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Section 1: 10-Q (FORM 10-Q)

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, 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 May 5, 2020 is 2,828,317.

 
 

 

TABLE OF CONTENTS

 

  PART 1 FINANCIAL INFORMATION Page
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2020 (unaudited) and DECEMBER 31, 2019 3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE MONTHS ENDED MARCH 31, 2020 and 2019 (unaudited) 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2020 and 2019 (unaudited) 5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2020 and 2019 (unaudited) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2020 and 2019 (unaudited) 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 35
Item 4. CONTROLS AND PROCEDURES 36
     
  PART II. OTHER INFORMATION 36
Item 1. LEGAL PROCEEDINGS 36
Item 1A. RISK FACTORS 36
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 36
Item 3. DEFAULTS UPON SENIOR SECURITIES 36
Item 4. MINE SAFETY DISCLOSURES 36
Item 5. OTHER INFORMATION 36
Item 6. EXHIBITS 37
SIGNATURES 37

 

 2 

 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)    March 31, 2020      December 31, 2019  
ASSETS          
Cash and due from banks  $6,597   $7,406 
Interest bearing demand deposits with other banks   32,665    19,479 
Total cash and cash equivalents   39,262    26,885 
Interest bearing Time Deposits with Financial Institutions   750    750 
Securities          
Available-for-sale at fair value   91,333    91,801 
CRA mutual fund at fair value   900    882 
Federal Home Loan Bank of Boston stock at cost   2,733    3,242 
Loans held-for-sale   580    332 
Loans receivable, net (allowance for loan losses: $10,618 and $8,895)   949,142    927,413 
Other real estate owned       314 
Bank premises and equipment, net   17,535    17,385 
Goodwill   13,815    13,815 
Intangible assets (net of accumulated amortization: $4,973 and $4,886)   908    995 
Accrued interest receivable   3,437    3,415 
Cash surrender value of life insurance policies   20,714    20,580 
Deferred taxes   1,174    1,249 
Other assets   3,468    3,390 
Total Assets  $1,145,751   $1,112,448 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
Demand (non-interest bearing)  $243,491   $237,852 
Demand (interest bearing)   157,069    153,314 
Money market   222,746    239,504 
Savings and other   167,408    161,112 
Certificates of deposit   174,906    127,724 
Total deposits   965,620    919,506 
Repurchase agreements   4,929    8,530 
Federal Home Loan Bank of Boston advances   40,932    50,887 
Subordinated debt   9,865    9,859 
Note payable   237    246 
Finance lease obligations   1,707    1,718 
Accrued interest and other liabilities   6,318    8,047 
Total Liabilities   1,029,608    998,793 
Shareholders' Equity          
Common stock - $0.10 per share par value          
Authorized: 5,000,000;          
Issued: 2,829,017 and 2,825,912          
Outstanding: 2,829,017 and 2,825,912   283    283 
Unearned compensation – restricted stock awards   (659)   (795)
Paid-in capital   44,566    44,490 
Retained earnings   69,547    68,320 
Accumulated other comprehensive income, net   2,406    1,357 
Total Shareholders' Equity   116,143    113,655 
Total Liabilities and Shareholders' Equity  $1,145,751   $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 March 31, (in thousands, except per share amounts)    2020      2019  
Interest and dividend income          
Interest and fees on loans  $9,987   $9,934 
Interest on debt securities          
Taxable   455    621 
Tax exempt   185    72 
Other interest and dividends   91    227 
Total interest and dividend income   10,718    10,854 
Interest expense          
Deposits   1,509    1,796 
Repurchase agreements   7    3 
Finance lease   36    46 
Note payable   4    4 
Subordinated Debt   156    156 
Federal Home Loan Bank of Boston advances   219    412 
Total interest expense   1,931    2,417 
Net interest and dividend income   8,787    8,437 
Provision for loan losses   1,706    294 
Net interest and dividend income after provision for loan losses   7,081    8,143 
Non-interest income          
Trust and wealth advisory   1,030    906 
Service charges and fees   905    920 
Gains on sales of mortgage loans, net   61    7 
Mortgage servicing, net   67    76 
Gains on CRA mutual fund   14    11 
Gains on sales and calls of available-for-sale-securities, net   1    (9)
BOLI income and gains   134    79 
Other   33    37 
Total non-interest income   2,245    2,027 
Non-interest expense          
Salaries   2,850    2,993 
Employee benefits   1,146    1,185 
Premises and equipment   911    972 
Data processing   540    509 
Professional fees   628    535 
OREO gains, losses and write-downs, net       52 
Collections, OREO, and loan related   25    130 
FDIC insurance   105    163 
Marketing and community support   125    156 
Amortization of intangibles   87    104 
Other   519    412 
Total non-interest expense   6,936    7,211 
Income before income taxes   2,390    2,959 
Income tax provision   343    525 
Net income  $2,047   $2,434 
Net income available to common shareholders  $2,013   $2,408 
           
