    2,666 
Construction of commercial   10,373    93    364        10,737    93 
Commercial real estate   267,771    2,659    4,566    100    272,337    2,759 
Farm land   4,125    33    241        4,366    33 
Vacant land   7,748    128    197    3    7,945    131 
Real estate secured   664,135    5,162    12,108    266    676,243    5,428 
Commercial and industrial   136,778    931    513    7    137,291    938 
Municipal   17,994    30            17,994    30 
Consumer   4,519    61            4,519    61 
Unallocated allowance       601                601 
Totals  $823,426   $6,785   $12,621   $273   $836,047   $7,058 

 

 19 

 

  (in thousands)  Collectively evaluated 1  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2017                              
Residential 1-4 family  $312,456   $1,759   $5,183   $103   $317,639   $1,862 
Residential 5+ multifamily   16,361    154    1,747    1    18,108    155 
Construction of residential 1-4 family   11,197    75            11,197    75 
Home equity lines of credit   33,658    235    113    1    33,771    236 
Residential real estate   373,672    2,223    7,043    105    380,715    2,328 
Commercial   243,602    2,432    5,709    115    249,311    2,547 
Construction of commercial   9,622    80    366        9,988    80 
Commercial real estate   253,224    2,512    6,075    115    259,299    2,627 
Farm land   4,024    32    250        4,274    32 
Vacant land   7,684    129    199    3    7,883    132 
Real estate secured   638,604    4,896    13,567    223    652,171    5,119 
Commercial and industrial   132,212    952    519    32    132,731    984 
Municipal   17,494    30            17,494    30 
Consumer   4,794    80            4,794    80 
Unallocated allowance       563                563 
Totals  $793,104   $6,521   $14,086   $255   $807,190   $6,776 

1 Includes amounts reflecting ASC 310-30 accounting for purchased loans with deteriorated credit quality with respect to deterioration in credit quality that occurs subsequent to origination and which makes it probable that the Company will be unable to collect all contractually required payments from the borrower. ASC 310-30 loans and allowance of $2.3 million and $71,000, respectively for March 31, 2018 and $2.4 million and $92,000, respectively for December 31, 2017.

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

March 31, 2018 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $813,011   $5,943   $   $   $813,011   $5,943 
Potential problem loans 1   10,415    241            10,415    241 
Impaired loans           12,621    273    12,621    273 
Unallocated allowance       601                601 
Totals  $823,426   $6,785   $12,621   $273   $836,047   $7,058 

 

December 31, 2017 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $783,206   $5,619   $   $   $783,206   $5,619 
Potential problem loans 1   9,898    339            9,898    339 
Impaired loans           14,086    255    14,086    255 
Unallocated allowance       563                563 
Totals  $793,104   $6,521   $14,086   $255   $807,190   $6,776 

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

 20 

 

A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the fair 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 as of and for the three months ended:

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
March 31, 2018                           
Residential  $4,724   $5,008   $3,884   $162   $30   $2,270   $3,020   $3,015   $28 
Home equity lines of credit   47    47    47    1    1    63    116    64     
Residential real estate   4,771    5,055    3,931    163    31    2,333    3,136    3,079    28 
Commercial   1,847    2,080    2,258    100    40    2,355    3,447    3,138    47 
Construction of commercial           27            364    386    338    2 
Farm land                       241    447    244     
Vacant land   44    44    44    3    1    153    176    154    3 
Real estate secured   6,662    7,179    6,260    266    72    5,446    7,592    6,953    80 
Commercial and industrial   106    115    108    7        407    498    408    1 
Consumer                           5         
Totals  $6,768   $7,294   $6,368   $273   $72   $5,853   $8,095   $7,361   $81 

 

 

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
March 31, 2017                           
Residential  $3,450   $3,608   $3,493   $140   $34   $3,640   $3,965   $3,594   $37 
Home equity lines of credit   48    47    137    1    1    152    182    214    1 
Residential real estate   3,498    3,655    3,630    141    35    3,792    4,147    3,808    38 
Commercial   2,022    2,415    3,712    222    40    3,761    4,838    2,868    40 
Construction of commercial                       371    392    372    2 
Farm land                       994    1,153    976     
Vacant land   45    45    45    4    1    162    186    163    4 
Real estate secured   5,565    6,115    7,387    367    76    9,080    10,716    8,187    84 
Commercial and industrial                       81    104    129    1 
Consumer                       4    7    4     
Totals  $5,565   $6,115   $7,387   $367   $76   $9,165   $10,827   $8,320   $85 

 

NOTE 4 - MORTGAGE SERVICING RIGHTS

(in thousands)    March 31, 2018      December 31, 2017  
Residential mortgage loans serviced for others  $116,096   $117,538 
Fair value of mortgage servicing rights   1,048    1,010 

Changes in mortgage servicing rights are as follows:

Three months ended March 31, (in thousands)    2018      2017  
Mortgage Servicing Rights          
Balance, beginning of period  $233   $339 
Originated   6    25 
Amortization (1)   (11)   (68)
Balance, end of period  $228   $296 
Valuation Allowance          
Balance, beginning of period  $   $(23)
Increase in impairment reserve (1)       (2)
Balance, end of period       (25)
Mortgage servicing rights, net  $228   $271 
(1)Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net, in the consolidated statements of income.

