LOANS

12 Months Ended

Dec. 31, 2012

Debt Disclosure [Abstract]

LOANS

NOTE 3 - LOANS

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

Years ended December 31, (in thousands)	2012	2011
Residential 1-4 family	$   198,552	$   187,676
Residential 5+ multifamily	3,889	3,187
Construction of residential 1-4 family	2,379	5,305
Home equity credit	34,162	34,621
Residential real estate	238,982	230,789
Commercial	87,382	81,958
Construction of commercial	5,823	7,069
Commercial real estate	93,205	89,027
Farm land	4,320	4,925
Vacant land	9,926	12,828
Real estate secured	346,433	337,569
Commercial and industrial	38,094	29,358
Municipal	3,378	2,415
Consumer	4,181	4,496
Loans receivable, gross	392,086	373,838
Deferred loan origination fees and costs, net	1,032	1,004
Allowance for loan losses	(4,360)	(4,076)
Loans receivable, net	$   388,758	$   370,766
Loans held-for-sale
Residential 1-4 family	$       1,879	$          948

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, 2012 and 2011, Salisbury serviced commercial real estate loans for other banks under loan participation agreements totaling $1,847,000 and $1,915,000, respectively. Salisbury did not purchase or sell any loan participations in 2012.

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, 2012
Residential 1-4 family	$ 180,442	$ 12,473	$ 5,538	$ 99	$ -	$ 198,552
Residential 5+ multifamily	2,872	773	244	-	-	3,889
Construction of residential 1-4 family	1,570	-	809	-	-	2,379
Home equity credit	30,981	1,848	1,333	-	-	34,162
Residential real estate	215,865	15,094	7,924	99	-	238,982
Commercial	64,817	13,299	9,266	-	-	87,382
Construction of commercial	5,055	297	471	-	-	5,823
Commercial real estate	69,872	13,596	9,737	-	-	93,205
Farm land	2,799	341	1,180	-	-	4,320
Vacant land	4,885	863	4,178	-	-	9,926
Real estate secured	293,421	29,894	23,019	99	-	346,433
Commercial and industrial	28,453	8,300	1,341	-	-	38,094
Municipal	3,378	-	-	-	-	3,378
Consumer	3,994	159	28	-	-	4,181
Loans receivable, gross	$ 329,246	$ 38,353	$ 24,388	$ 99	$ -	$ 392,086
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

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

(in thousands)	Current	Past due							Non- accrual
		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
December 31, 2012
Residential 1-4 family	$ 190,488	$ 2,545	$3,578	$ 639	$ 1,185	$ 117	$ 5,519	$ -	$ 3,024
Residential 5+ multifamily	3,889	-	-	-	-	-	-	-	-
Residential 1-4 family construction	2,379	-	-	-	-	-	-	-	-
Home equity credit	32,540	890	113	396	-	223	732	-	442
Residential real estate	229,296	3,435	3,691	1,035	1,185	340	6,251	-	3,466
Commercial	83,477	864	1,104	566	58	1,313	3,042	-	2,214
Construction of commercial	5,659	-	164	-	-	-	164	-	21
Commercial real estate	89,136	864	1,268	566	58	1,313	3,206	-	2,235
Farm land	3,898	422	-	-	-	-	-	-	-
Vacant land	5,932	-	-	48	740	3,206	3,994	-	3,994
Real estate secured	328,262	4,721	4,959	1,649	1,983	4,859	13,451	-	9,696
Commercial and industrial	37,618	351	26	99	-	-	126	-	164
Municipal	3,378	-	-	-	-	-	-	-	-
Consumer	4,034	108	25	14	-	-	39	-	-
Loans receivable, gross	$373,292	$5,180	$5,010	$1,762	$1,983	$ 4,859	$ 13,616	$ -	$ 9,860
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	-	-
Residential 1-4 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	1,033	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

Interest on non-accrual loans that would have been recorded as additional interest income for the years ended December 31, 2012, 2011 and 2010 had the loans been current in accordance with their original terms totaled $507,000, $700,000 and $335,000, respectively.

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

	December 31, 2012			December 31, 2011
(in thousands)	Quantity	Pre-modification balance	Post-modification balance	Quantity	Pre-modification balance	Post-modification balance
Residential real estate	9	$ 2,002	$ 2,002	3	$ 2,010	$ 2,010
Commercial real estate	4	1,871	1,871	2	305	305
Commercial and industrial	4	528	528	2	273	273
Troubled debt restructurings	17	$ 4,401	$ 4,401	7	$ 2,588	$ 2,588
Rate reduction and term extension	3	$ 513	$ 513	2	$ 1,260	$ 1,260
Rate reduction and note bifurcation	-	-	-	2	1,000	1,000
Debt consolidation and term extension	4	2,276	2,276	2	278	278
Rate reduction	3	727	727	-	-	-
Rate reduction interest only	2	625	625	-	-	-
Debt consolidation, rate reduction and term extension, note bifurcation	1	99	99	-	-	-
Refinance	1	80	80	-	-	-
Modification pursuant to bankruptcy	1	34	34	-	-	-
Seasonal interest only concession	1	26	26	-	-	-
Term extension	1	21	21	1	50	50
Troubled debt restructurings	17	$ 4,401	$ 4,401	7	$ 2,588	$ 2,588

Seventeen loans were restructured during 2012, of which one loan, totaling $905,000, was past due 30-59 days and two loans totaling $183,000 were past due 60-89 days at December 31, 2012.

