LOANS

12 Months Ended

Dec. 31, 2011

Loans

LOANS

NOTE 3 - LOANS

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

Years ended December 31, (in thousands)	2011			2010
Residential 1-4 family	$	187,676		$	173,932
Residential 5+ multifamily		3,187			2,889
Construction of residential 1-4 family		5,305			8,948
Home equity credit		34,621			34,164
Residential real estate		230,789			219,933
Commercial		81,958			75,495
Construction of commercial		7,069			7,312
Commercial real estate		89,027			82,807
Farm land		4,925			5,690
Vacant land		12,828			12,979
Real estate secured		337,569			321,409
Commercial and industrial		29,358			25,123
Municipal		2,415			4,338
Consumer		4,496			4,677
Loans receivable, gross		373,838			355,547
Deferred loan origination fees and costs, net		1,004			822
Allowance for loan losses		(4,076	)		(3,920	)
Loans receivable, net	$	370,766		$	352,449
Loans held-for-sale
Residential 1-4 family	$	948		$	1,184

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.

At December 31, 2011 and 2010, Salisbury serviced commercial real estate loans for other banks under loan participation agreements totaling $1,915,000 and $1,978,000, respectively. Salisbury did not purchase or sell any loan participations in 2011.

Concentrations of Credit Risk

Salisbury’s loans consist primarily of residential and commercial real estate loans located principally in northwestern Connecticut and nearby New York and Massachusetts towns, which constitute Salisbury’s service area. Salisbury offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, equipment loans, and a variety of consumer loans, including home equity lines of credit, and installment and collateral loans. 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 to determine its 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.

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 CTDOB.

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

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2011
Residential 1-4 family	$	168,326	$	15,517	$	3,833	$	—	$	—	$	187,676
Residential 5+ multifamily		2,752		435		—		—		—		3,187
Construction of residential 1-4 family		4,116		415		774		—		—		5,305
Home equity credit		31,843		1,451		1,327		—		—		34,621
Residential real estate		207,037		17,818		5,934		—		—		230,789
Commercial		64,458		6,187		11,313		—		—		81,958
Construction of commercial		6,296		302		471		—		—		7,069
Commercial real estate		70,754		6,489		11,784		—		—		89,027
Farm land		2,327		1,768		830		—		—		4,925
Vacant land		8,039		883		3,906		—		—		12,828
Real estate secured		288,157		26,958		22,454		—		—		337,569
Commercial and industrial		21,104		6,847		1,407		—		—		29,358
Municipal		2,415		—		—		—		—		2,415
Consumer		4,254		178		64		—		—		4,496
Loans receivable, gross	$	315,930	$	33,983	$	23,925	$	—	$	—	$	373,838
December 31, 2010
Residential 1-4 family	$	155,291	$	13,207	$	5,434	$	—	$	—	$	173,932
Residential 5+ multifamily		1,799		1,001		89		—		—		2,889
Construction of residential 1-4 family		4,798		1,115		3,035		—		—		8,948
Home equity credit		31,512		1,472		1,180		—		—		34,164
Residential real estate		193,400		16,795		9,738		—		—		219,933
Commercial		54,932		13,635		6,928		—		—		75,495
Construction of commercial		6,327		938		47		—		—		7,312
Commercial real estate		61,259		14,573		6,975		—		—		82,807
Farm land		1,519		3,290		881		—		—		5,690
Vacant land		8,446		266		4,267		—		—		12,979
Real estate secured		264,624		34,924		21,861		—		—		321,409
Commercial and industrial		19,439		4,304		1,380		—		—		25,123
Municipal		4,338		—		—		—		—		4,338
Consumer		4,412		188		67		10		—		4,677
Loans receivable, gross	$	292,813	$	39,416	$	23,308	$	10	$	—	$	355,547

