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NOTE 3 - LOANS

3 Months Ended

Mar. 31, 2021

NOTE 3 - LOANS

The composition of loans receivable is as follows:

(In thousands)		March 31, 2021			December 31, 2020
Residential 1-4 family	$	344,527		$	352,001
Residential 5+ multifamily		37,789			37,058
Construction of residential 1-4 family		10,435			8,814
Home equity lines of credit		26,240			27,804
Residential real estate		418,991			425,677
Commercial		306,830			310,841
Construction of commercial		34,312			31,722
Commercial real estate		341,142			342,563
Farm land		3,606			3,198
Vacant land		13,228			14,079
Real estate secured		776,967			785,517
Commercial and industrial		249,357			227,148
Municipal		21,495			21,512
Consumer		8,617			7,687
Loans receivable, gross		1,056,436			1,041,864
Deferred loan origination (fees) and costs, net		(1,365	)		(372	)
Allowance for loan losses		(13,886	)		(13,754	)
Loans receivable, net	$	1,041,185		$	1,027,738
Loans held-for-sale
Residential 1-4 family	$	2,313		$	2,735

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, 2021 and December 31, 2020, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $68.0 million and $65.3 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 due to the COVID-19 virus pandemic ("virus"). Approximately 40% of the Bank's commercial loan portfolio are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 14% of the Bank's commercial loans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 8% of the Bank's commercial loans are to educational institutions and approximately 5% of Salisbury's commercial loans are to entertainment and recreation related businesses, which include camps and amusement parks. Salisbury's commercial real estate exposure as a percentage of the Bank's total risk-based capital, which represents Tier 1 plus Tier 2 capital, was approximately 165% as of March 31, 2021 and 182% at December 31, 2020 compared to the regulatory monitoring guideline of 300%.

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. Due to the COVID-19 pandemic, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses. Management is currently unable to predict the extent to which the COVID-19 pandemic will impact these and other borrowers.

On a year-to-date basis through March 31, 2021, Salisbury processed 435 applications for loans of approximately $47 million under the SBA's PPP program. The PPP loans are reported in the Commercial and Industrial category at their outstanding principal balance, net of unamortized deferred loan origination fees and costs on originated loans. Interest income is accrued on the unpaid principal balance. Deferred loan origination fees and costs on the loans originated in 2021 are amortized as an adjustment to yield over the lives of the related loans, which is predominately five years. For the three months ended March 31, 2021, Salisbury recorded net interest income of $0.2 million and net origination fees of approximately $1.1 million on PPP loans. At March 31, 2021 Salisbury had PPP loan balances of $94 million, net of deferred fees, on its consolidated balance sheet compared with approximately $85 million at December 31, 2020.

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.

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 presented below. The increase in the balance of loans classified as "substandard" at March 31, 2021 primarily reflected the downgrade of loans to certain borrowers in the hospitality and entertainment industries who are receiving loan payments deferrals due to COVID-19. Such loans were classified as either "pass" or "special mention" at December 31, 2020.

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
March 31, 2021
Residential 1-4 family	$	334,636	$	5,807	$	4,084	$	-	$	-	$	344,527
Residential 5+ multifamily		35,919		180		1,690		-		-		37,789
Construction of residential 1-4 family		10,435		-		-		-		-		10,435
Home equity lines of credit		25,756		247		237		-		-		26,240
Residential real estate		406,746		6,234		6,011		-		-		418,991
Commercial		262,655		7,163		37,012		-		-		306,830
Construction of commercial		34,086		-		226		-		-		34,312
Commercial real estate		296,741		7,163		37,238		-		-		341,142
Farm land		1,636		1,369		601		-		-		3,606
Vacant land		12,344		847		37		-		-		13,228
Real estate secured		717,467		15,613		43,887		-		-		776,967
Commercial and industrial		246,241		920		1,906		290		-		249,357
Municipal		21,495		-		-		-		-		21,495
Consumer		8,593		-		24		-		-		8,617
Loans receivable, gross	$	993,796	$	16,533	$	45,817	$	290	$	-	$	1,056,436

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2020
Residential 1-4 family	$	342,243	$	5,615	$	4,143	$	-	$	-	$	352,001
Residential 5+ multifamily		35,272		90		1,696		-		-		37,058
Construction of residential 1-4 family		8,814		-		-		-		-		8,814
Home equity lines of credit		27,393		257		154		-		-		27,804
Residential real estate		413,722		5,962		5,993		-		-		425,677
Commercial		276,866		15,565		18,410		-		-		310,841
Construction of commercial		31,493		-		229		-		-		31,722
Commercial real estate		308,359		15,565		18,639		-		-		342,563
Farm land		1,612		-		1,586		-		-		3,198
Vacant land		13,992		50		37		-		-		14,079
Real estate secured		737,685		21,577		26,255		-		-		785,517
Commercial and industrial		224,906		1,271		632		339		-		227,148
Municipal		21,512		-		-		-		-		21,512
Consumer		7,660		-		27		-		-		7,687
Loans receivable, gross	$	991,763	$	22,848	$	26,914	$	339	$	-	$	1,041,864