Basic earnings per common share  $0.72   $0.87 
Diluted earnings per common share   0.72    0.86 
Common dividends per share   0.29    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)    2020      2019  
Net income  $2,047   $2,434 
Other comprehensive income          
Net unrealized gains on securities available-for-sale   1,330    1,130 
Reclassification of net realized (income) losses in net income(1)   (1)   9 
Unrealized gains on securities available-for-sale   1,329    1,139 
Income tax expense   (280)   (239)
Unrealized gains on securities available-for-sale, net of tax   1,049    900 
Comprehensive income  $3,096   $3,334 

(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive 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, which is immaterial to Salisbury's consolidated results, 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 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               2,434            2,434 
Other comprehensive income, net of tax                       900    900 
Common stock dividends declared ($0.28 per share)               (784)           (784)
Forfeiture of restricted stock shares   (100)       (5)       5         
Stock based compensation-restricted stock awards                   100        100 
Balances at March 31, 2019   2,806,681   $281   $43,765   $61,989   $(606)  $680   $106,109 
Balances at December 31, 2019   2,825,912   $283   $44,490   $68,320   $(795)  $1,357   $113,655 
Net income               2,047            2,047 
Other comprehensive income, net of tax                       1,049    1,049 
Common stock dividends declared ($0.29 per share)               (820)           (820)
Stock Options exercised   3,105        53                53 
Stock based compensation-restricted stock awards           23        136        159 
Balances at March 31, 2020   2,829,017   $283   $44,566   $69,547   $(659)  $2,406   $116,143 

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)    2020      2019  
Operating Activities          
Net income  $2,047   $2,434 
Adjustments to reconcile net income to net cash provided by operating activities:          
(Accretion), amortization and depreciation:          
Securities   105    12 
Bank premises and equipment   355    410 
Core deposit intangible   87    104 
Modification fees on Federal Home Loan Bank of Boston advances   45    58 
Subordinated debt issuance costs   6    6 
Mortgage servicing rights   16    11 
Fair value adjustment on loans       (64)
Fair value adjustment on deposits   (1)   (2)
(Gains) and losses, including write-downs          
Gain on CRA mutual fund   (14)   (11)
(Gain) loss on securities available-for-sale, net   (1)   9 
Gain on sales of loans, excluding capitalized servicing rights   (45)   (5)
Write-downs of other real estate owned       52 
Provision for loan losses   1,706    294 
Proceeds from loans sold   3,157    368 
Loans originated for sale   (3,360)   (363)
Decrease in deferred loan origination fees and costs, net   33    88 
Mortgage servicing rights originated   (33)   (4)
Increase in interest receivable   (22)   (263)
Deferred tax (benefit) expense   (205)   271 
Decrease (increase) in prepaid expenses   18    (143)
Increase in cash surrender value of life insurance policies   (134)   (79)
Decrease in income tax receivable       137 
(Increase) decrease in other assets   (78)   649 
Decrease in accrued expenses   (2,969)   (1,628)
Increase in income tax payable   408     
Increase in interest payable   219    341 
Increase (decrease) in other liabilities   613    (142)
Stock based compensation-restricted stock awards   159    100 
Net cash provided by operating activities   2,112    2,640 
Investing Activities          
Redemption of Federal Home Loan Bank of Boston stock   509    1,124 
Purchases of securities available-for-sale   (2,729)   (9,391)
Proceeds from sale of securities       965 
Reinvestment of CRA mutual fund   (4)   (5)
Proceeds from calls of securities available-for-sale   655     
Proceeds from maturities/principal payments of securities available-for-sale   3,767    3,107 
Loan originations and principal collections, net   (23,497)   (2,235)
Recoveries of loans previously charged off   29    7 
Proceeds from sale of OREO   314    1,017 
Purchase of life insurance (BOLI)       (750)
Capital expenditures   (505)   (47)
Net cash utilized by investing activities  $(21,461)  $(6,208)

 

 

 6 

 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)