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

			Past due
(in thousands)	Current		1-29 days		30-59 days		60-89 days		90-179 days		180 days and over		30 days and over		Accruing 90 days and over		Non- accrual
December 31, 2011
Residential 1-4 family	$	182,263	$	3,772	$	811	$	121	$	—	$	709	$	1,641	$	—	$	1,240
Residential 5+ multifamily		2,918		—		112		157		—		—		269		—		—
Residential1-4 family construction		5,305		—		—		—		—		—		—		—		—
Home equity credit		34,124		298		50		—		83		66		199		—		173
Residential real estate		224,610		4,070		973		278		83		775		2,109		—		1,413
Commercial		75,486		3,887		483		180		930		992		2,585		—		2,317
Construction of commercial		6,796		108		145		—		20		—		165		—		20
Commercial real estate		82,282		3,995		628		180		950		992		2,750		—		2,337
Farm land		4,499		46		380		—		—		—		380		—		—
Vacant land		9,047		73		50		—		—		3,658		3,708		—		3,658
Real estate secured		320,438		8,184		2,031		458		—		5,425		8,947		—		7,408
Commercial and industrial		28,542		152		51		1		62		550		664		—		668
Municipal		2,415		—		—		—		—		—		—		—		—
Consumer		4,371		72		51		2		—		—		53		—		—
Loans receivable, gross	$	355,766	$	8,408	$	2,133	$	461	$	1,095	$	5,975	$	9,664	$	—	$	8,076
December 31, 2010
Residential 1-4 family	$	165,785	$	4,606	$	731	$	1,668	$	—	$	1,142	$	3,541	$	—	$	2,534
Residential 5+ multifamily		2,728		—		161		—		—		—		161		—		—
Residential 1-4 family construction		8,948		—		—		—		—		—		—		—		—
Home equity credit		33,575		419		55		90		—		25		170		—		362
Residential real estate		211,036		5,025		947		1,758		—		1,167		3,872		—		2,896
Commercial		72,817		1,401		537		—		346		394		1,277		—		2,924
Construction of commercial		7,312		—		—		—		—		—		—		—		—
Commercial real estate		80,129		1,401		537		—		346		394		1,277		—		2,924
Farm land		4,754		936		—		—		—		—		—		—		—
Vacant land		9,498		30		53		—		241		3,157		3,451		—		4,018
Real estate secured		305,417		7,392		1,537		1,758		587		4,718		8,600		—		9,838
Commercial and industrial		24,618		250		159		—		96		—		255		96		207
Municipal		4,338		—		—		—		—		—		—		—		—
Consumer		4,512		110		33		22		—		—		55		—		—
Loans receivable, gross	$	338,885	$	7,752	$	1,729	$	1,780	$	683	$	4,718	$	8,910	$	96	$	10,045

Interest on non-accrual loans that would have been recorded as additional interest income for the years ended December 31, 2011, 2010 and 2009 had the loans been current in accordance with their original terms totaled $700,000, $335,000 and $262,000, respectively.

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

December 31, 2011 (in thousands)	Quantity		Pre-modification balance		Post-modification balance
Residential real estate		3	$	2,010	$	2,010
Commercial real estate		2		305		305
Commercial and industrial		2		273		273
Troubled debt restructurings		7	$	2,588	$	2,588
Rate reduction and term extension		2	$	1,260	$	1,260
Rate reduction and note bifurcation		2		1,001		1,001
Debt consolidation and term extension		2		278		278
Term extension		1		50		50
Troubled debt restructurings		7	$	2,588	$	2,588

Seven loans were restructured during 2011, of which two loans, totaling $98,000, were past due 30-59 days at December 31, 2011.

Impaired loans

Loans individually evaluated for impairment (impaired loans) are loans for which Salisbury does not expect to collect all contractual principal and interest in accordance with the contractual terms of the loan. Impaired loans include all modified loans classified as troubled debt restructurings (TDRs) and loans on non-accrual status. The components of impaired loans are as follows:

Years ended December 31, (in thousands)	2011		2010
Non-accrual loans, excluding troubled debt restructured loans	$	6,323	$	5,791
Non-accrual troubled debt restructured loans		1,753		4,254
Accruing troubled debt restructured loans		4,602		5,330
Total impaired loans	$	12,678	$	15,375
Commitments to lend additional amounts to impaired borrowers	$	—	$	—

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

Years ended December 31, (in thousands)	Beginning balance		Provision			Charge-offs			Reco-veries		Ending balance
Residential	$	1,504	$	329		$	(357	)	$	3	$	1,479
Commercial		1,132		258			(274	)		23		1,139
Land		392		371			(354	)		—		409
Real estate		3,028		958			(985	)		26		3,027
Commercial & industrial		540		315			(180	)		29		704
Municipal		51		(27	)		—			—		24
Consumer		164		89			(201	)		27		79
Unallocated		137		105			—			—		242
2011	$	3,920	$	1,440		$	(1,366	)	$	82	$	4,076
2010	$	3,473	$	1,000		$	(582	)	$	29	$	3,920
2009	$	2,724	$	985		$	(266	)	$	30	$	3,473