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, 2021
Residential 1-4 family	$	341,636	$	1,806	$	-	$	372	$	713	$	2,891	$	-	$	1,358
Residential 5+ multifamily		36,928		-		-		-		861		861		-		861
Construction of residential 1-4 family		10,435		-		-		-		-		-		-		-
Home equity lines of credit		26,119		8		-		9		104		121		-		237
Residential real estate		415,118		1,814		-		381		1,678		3,873		-		2,456
Commercial		306,233		293		-		209		95		597		40		2,233
Construction of commercial		34,312		-		-		-		-		-		-		-
Commercial real estate		340,545		293		-		209		95		597		40		2,233
Farm land		3,005		4		147		450		-		601		450		151
Vacant land		13,191		-		-		37		-		37		-		37
Real estate secured		771,859		2,111		147		1,077		1,773		5,108		490		4,877
Commercial and industrial		249,042		266		-		2		47		315		14		325
Municipal		21,495		-		-		-		-		-		-		-
Consumer		8,615		2		-		-		-		2		-		-
Loans receivable, gross	$	1,051,011	$	2,379	$	147	$	1,079	$	1,820	$	5,425	$	504	$	5,202

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, 2020

Residential 1-4 family $ 349,382 $ 1,419 $ 308 $ 673 $ 219 $ 2,619 $ - $ 1,508

Residential 5+ multifamily 36,197 - - - 861 861 - 861

Construction of residential 1-4 family 8,814 - - - - - - -

Home equity lines of credit 27,522 157 9 - 116 282 - 154

Residential real estate 421,915 1,576 317 673 1,196 3,762 - 2,523

Commercial 307,927 1,855 530 95 434 2,914 - 2,544

Construction of commercial 31,722 - - - - - - -

Commercial real estate 339,649 1,855 530 95 434 2,914 - 2,544

Farm land 2,594 154 450 - - 604 - 158

Vacant land 14,079 - - - - - - 37

Real estate secured 778,237 3,585 1,297 768 1,630 7,280 - 5,262

Commercial and industrial 224,496 2,148 457 1 46 2,652 12 374

Municipal 21,512 - - - - - - -

Consumer 7,677 10 - - - 10 - -

Loans receivable, gross $ 1,031,922 $ 5,743 $ 1,754 $ 769 $ 1,676 $ 9,942 $ 12 $ 5,636

Troubled Debt Restructurings (TDRs)

There were no troubled debt restructurings in the first quarter of 2021. For the three months ended March 31, 2020, there was one commercial real estate troubled debt restructuring for $133 thousand. Salisbury currently does not have any commitments to lend additional funds to TDR loans.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:


	Three months ended March 31, 2021												Three months ended March 31, 2020
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	2,646	$	(208	)	$	(9	)	$	1	$	2,430	$	2,393	$	306		$	-		$	7	$	2,706
Residential 5+ multifamily		686		(64	)		-			-		622		446		62			-			-		508
Construction of residential 1-4 family		65		12			-			-		77		75		12			-			-		87
Home equity lines of credit		252		(57	)		-			-		195		197		81			-			-		278
Residential real estate		3,649		(317	)		(9	)		1		3,324		3,111		461			-			7		3,579
Commercial		6,546		530			(6	)		10		7,080		3,742		758			-			19		4,519
Construction of commercial		596		(12	)		-			-		584		104		22			-			-		126
Commercial real estate		7,142		518			(6	)		10		7,664		3,846		780			-			19		4,645
Farm land		59		(9	)		-			-		50		47		5			-			-		52
Vacant land		180		(71	)		-			-		109		71		73			-			-		144
Real estate secured		11,030		121			(15	)		11		11,147		7,075		1,319			-			26		8,420
Commercial and industrial		1,397		(28	)		-			-		1,369		1,145		(74	)		-			-		1,071
Municipal		43		-			-			-		43		46		7			-			-		53
Consumer		77		(3	)		(24	)		2		52		60		51			(12	)		3		102
Unallocated		1,207		68			-			-		1,275		569		403			-			-		972
Totals	$	13,754	$	158		$	(39	)	$	13	$	13,886	$	8,895	$	1,706		$	(12	)	$	29	$	10,618

