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MERGERS AND ACQUISITIONS

12 Months Ended

Dec. 31, 2016

NOTE 2 – MERGERS AND ACQUISITIONS

On December 5, 2014, the Company acquired Riverside Bank. Riverside Bank operated four banking offices serving Dutchess, Ulster and Orange Counties in New York, and was merged with and into the Bank. This business combination is an extension of the Salisbury franchise and the goodwill recognized results from the expected synergies and earnings accretion from this combination, including future cost savings related to Riverside's operations. The combination was negotiated between the companies and was approved by their respective shareholders and unanimously by their respective boards of directors.

Riverside Bank shareholders received 1,001,485 shares of the Company common stock. On the acquisition date, Riverside Bank had 741,876 outstanding common shares. Salisbury exchanged its stock in a ratio of 1.35 shares of the Company's common stock for each share of Riverside Bank stock. The 1,001,485 shares of Salisbury common stock issued in this exchange were valued at $27.19 per share based on the closing price of Salisbury posted on December 5, 2014 resulting in consideration paid of $27 million. Salisbury paid $1,000 in cash consideration to settle all fractional shares outstanding of Riverside Bank.

The results of Riverside Bank's operations are included in Salisbury's Consolidated Statements of Income from the date of acquisition.

The assets and liabilities in the Riverside Bank acquisition were recorded at their fair value based on the utilization of third party specialists and management's best estimate using information available at the date of acquisition. Consideration paid, and fair values of Riverside Bank's assets acquired and liabilities assumed are summarized in the following tables:

Consideration Paid: (In thousands)		Amount
Salisbury Bancorp common stock issued to Riverside Bank common stockholders	$	27,230
Cash consideration paid for fractional shares		1
Riverside stock options, vested upon acquisition		20
Total consideration paid	$	27,251

Recognized amounts of identifiable assets acquired and liabilities					Fair Value			As Recorded
assumed, at fair value:		As Acquired			Adjustment			at Acquisition
Cash and cash equivalents	$	18,650		$	—		$	18,650
Investment securities		11,820			(78	)^(a)		11,742
Loans		204,398			(8,093	)^(b)		196,305
Premises and equipment		1,046			497	^(c)		1,543
Other assets		7,006			—			7,006
Core deposit intangible		—			2,215			2,215
Deposits		(210,559	)		(641	)^(d)		(211,200	)
Other liabilities		(1,733	)		—			(1,733	)
Total identifiable net assets	$	30,628		$	(6,100	)	$	24,528

Goodwill		—			—		$	2,723

Explanation of Certain Fair Value Adjustments

(a)	The adjustment represents the decrease in the book value of investments to their estimated fair value based on fair values on the date of acquisition.
(b)	The adjustment represents the write down of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. Loans that met the criteria and are being accounted for in accordance with ASC 310-30 had a carrying amount of $13.7 million at acquisition. Non-impaired loans not accounted for under ASU 310-30 had a carrying value of $190.7 million at acquisition.
(c)	The adjustment represents the appraised value of the land and building acquired in the acquisition. The land and building were recorded as fixed assets and the building will be amortized over its remaining useful life.
(d)	The adjustment is necessary because the weighted average interest rate of deposits exceeded the cost of similar funding at the time of acquisition.

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Riverside Bank were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, to estimate the fair value, Salisbury analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. Those values were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of Riverside Bank's allowance for credit losses associated with the loans that were acquired as the loans were recorded at fair value upon acquisition.

Information about the acquired loan portfolio subject to purchased credit impaired loan accounting guidance (ASC 310-30) as of December 5, 2014 (acquisition date) is as follows:

(In thousands)		ASC 310-30 Loans
Contractually required principal and interest at acquisition	$	16,209
Contractual cash flows not expected to be collected (nonaccretable discount)		(4,288	)
Expected cash flows at acquisition		11,921
Interest component of expected cash flows (accretable discount)		(1,293	)
Fair value of acquired loans	$	10,628

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30.

(In thousands)		2016			2015
Balance at beginning of period	$	1,901		$	1,242
Accretion		(980	)		(1,109	)
Disposals		(342	)		—
Reclassification from non-accretable to accretable		611			1,768
Balance at end of period	$	1,190		$	1,901

At December 31, 2016 and 2015, Salisbury ASC 310-30 loans had an outstanding balance totaling $8.1 million and $10.9 million, respectively. The carrying value as of December 31, 2016 and 2015 was $7.1 million and $8.9 million, respectively.

The following pro forma information assumes that the acquisition occurred at the beginning of the earliest period presented.

Years ended December 31, (in thousands)		2014
Total revenue	$	39,841
Net income		6,411
Net income allocated to common stock		6,245
Earnings per share
Basic	$	2.26
Diluted		2.24

The goodwill is not amortized for book purposes, and is not deductible for tax purposes.

The fair value of savings and transaction deposit accounts acquired from Riverside Bank was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

Direct merger, acquisition and integration costs of the Riverside Bank acquisition were expensed as incurred, and totaled $2.0 million in 2014.