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

	Collectively evaluated				Individually evaluated				Total portfolio
(in thousands)	Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2011
Residential 1-4 family	$	182,695	$	762	$	4,981	$	297	$	187,676	$	1,059
Residential 5+ multifamily		2,437		17		750		4		3,187		21
Construction of residential 1-4 family		4,606		17		699		—		5,305		17
Home equity credit		34,333		382		288		—		34,621		382
Residential real estate		224,071		1,178		6,718		301		230,789		1,479
Commercial		74,419		840		7,539		202		81,958		1,042
Construction of commercial		7,049		77		20		20		7,069		97
Commercial real estate		81,468		917		7,559		222		89,027		1,139
Farm land		4,095		35		830		150		4,925		185
Vacant land		9,021		104		3,807		120		12,828		224
Real estate secured		318,655		2,234		18,914		793		337,569		3,027
Commercial and industrial		28,091		368		1,267		336		29,358		704
Municipal		2,415		24		—		—		2,415		24
Consumer		4,431		44		65		35		4,496		79
Unallocated allowance		—		—		—		—		—		242
Totals	$	353,592	$	2,670	$	20,246	$	1,164	$	373,838	$	4,076

	Collectively evaluated				Individually evaluated				Total portfolio
(in thousands)	Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2010
Residential 1-4 family	$	170,145	$	740	$	3,787	$	350	$	173,932	$	1,090
Residential 5+ multifamily		2,889		25		—		—		2,889		25
Construction of residential 1-4 family		5,988		28		2,960		—		8,948		28
Home equity credit		33,801		361		363		—		34,164		361
Residential real estate		212,823		1,154		7,110		350		219,933		1,504
Commercial		70,574		813		4,921		279		75,495		1,092
Construction of commercial		7,291		41		21		—		7,312		41
Commercial real estate		77,865		854		4,942		279		82,807		1,133
Farm land		5,690		61		—		—		5,690		61
Vacant land		8,801		99		4,178		232		12,979		331
Real estate secured		305,179		2,168		16,230		861		321,409		3,029
Commercial and industrial		23,789		286		1,334		254		25,123		540
Municipal		4,338		51		—		—		4,338		51
Consumer		4,677		164		—		—		4,677		164
Unallocated allowance		—		—		—		—		—		136
Totals	$	337,983	$	2,669	$	17,564	$	1,115	$	355,547	$	3,920

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

	Collectively evaluated				Individually evaluated				Total portfolio
December 31, 2011 (in thousands)	Loans		Allowance		Loans		Allowance		Loans		Allowance
Performing loans	$	346,303	$	2,436	$	819	$	35	$	347,122	$	2,471
Potential problem loans		7,289		234		6,750		255		14,039		489
Impaired loans		—		—		12,677		874		12,677		874
Unallocated allowance		—		—		—		—		—		242
Totals	$	353,592	$	2,670	$	20,246	$	1,164	$	373,838	$	4,076

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:

	Impaired loans with specific allowance										Impaired loans with no specific allowance
	Loan balance										Loan balance
(in thousands)	Book		Note		Average		Specific  allowance		Income  recognized		Book		Note		Average		Income  recognized
December 31, 2011
Residential 1-4 family	$	3,012	$	3,160	$	1,822	$	266	$	38	$	390	$	426	$	3,875	$	—
Home equity credit		—		—		—		—		—		173		177		227		—
Residential real estate		3,012		3,160		1,822		266		38		563		603		4,102		—
Commercial		2,151		2,405		2,550		203		77		2,157		2,612		2,175		37
Vacant land		594		774		639		70		—		3,063		3,627		3,243		—
Real estate secured		5,757		6,339		5,011		539		115		5,783		6,842		9,520		37
Commercial and industrial		560		639		364		335		—		577		1,221		876		16
Consumer		—		—		—		—		—		—		142		14		—
Totals	$	6,317	$	6,978	$	5,375	$	874	$	115	$	6,360	$	8,205	$	10,410	$	53
December 31, 2010
Residential 1-4 family	$	1,819	$	1,896	$	1,616	$	275	$	7	$	4,092	$	4,092	$	3,464	$	110
Home equity credit		—		—		—		—		—		362		362		365		20
Residential real estate		1,819		1,896		1,616		275		7		4,454		4,454		3,829		130
Commercial		2,532		2,633		2,482		267		123		2,069		2,084		2,017		91
Vacant land		995		1,015		1,015		139		—		3,023		3,387		3,023		—
Real estate secured		5,346		5,544		5,113		681		130		9,546		9,925		8,869		221
Commercial and industrial		207		207		220		104		11		276		800		284		—
Totals	$	5,553	$	5,751	$	5,333	$	785	$	141	$	9,822	$	10,725	$	9,153	$	221