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, 2021
Residential 1-4 family	$	340,398	$	2,337	$	4,129	$	93	$	344,527	$	2,430
Residential 5+ multifamily		36,826		622		963		-		37,789		622
Construction of residential 1-4 family		10,435		77		-		-		10,435		77
Home equity lines of credit		26,003		195		237		-		26,240		195
Residential real estate		413,662		3,231		5,329		93		418,991		3,324
Commercial		301,526		6,946		5,304		134		306,830		7,080
Construction of commercial		34,312		584		-		-		34,312		584
Commercial real estate		335,838		7,530		5,304		134		341,142		7,664
Farm land		3,455		50		151		-		3,606		50
Vacant land		13,064		107		164		2		13,228		109
Real estate secured		766,019		10,918		10,948		229		776,967		11,147
Commercial and industrial		248,925		1,247		432		122		249,357		1,369
Municipal		21,495		43		-		-		21,495		43
Consumer		8,593		52		24		-		8,617		52
Unallocated allowance		-		1,275		-		-		-		1,275
Totals	$	1,045,032	$	13,535	$	11,404	$	351	$	1,056,436	$	13,886


(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2020
Residential 1-4 family	$	347,695	$	2,445	$	4,306	$	201	$	352,001	$	2,646
Residential 5+ multifamily		36,094		686		964		-		37,058		686
Construction of residential 1-4 family		8,814		65		-		-		8,814		65
Home equity lines of credit		27,650		232		154		20		27,804		252
Residential real estate		420,253		3,428		5,424		221		425,677		3,649
Commercial		305,193		6,298		5,648		248		310,841		6,546
Construction of commercial		31,722		596		-		-		31,722		596
Commercial real estate		336,915		6,894		5,648		248		342,563		7,142
Farm land		3,040		59		158		-		3,198		59
Vacant land		13,912		178		167		2		14,079		180
Real estate secured		774,120		10,559		11,397		471		785,517		11,030
Commercial and industrial		226,662		1,223		486		174		227,148		1,397
Municipal		21,512		43		-		-		21,512		43
Consumer		7,661		59		26		18		7,687		77
Unallocated allowance		-		1,207		-		-		-		1,207
Totals	$	1,029,955	$	13,091	$	11,909	$	663	$	1,041,864	$	13,754

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


March 30, 2021 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	1,007,513	$	9,131	$	-	$	-	$	1,007,513	$	9,131
Potential problem loans ¹		37,519		3,129		-		-		37,519		3,129
Impaired loans		-		-		11,404		351		11,404		351
Unallocated allowance		-		1,275		-		-		-		1,275
Totals	$	1,045,032	$	13,535	$	11,404	$	351	$	1,056,436	$	13,886


December 31, 2020 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	1,011,757	$	10,424	$	-	$	-	$	1,011,757	$	10,424
Potential problem loans ¹		18,198		1,460		-		-		18,198		1,460
Impaired loans		-		-		11,909		663		11,909		663
Unallocated allowance		-		1,207		-		-		-		1,207
Totals	$	1,029,955	$	13,091	$	11,909	$	663	$	1,041,864	$	13,754

¹Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired.

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, 2021
Residential	$	836	$	860	$	2,368	$	93	$	9	$	4,257	$	4,688	$	2,779	$	21
Home equity lines of credit		-		-		56		-		-		237		277		140		-
Residential real estate		836		860		2,424		93		9		4,494		4,965		2,919		21
Commercial		1,941		1,958		2,769		134		20		3,363		4,006		2,873		35
Construction of commercial		-		-		-		-		-		-		-		-		-
Farm land		-		-		-		-		-		151		316		154		-
Vacant land		164		182		101		2		2		-		-		65		-
Real estate secured		2,941		3,000		5,294		229		31		8,008		9,287		6,011		56
Commercial and industrial		338		349		382		122		1		93		308		82		1
Consumer		-		-		19		-		-		24		24		6		-
Totals	$	3,279	$	3,349	$	5,695	$	351	$	32	$	8,125	$	9,619	$	6,099	$	57

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

Certain data with respect to loans individually evaluated for impairment is as follows as of and for the year ended December 31, 2020:


	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Recorded Investment		Note		Average		Specific allowance		Income recognized		Recorded Investment		Note		Average		Income recognized
December 31, 2020
Residential	$	2,971	$	3,040	$	3,862	$	201	$	72	$	2,299	$	2,676	$	1,993	$	27
Home equity lines of credit		75		75		76		20		-		79		117		103		-
Residential real estate		3,046		3,115		3,938		221		72		2,378		2,793		2,096		27
Commercial		3,058		3,117		3,325		248		132		2,590		3,203		1,139		91
Construction of commercial		-		-		-		-		-		-		-		-		-
Farm land		-		-		-		-		-		158		319		173		-
Vacant land		37		40		39		2		-		130		145		134		9
Real estate secured		6,141		6,272		7,302		471		204		5,256		6,460		3,542		127
Commercial and industrial		416		424		482		174		4		70		283		58		2
Consumer		26		26		31		18		2		-		-		-		-
Totals	$	6,583	$	6,722	$	7,815	$	663	$	210	$	5,326	$	6,743	$	3,600	$	129