 21 

 

NOTE 5 - PLEDGED ASSETS

(in thousands)    March 31, 2018      December 31, 2017  
Securities available-for-sale (at fair value)  $63,562   $67,377 
Loans receivable   206,225    204,354 
Total pledged assets  $269,787   $271,731 

At March 31, 2018, securities were pledged as follows: $59.3 million to secure public deposits, $4.2 million to secure repurchase agreements and $0.1 million to secure FHLBB advances. Additionally, loans receivable were pledged to secure FHLBB advances and credit facilities.

 

NOTE 6 – EARNINGS PER SHARE

The Company 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 shareholders 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 Salisbury’s earnings.

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

Three months ended March 31, (in thousands)    2018      2017  
Net income  $2,015   $1,604 
Less: Undistributed earnings allocated to participating securities   (20)   (10)
Net income allocated to common stock  $1,995   $1,594 
Weighted-average common shares issued   2,786    2,765 
Less: Unvested restricted stock awards   (27)   (16)
Weighted average common shares outstanding used to calculate basic earnings per common share   2,759    2,749 
Add: Dilutive effect of stock options   21    19 
Weighted-average common shares outstanding used to calculate diluted earnings per common share   2,780    2,768 
Earnings per common share (basic)  $0.72   $0.58 
Earnings per common share (diluted)  $0.72   $0.58 


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 and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 22 

 

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 increased for both the quantity and quality of capital held by the Bank and Company. The rules include a common equity Tier 1 capital risk-weighted assets minimum ratio of 4.5%, minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. The initial implementation of the capital conservation buffer began phasing in January 1, 2016 at 0.625% of risk-weighted assets and increases each subsequent January 1, by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. As of March 31, 2018, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for Salisbury and the Bank are as follows:

      To be Well Capitalized
   Actual  For Capital Adequacy Purposes  Under Prompt Corrective Action Provisions
  (dollars in thousands)  Amount  Ratio  Amount  Ratio  Amount  Ratio
March 31, 2018                              
Total Capital (to risk-weighted assets)                              
Salisbury  $100,870    12.70%  $63,523    8.0%   n/a     
Bank   97,862    12.32    63,523    8.0   $79,404    10.0%
Tier 1 Capital (to risk-weighted assets)                              
Salisbury   83,708    10.54    47,643    6.0    n/a     
Bank   90,700    11.42    47,643    6.0    63,523    8.0 
Common Equity Tier 1 Capital (to risk-weighted assets)                              
Salisbury   83,708    10.54    35,732    4.5    n/a     
Bank   90,700    11.42    35,732    4.5    51,613    6.5 
Tier 1 Capital (to average assets)                              
Salisbury   83,708    8.56    39,125    4.0    n/a     
Bank   90,700    9.27    39,125    4.0    48,906    5.0 

 

      To be Well Capitalized
   Actual  For Capital Adequacy Purposes  Under Prompt Corrective Action Provisions
  (dollars in thousands)  Amount  Ratio  Amount  Ratio  Amount  Ratio
December 31, 2017                              
Total Capital (to risk-weighted assets)                              
Salisbury  $98,920    12.94%  $61,154    8.0%   n/a     
Bank   95,810    12.54    61,130    8.0   $76,413    10.0%
Tier 1 Capital (to risk-weighted assets)                              
Salisbury   82,034    10.73    45,865    6.0    n/a     
Bank   88,924    11.64    45,848    6.0    61,130    8.0 
Common Equity Tier 1 Capital (to risk-weighted assets)                              
Salisbury   82,034    10.73    34,399    4.5    n/a     
Bank   88,924    11.64    34,386    4.5    49,668    6.5 
Tier 1 Capital (to average assets)                              
Salisbury   82,034    8.53    38,461    4.0    n/a     
Bank   88,924    9.25    38,461    4.0    48,076    5.0 

 

 23 

 

Cash Dividends to Common Shareholders

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

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

 

NOTE 8 –BE