SECURITIES

9 Months Ended

Sep. 30, 2017

Investments, Debt and Equity Securities [Abstract]

SECURITIES

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
September 30, 2017
Available-for-sale
Municipal bonds	$	4,611	$	30	$	—	$	4,641
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		49,655		274		172		49,757
Collateralized mortgage obligations:
U.S. Government agencies		10,815		39		13		10,841
Non-agency		2,464		420		16		2,868
SBA bonds		12,767		59		10		12,816
CRA mutual funds		847		—		7		840
Corporate bonds		3,500		57		—		3,557
Preferred stock		7		181		—		188
Total securities available-for-sale	$	84,666	$	1,060	$	218	$	85,508
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,038	$	—	$	—	$	3,038

(in thousands)	Amortized cost basis (1)		Gross un- realized gains			Gross un- realized losses		Fair Value
December 31, 2016
Available-for-sale
Municipal bonds	$	15,800		$	197	$	1	$	15,996
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		53,407			229		335		53,301
Collateralized mortgage obligations:
U.S. Government agencies		1,470			4		—		1,474
Non-agency		3,327			414		6		3,735
SBA bonds		2,056			9		1		2,064
CRA mutual funds		834			—		16		818
Corporate bonds		2,000			16		3		2,013
Preferred stock		7			215		—		222
Total securities available-for-sale	$	78,901		$	1,084	$	362	$	79,623
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,211		$	—	$	—	$	3,211

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

Salisbury did not sell any available-for-sale securities during the nine month period ended September 30, 2017. Salisbury sold $3.9 million in securities available-for-sale during the nine month period ended September 30, 2016 realizing a pre-tax gain of $148 thousand and related tax expense of $50 thousand.

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

September 30, 2017 (in thousands)	Less than 12 Months				12 Months or Longer				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
Mortgage-backed securities	$	10,483	$	56	$	18,553	$	116	$	29,036	$	172
Collateralized mortgage obligations:
U.S. Government agencies		4,810		13		—		—		4,810		13
Non-agency		—		—		118		3		118		3
SBA bonds		3,414		10		—		—		3,414		10
Corporate bonds		500		—		—		—		500		—
CRA mutual funds		840		7		—		—		840		7
Total temporarily impaired securities		20,047		86		18,671		119		38,718		205
Other-than-temporarily impaired securities
Collateralized mortgage obligations:
Non-agency		107		13		—		—		107		13
Total temporarily impaired and other-than-temporarily impaired securities	$	20,154	$	99	$	18,671	$	119	$	38,825	$	218
December 31, 2016 (in thousands)	Less than 12 Months				12 Months or Longer				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
Municipal bonds	$	517	$	1	$	—	$	—	$	517	$	1
Mortgage-backed securities		34,758		329		249		6		35,007		335
Collateralized mortgage obligations:
Non-agency		60		—		339		5		399		5
SBA bonds		475		1		—		—		475		1
CRA mutual funds		818		16		—		—		818		16
Corporate bonds		498		3		—		—		498		3
Total temporarily impaired securities		37,126		350		588		11		37,714		361
Other-than-temporarily impaired securities
Collateralized mortgage obligations:
Non-agency		174		1		—		—		174		1
Total temporarily impaired and other-than-temporarily impaired securities	$	37,300	$	351	$	588	$	11	$	37,888	$	362

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

September 30, 2017 (in thousands)	Maturity	Amortized cost		Fair value		Yield(1)
Municipal bonds	Within 1 year	$	305	$	306		6.26	%
	After 1 year but within 5 years		491		495		5.10
	After 10 years but within 15 years		1,839		1,852		7.01
	After 15 years		1,976		1,988		6.94
	Total		4,611		4,641		6.73
Mortgage-backed securities	U.S. Government agency and U.S. Government-sponsored enterprises		49,655		49,757		2.31
Collateralized mortgage obligations	U.S. Government agency and U.S. Government-sponsored enterprises		10,815		10,841		2.73
	Non-agency		2,464		2,868		3.99
SBA bonds			12,767		12,816		3.02
CRA mutual funds			847		840		2.30
Corporate bonds	After 5 years but within 10 years		3,500		3,557		5.57
Preferred stock			7		188		5.49
Securities available-for-sale		$	84,666	$	85,508		2.89	%

(1)       Yield is based on amortized cost.

Salisbury evaluates securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers whether it has the intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI.

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at September 30, 2017.

U.S. Government agency mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. 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 the twenty-four securities with unrealized losses at September 30, 2017 to be OTTI.

SBA bonds: The contractual cash flows are guaranteed by the U.S. government. 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. Therefore, management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses on six positions were temporary in nature and does not consider these investments to be other-than temporarily impaired at September 30, 2017.

Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. 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. Therefore, management evaluated the impairment status of this debt security, and concluded that the gross unrealized loss was temporary in nature and does not consider this investment- to be other-than temporarily impaired at September 30, 2017.

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at September 30, 2017, to assess whether any of the securities were OTTI. Salisbury uses cash flow forecasts for each security based on a variety of market driven assumptions and securitization terms, including prepayment speed, default or delinquency rate, and default severity for losses including interest, legal fees, property repairs, expenses and realtor fees, that, together with the loan amount are subtracted from collateral sales proceeds to determine severity. In 2009, Salisbury determined that five non-agency CMO securities reflected OTTI and recognized losses for deterioration in credit quality of $1,128,000. Salisbury judged the four remaining securities not to have additional OTTI and all other CMO securities not to be OTTI as of September 30, 2017. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI for further deterioration in credit quality. Salisbury evaluates these securities for strategic fit and depending upon such factor could reduce its position in these securities, although it has no present intention to do so, and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis.

CRA mutual funds consist of an investment in a fixed income mutual fund ($840 thousand in total fair value and $7 thousand in total unrealized losses as of September 30, 2017). The severity of the impairment (fair value is approximately 0.83% less than cost) and the duration of the impairment correlates with interest rates in 2017. Salisbury evaluated the near-term prospects of this fund in relation to the severity and duration of the impairment.  Based on that evaluation, Salisbury does not consider this investment to be OTTI at September 30, 2017.

The following table presents activity related to credit losses recognized into earnings on the non-agency CMOs held by Salisbury for which a portion of an OTTI charge was recognized in accumulated other comprehensive income:

Nine months ended September 30 (in thousands)		2017		2016
Balance, beginning of period	$	1,128	$	1,128
Credit component on debt securities in which OTTI was not previously recognized		—		—
Balance, end of period	$	1,128	$	1,128

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank’s FHLBB stock as of September 30, 2017. 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.