Three months ended March 31, (in thousands)    2020      2019  
Financing Activities          
(Decrease) increase in deposit transaction accounts, net  $(1,068)  $4,551 
Increase in time deposits, net   47,182    10,681 
Decrease in securities sold under agreements to repurchase, net   (3,601)   (1,153)
Federal Home Loan Bank of Boston advances, net change in advances with maturity dates less than three months   (20,000)   (9,500)
Advances (principal payments) on Federal Home Loan Bank of Boston long term advances   10,000    (10,000)
Principal payments on note payable   (9)   (8)
Principal payments on finance lease obligations   (11)   (35)
Stock options exercised   53     
Common stock dividends paid   (820)   (784)
Net cash provided by (utilized by) financing activities   31,726    (6,248)
Net increase (decrease) in cash and cash equivalents   12,377    (9,816)
Cash and cash equivalents, beginning of period   26,885    58,445 
Cash and cash equivalents, end of period  $39,262   $48,629 
Cash paid during period          
Interest  $1,662   $2,014 
Income taxes   140    81 
Non-cash investing and financing activities          
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.

 

 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 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 March 31, 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 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.

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 is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to small businesses. If the economic shutdown to contain the virus continues for an extended period or is unsuccessful, 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 extended economic shutdown will have on Salisbury's operations, Salisbury is disclosing the material items of which it is currently aware.

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.

 8 

 

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.

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 expects to meet the new definition of non-accelerated filer while continuing to qualify as a “smaller reporting company”, and would 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.

 

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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, 2020                    
Available-for-sale                    
U.S. Government Agency notes  $4,218   $174   $1   $4,391 
Municipal bonds   26,392    861    3    27,250 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government- sponsored enterprises   29,003    871    31    29,843 
Collateralized mortgage obligations:                    
U.S. Government agencies   23,674    1,053        24,727 
Corporate bonds   5,000    158    36    5,122 
Total securities available-for-sale  $88,287   $3,117   $71   $91,333 
CRA mutual fund                 $900 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $2,733   $   $   $2,733 
(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 did not sell any available-for-sale securities during the three month period ended March 31, 2020. Salisbury sold $1.0 million in securities available-for-sale during the three month period ended March 31, 2019 realizing a pre-tax loss of $9 thousand and related tax benefit of $2 thousand.

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
March 31, 2020 (in thousands)  Fair value  Unrealized losses  Fair value  Unrealized losses  Fair value  Unrealized losses
Available-for-sale                  
U.S. Government Agency notes  $   $   $126   $1   $126   $1 
Municipal bonds   1,060    3            1,060    3 
Mortgage- backed securities:                              
U.S. Government agencies and U.S. Government - sponsored enterprises   2,808    30    108    1    2,916    31 
Corporate bonds   714    36            714    36 
Total temporarily impaired securities  $4,582   $69   $234   $2   $4,816   $71 
                               
   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 

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The table below presents the amortized cost, fair value and tax equivalent yield of securities, by maturity. Debt securities issued by U.S. Government agencies (SBA securities), MBS, and CMOS are disclosed separately in the table below as these securities may prepay prior to the scheduled contractual maturity dates.

March 31, 2020 (in thousands)  Maturity  Amortized cost    Fair value     Yield(1)  
U.S. Government Agency notes  After 1 year but within 5 years  $   $    %
   After 5 year but within 10 years   2,496    2,567    3.48 
   Total   2,493    2,567    3.48 
Municipal bonds  After 5 year but within 10 years   1,727    1,841    3.16 
   After 10 years   24,665    25,409    3.43 
   Total   26,392    27,250    3.41 
Mortgage-backed securities and Collateralized mortgage obligations  U.S. Government agencies   54,399    56,394    2.85 
                   
Corporate bonds  After 5 years but within 10 years   5,000    5,122    5.21 
Securities available-for-sale     $88,287   $91,333    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 debt securities were OTTI at March 31, 2020.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Four securities had unrealized losses at March 31, 2020, which approximated 0.70% 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, 2020

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Two securities had unrealized losses at March 31, 2020, which approximated 0.24% 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, 2020.

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. Five securities had unrealized losses at March 31, 2020, which approximated 1.04% 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, 2020.

Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. One security had an unrealized loss at March 31, 2020, which approximated 4.80% of its 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 this security. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in this security, although it is not more likely than not that Salisbury will be required to sell this security before recovery of its cost basis, which may be maturity, and does not intend to sell this security. Management evaluated the impairment status of this debt security, and concluded that the gross unrealized loss was temporary in nature. Therefore, management does not consider this investment to be other-than temporarily impaired at March 31, 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 March 31, 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.