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)	2012	2011
Non-accrual loans, excluding troubled debt restructured loans	$ 7,579	$ 6,323
Non-accrual troubled debt restructured loans	2,280	1,753
Accruing troubled debt restructured loans	6,703	4,602
Total impaired loans	$ 16,562	$ 12,678
Commitments to lend additional amounts to impaired borrowers	$ -	$ -

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

Years ended (in thousands)	December 31, 2012					December 31, 2011
	Beginning balance	Provision	Charge-offs	Reco-veries	Ending balance	Beginning balance	Provision	Charge-offs	Reco-veries	Ending balance
Residential	$ 1,479	$ 688	$ (233)	$ -	$ 1,934	$ 1,504	$ 329	$ (357)	$ 3	$ 1,479
Commercial	1,139	(52)	(64)	36	1,059	1,132	258	(274)	23	1,139
Land	409	167	(276)	-	300	392	371	(354)	-	409
Real estate	3,027	803	(573)	36	3,293	3,028	958	(985)	26	3,027
Commercial & industrial	704	(21)	(222)	38	499	540	315	(180)	29	704
Municipal	24	12	-	-	36	51	(27)	-	-	24
Consumer	79	78	(91)	26	92	164	89	(201)	27	79
Unallocated	242	198	-	-	440	137	105	-	-	242
Totals	$ 4,076	$ 1,070	$ (886)	$ 100	$ 4,360	$ 3,920	$ 1,440	$ (1,366)	$ 82	$ 4,076
2010						$ 3,473	$ 1,000	$ (582)	$ 29	$ 3,920

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
December 31, 2012
Residential 1-4 family	$ 191,886	$ 743	$ 6,666	$ 652	$ 198,552	$ 1,395
Residential 5+ multifamily	2,913	22	976	50	3,889	72
Construction of residential 1-4 family	2,379	10	-	-	2,379	10
Home equity credit	33,697	365	465	92	34,162	457
Residential real estate	230,875	1,140	8,107	794	238,982	1,934
Commercial	81,635	931	5,747	64	87,382	995
Construction of commercial	5,802	64	21	-	5,823	64
Commercial real estate	87,437	995	5,768	64	93,205	1,059
Farm land	4,320	66	-	-	4,320	66
Vacant land	5,795	70	4,131	164	9,926	234
Real estate secured	328,427	2,271	18,006	1,022	346,433	3,293
Commercial and industrial	37,073	467	1,021	32	38,094	499
Municipal	3,378	36	-	-	3,378	36
Consumer	4,061	39	120	53	4,181	92
Unallocated allowance	-	-	-	-	-	440
Totals	$372,939	$ 2,813	$ 19,147	$ 1,107	$392,086	$ 4,360

(in thousands)	Collectively evaluated		Individually evaluated		Total portfolio
	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

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

December 31, 2012  (in thousands)	Collectively evaluated		Individually evaluated		Total portfolio
	Loans	Allowance	Loans	Allowance	Loans	Allowance
Performing loans	$ 364,593	$ 2,567	$ 121	$ 52	$ 364,714	$ 2,619
Potential problem loans	8,345	246	2,465	131	10,810	377
Impaired loans	-	-	16,562	924	16,562	924
Unallocated allowance	-	-	-	-	-	440
Totals	$372,938	$ 2,813	$ 19,148	$ 1,107	$392,086	$ 4,360

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:

(in thousands)	Impaired loans with specific allowance					Impaired loans with no specific allowance
	Loan balance			Specific allowance	Income recognized	Loan balance			Income recognized
	Book	Note	Average			Book	Note	Average
December 31, 2012
Residential 1-4 family	$3,857	$3,925	$ 2,404	$ 578	$ 77	$ 2,263	$ 2,460	$ 1,601	$ 34
Home equity credit	351	351	146	92	-	91	93	203	-
Residential real estate	4,208	4,276	2,550	670	77	2,354	2,553	1,804	34
Commercial	1,629	1,784	1,925	64	60	3,381	3,576	3,122	82
Vacant land	3,186	3,387	1,455	158	-	808	1,467	2,358	4
Real estate secured	9,023	9,447	5,930	892	137	6,543	7,596	7,284	120
Commercial and industrial	335	368	833	32	13	661	1,063	854	31
Consumer	-	-	-	-	-	-	-	-	-
Totals	$9,358	$9,815	$ 6,763	$ 924	$ 150	$7,204	$8,659	$ 8,138	$ 151
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