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NOTE 3 – LOANS

The composition of loans receivable is as follows:

(In thousands)    March 31, 2020     December 31, 2019  
Residential 1-4 family  $353,112   $346,299 
Residential 5+ multifamily   35,008    35,455 
Construction of residential 1-4 family   12,214    11,889 
Home equity lines of credit   31,907    33,798 
Residential real estate   432,241    427,441 
Commercial   310,436    289,795 
Construction of commercial   10,922    8,466 
Commercial real estate   321,358    298,261 
Farm land   3,612    3,641 
Vacant land   14,488    7,893 
Real estate secured   771,699    737,236 
Commercial and industrial   157,573    169,411 
Municipal   20,964    21,914 
Consumer   8,195    6,385 
Loans receivable, gross   958,431    934,946 
Deferred loan origination fees and costs, net   1,329    1,362 
Allowance for loan losses   (10,618)   (8,895)
Loans receivable, net  $949,142   $927,413 
Loans held-for-sale          
Residential 1-4 family  $580   $332 

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 March 31, 2020 and December 31, 2019, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $62.6 million and $67.0 million, respectively.

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 34% 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 6% 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.

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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”).

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

(in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
March 31, 2020                              
Residential 1-4 family  $344,792   $4,191   $4,129   $   $   $353,112 
Residential 5+ multifamily   33,180    98    1,730            35,008 
Construction of residential 1-4 family   12,214                    12,214 
Home equity lines of credit   31,313    387    207            31,907 
Residential real estate   421,499    4,676    6,066            432,241 
Commercial   291,486    4,687    14,192    71        310,436 
Construction of commercial   10,684        238            10,922 
Commercial real estate   302,170    4,687    14,430    71        321,358 
Farm land   1,918        1,694            3,612 
Vacant land   14,390    57    41            14,488 
Real estate secured   739,977    9,420    22,231    71        771,699 
Commercial and industrial   155,326    473    1,774            157,573 
Municipal   20,964                    20,964 
Consumer   8,157    4    34            8,195 
Loans receivable, gross  $924,424   $9,897   $24,039   $71   $   $958,431 
(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 

 

 

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 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, 2020                        
Residential 1-4 family  $349,628   $3,211   $236   $37   $   $3,484   $   $1,019 
Residential 5+ multifamily   34,147                861    861        861 
Construction of residential 1-4 family   12,214                             
Home equity lines of credit   31,300    337    89    103    78    607        207 
Residential real estate   427,289    3,548    325    140    939    4,952        2,087 
Commercial   307,973    2,114    278        71    2,463        755 
Construction of commercial   10,922                             
Commercial real estate   318,895    2,114    278        71    2,463        755 
Farm land   3,436    176                176        181 
Vacant land   14,447            41        41    41     
Real estate secured   764,067    5,838    603    181    1,010    7,632    41    3,023 
Commercial and industrial   157,341    83    25    124        232    27    97 
Municipal   20,964                             
Consumer   8,190    4    1            5         
Loans receivable, gross  $950,562   $5,925   $629   $305   $1,010   $7,869   $68   $3,120 

 

      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 

 

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Troubled Debt Restructurings (TDRs)

Troubled debt restructurings are as follows:

   For the three months ending March 31, 2020  For the three months ending March 31, 2019
(in thousands)  Quantity  Pre-modification balance  Post-modification balance  Quantity  Pre-modification balance  Post-modification balance
Residential real estate      $   $       $   $ 
Commercial real estate   1    133    133             
Consumer                        
Troubled debt restructurings   1   $133   $133       $   $ 
Interest only payments to sell property      $   $       $   $ 
Rate reduction                        
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       $   $ 

For the three months ended March 31, 2020, there was one troubled debt restructurings. For the three months ended March 31, 2019, there were no troubled debt restructurings. Salisbury currently does not have any commitments to lend additional funds to TDR loans.

There were no modifications for TDRs within the last year where a concession has been made, that then defaulted in the current reporting period. All TDR loans are included in the Impaired Loan schedule and are individually evaluated.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

   Three months ended March 31, 2020  Three months ended March 31, 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   $306   $   $7   $2,706   $2,149   $10   $(180)  $   $1   $1,980 
Residential 5+ multifamily   446    62            508    413        53            466 
Construction of residential 1-4 family   75    12            87    83        (6)           77 
Home equity lines of credit   197    81            278    219    1    (11)           209 
Residential real estate   3,111    461        7    3,579    2,864    11    (144)       1    2,732 
Commercial   3,742    758        19    4,519    3,048    488    276    (9)       3,803 
Construction of commercial   104    22            126    122        21            143 
Commercial real estate   3,846    780        19    4,645    3,170    488    297    (9)       3,946 
Farm land   47    5            52    33        14            47 
Vacant land   71    73            144    100        (11)           89 
Real estate secured   7,075    1,319        26    8,420    6,167    499    156    (9)   1    6,814 
Commercial and industrial   1,145    (74)           1,071    1,158    164    (61)   (30)   2    1,233 
Municipal   46    7            53    12        2            14 
Consumer   60    51    (12)   3    102    56        (3)   (6)   4    51 
Unallocated   569    403            972    438        200            638 
Totals  $8,895   $1,706   $(12)  $29   $10,618   $7,831   $663   $294   $(45)  $7   $8,750 

 

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

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
March 31, 2020                              
Residential 1-4 family  $348,369   $2,400   $4,743   $306   $353,112   $2,706 
Residential 5+ multifamily   34,031    508    977        35,008    508 
Construction of residential 1-4 family   12,214    87            12,214    87 
Home equity lines of credit   31,700    252    207    26    31,907    278 
Residential real estate   426,314    3,247    5,927    332    432,241    3,579 
Commercial   306,125    3,986    4,311    533    310,436    4,519 
Construction of commercial   10,922    126            10,922    126 
Commercial real estate   317,047    4,112    4,311    533    321,358    4,645 
Farm land   3,431    52    181        3,612    52 
Vacant land   14,311    136    177    8    14,488    144 
Real estate secured   761,103    7,547    10,596    873    771,699    8,420 
Commercial and industrial   157,354    1,063    219    8    157,573    1,071 
Municipal   20,964    53            20,964    53 
Consumer   8,161    75    34    27    8,195    102 
Unallocated allowance       972                972 
Totals  $947,582   $9,710   $10,849   $908   $958,431   $10,618 

 

  (in thousands)  Collectively evaluated  Individually evaluated  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 

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

March 30, 2020 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $930,294   $8,044   $   $   $930,294   $8,044 
Potential problem loans 1   17,288    694            17,288    694 
Impaired loans           10,849    908    10,849    908 
Unallocated allowance       972                972 
Totals  $947,582   $9,710   $10,849   $908   $958,431   $10,618 

 

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.

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A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the present value of expected cash flows or the 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 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, 2020                           
Residential  $4,015   $4,140   $4,067   $306   $42   $1,705   $2,019   $2,070   $6 
Home equity lines of credit   89    89    22    26        118    464    108     
Residential real estate   4,104    4,229    4,089    332    42    1,823    2,483    2,178    6 
Commercial   3,672    3,741    3,405    533    44    638    1,254    924    10 
Construction of commercial                                    
Farm land                       181    327    184     
Vacant land   41    41    41    8    1    137    154    138    2 
Real estate secured   7,817    8,011    7,535    873    87    2,779    4,218    3,424    18 
Commercial and industrial   166    170    111    8    1    53    207    86    1 
Consumer   34    34    35    27                     
Totals  $8,017   $8,215   $7,681   $908   $88   $2,832   $4,425   $3,510   $19 

 

 

   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, 2019                           
Residential  $2,769   $2,823   $2,780   $113   $27   $3,454   $4,758   $3,620   $16 
Home equity lines of credit   45    45    46    2    1    407    495    409     
Residential real estate   2,814    2,868    2,826    115    28    3,861    5,253    4,029    16 
Commercial   2,568    2,568    1,993    186    24    2,427    3,912    2,748    14 
Construction of commercial   249    249    251    14        100    108    101    2 
Farm land                       212    430    215     
Vacant land   42    42    42    2    1    145    165    146    3 
Real estate secured   5,673    5,727    5,112    317    53    6,745    9,868    7,239    35 
Commercial and industrial                       498    620    500    2 
Consumer                           1         
Totals  $5,673   $5,727   $5,112   $317   $53   $7,243   $10,489   $7,739   $37 

 

Certain data with respect to loans individually evaluated for impairment is as follows as of and for the year ended December 31, 2019:

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
December 31, 2019                           
Residential  $4,111   $4,190   $3,725   $276   $162   $2,318   $3,081   $2,940   $52 
Home equity lines of credit           52            105    450    391     
Residential real estate   4,111    4,190    3,777    276    162    2,423    3,531    3,331    52 
Commercial   3,309    3,335    2,574    409    90    1,024    1,733    1,747    54 
Construction of commercial           77                    39     
Farm land                       186    329    203     
Vacant land   41    41    42    5    3    139    157    143    10 
Real estate secured   7,461    7,566    6,470    690    255    3,772    5,750    5,463    116 
Commercial and industrial   93    97    16    2    4    33    188    265    4 
Consumer   36    36    21    1                3     
Totals  $7,590   $7,699   $6,507   $693   $259   $3,805   $5,938   $5,731   $120 

 

 

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NOTE 4 – LEASES

On January 1, 2019, the Bank adopted ASU 2016-02, “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Bank leases facilities and equipment with various expiration dates through 2036. The facilities leases have varying renewal options, generally require fixed annual rent, and provide that real estate taxes, insurance, and maintenance are to be paid by Salisbury. Effective January 1, 2019, the Bank recorded approximately $1.6 million of right-of-use assets and corresponding lease liability related to these operating leases. The Bank does not have any leases with related parties and equipment leases are not material to Salisbury's consolidated financial statements.

The following table provides the assets and liabilities as well as the costs of operating and financial leases which are included in the Bank's consolidated income statement for the three months ended March 31, 2020.

Three months ended (in thousands, except lease term and discount rate)   Classification    March 31, 2020      December 31, 2019  
Assets         
Operating  Other assets  $1,310   $1,360 
Finance  Bank premises and equipment 1   1,478    1,503 
Total Leased Assets     $2,788   $2,863 
Liabilities             
Operating  Other liabilities  $1,310   $1,360 
Finance  Finance lease   1,707    1,718 
Total lease liabilities     $3,017   $3,078 
1 Net of accumulated depreciation of $319 thousand.
              
Lease cost  Classification   March 31, 2020    March 31, 2019 
Operating leases  Premises and equipment  $62   $61 
Finance leases:             
Amortization of leased assets  Premises and equipment   25    47 
Interest on finance leases  Interest expense   36    46 
Total lease cost     $123   $154 
              
Weighted Average Remaining Lease Term
Operating leases      8.6 years    8.7 years 
Financing leases      15.2 years    13.2 years 
Weighted Average Discount Rate 1             
Operating leases      3.7%   3.7%
Financing leases      8.4%   7.5%
1 Salisbury uses the FHLB five year Advance rate as the discount rate, as our leases do not provide an implicit rate.
              

The following is a schedule by years of the present value of the net minimum lease payments as of March 31, 2020.

  Future minimum lease payments (in thousands)    Operating Leases      Finance Leases  
 2020   $185   $140 
 2021    228    192 
 2022    199    195 
 2023    148    197 
 2024    129    200 
 Thereafter    650    1,980 
 Total future minimum lease payments    1,539    2,904 
 Less amount representing interest    (229)   (1,197)
 Total present value of net future minimum lease payments   $1,310   $1,707 

NOTE 5 - MORTGAGE SERVICING RIGHTS

(in thousands)    March 31, 2020      December 31, 2019  
Residential mortgage loans serviced for others  $106,990   $106,255 
Fair value of mortgage servicing rights   625    813 

Changes in mortgage servicing rights are as follows:

Three months ended March 31, (in thousands)    2020      2019  
Mortgage Servicing Rights          
Balance, beginning of period  $238   $228 
Originated   33    4 
Amortization (1)   (16)   (11)
Balance, end of period  $255   $221 

(1) Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

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NOTE 6 - PLEDGED ASSETS

The following securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase, FHLBB advances and credit facilities available.

(in thousands)    March 31, 2020      December 31, 2019  
Securities available-for-sale (at fair value)  $55,337   $52,845 
Loans receivable   434,738    434,329 
Total pledged assets  $490,075   $487,174 

At March 31, 2020, securities were pledged as follows: $46.34 million to secure public deposits, $8.95 million to secure repurchase agreements and $0.05 million to secure FHLBB advances. Additionally, loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 7 – EARNINGS PER SHARE

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

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

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

Three months ended March 31, (in thousands, except per share data)    2020      2019  
Net income  $2,047   $2,434 
Less: Undistributed earnings allocated to participating securities   (34)   (26)
Net income allocated to common stock  $