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NOTE 3 - LOANS
 12 Months Ended
Dec. 31, 2021
Receivables [Abstract]  
NOTE 3 - LOANS

NOTE 3 - LOANS

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

December 31,    2021      2020  
(in thousands)    Total Loans      Total Loans  
Residential 1-4 family  $373,131   $352,001 
Residential 5+ multifamily   52,325    37,058 
Construction of residential 1-4 family   19,738    8,814 
Home equity lines of credit   23,270    27,804 
Residential real estate   468,464    425,677 
Commercial   310,923    310,841 
Construction of commercial   58,838    31,722 
Commercial real estate   369,761    342,563 
Farm land   2,807    3,198 
Vacant land   14,182    14,079 
Real estate secured   855,214    785,517 
Commercial and industrial ex PPP Loans   169,543    140,516 
PPP Loans   25,589    86,632 
Total Commercial and industrial   195,132    227,148 
Municipal   16,534    21,512 
Consumer   12,547    7,687 
Loans receivable, gross   1,079,427    1,041,864 
Deferred loan origination costs (fees), net   285    (372)
Allowance for loan losses   (12,962)   (13,754)
Loans receivable, net  $1,066,750   $1,027,738 
Loans held-for-sale          
Residential 1-4 family  $2,684   $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 December 31, 2021 and 2020, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $77.5 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 from the economic downturn caused by the COVID-19 virus pandemic (“virus”). Approximately 43% 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 11% of the Bank’s commercial loans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 9% of the Bank’s commercial loans are to educational institutions and approximately 6% of Salisbury’s commercial loans are to entertainment and recreation related businesses, which include a ski resort, bowling alleys 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 179% as of December 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. Management is currently unable to predict the extent to which the COVID-19 pandemic may adversely affect the ability of some borrowers to make timely loan payments. As a result, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

In 2020, Salisbury processed 932 applications for loans of nearly $100 million under the SBA’s PPP program. The PPP loans are recorded 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 are amortized as an adjustment to yield over the lives of the related loans, which is predominately two years. Salisbury processed 472 applications for loans of $48 million under the SBA’s 2021 PPP program which launched in January 2021 and completed in May 2021. For the twelve months ended December 31, 2021, Salisbury recognized net interest income of $651 thousand and net origination fees of approximately $2.9 million on PPP loans compared with net interest income of $683 thousand and net origination fees of approximately $1.4 million for the twelve months ended December 31, 2020. At December 31, 2021, Salisbury had approximately $26 million of PPP loans on its balance sheet and it has approximately $0.8 million of deferred fee income that has not yet been recognized on these loans.

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 FDIC and the CTDOB.

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

(in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2021                              
Residential 1-4 family  $367,225   $3,543   $2,363   $—   $—   $373,131 
Residential 5+ multifamily   50,588    79    1,658    —    —    52,325 
Construction of residential 1-4 family   19,738    —    —    —    —    19,738 
Home equity lines of credit   23,037    212    21    —    —    23,270 
Residential real estate   460,588    3,834    4,042    —    —    468,464 
Commercial   271,821    16,034    23,068    —    —    310,923 
Construction of commercial   58,838    —    —    —    —    58,838 
Commercial real estate   330,659    16,034    23,068    —    —    369,761 
Farm land   1,162    1,214    431    —    —    2,807 
Vacant land   14,143    39    —    —    —    14,182 
Real estate secured   806,552    21,121    27,541    —    —    855,214 
Commercial and industrial   191,857    688    2,587    —    —    195,132 
Municipal   16,534    —    —    —    —    16,534 
Consumer   12,547    —    —    —    —    12,547 
Loans receivable, gross  $1,027,490   $21,809   $30,128   $—   $—   $1,079,427 

 

(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
(In thousands)   Current     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, 2021                        
Residential 1-4 family  $372,620   $223   $135   $63   $90   $511   $—   $750 
Residential 5+ multifamily   51,464    —    —    —    861    861    —    861 
Construction of residential 1-4 family   19,668    —    70    —    —    70    —    — 
Home equity lines of credit   23,000    165    98    —    7    270    —    21 
Residential real estate   466,752    388    303    63    958    1,712    —    1,632 
Commercial   310,331    87    251    —    254    592    —    1,924 
Construction of commercial   58,838    —    —    —    —    —    —    — 
Commercial real estate   369,169    87    251    —    254    592    —    1,924 
Farm land   2,807    —    —    —    —    —    —    432 
Vacant land   14,182    —    —    —    —    —    —    — 
Real estate secured   852,910    475    554    63    1,212    2,304    —    3,988 
Commercial and industrial   194,838    250    32    1    11    294    11    200 
Municipal   16,534    —    —    —    —    —    —    — 
Consumer   12,503    40    4    —    —    44    —    — 
Loans receivable, gross  $1,076,785   $765   $590   $64   $1,223   $2,642   $11   $4,188 

 

 

         Past due
(In thousands)   Current     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, 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)

Troubled debt restructurings occurring during the years ended December 31, 2021 and 2020:

  Business Activities Loans   December 31, 2021   December 31, 2020
(in thousands)   Quantity   Pre-modification balance   Post-modification balance   Quantity   Pre-modification balance   Post-modification balance
Residential real estate     1     $ 74     $ 74       1     $ 180     $ 180  
Commercial real estate     —       —       —       1       133       133  
Consumer     —       —       —       —       —       —  
Troubled debt restructurings     1     $ 74     $ 74       2     $ 313     $ 313  
Interest only payments to sell property     —     $ —     $ —       —     $ —     $ —  
Rate reduction     —       —       —       —       —       —  
Modification and Rate reduction     —       —       —       —       —       —  
Extension of new funds to pay outstanding taxes     —       —       —       —       —       —  
Modification and term extension     1       74       74       2       313       313  
Troubled debt restructurings     1     $ 74     $ 74       2     $ 313     $ 313  

 

For the twelve months ended December 2021, there was one troubled debt restructuring. Salisbury currently does not have any commitments to lend additional funds to TDR loans.

The following table discloses the recorded investment and number of modifications for TDRs within the last year where a concession has been made, that then defaulted in the current reporting period. All TDR loans are included in the Impaired Loan schedule and are individually evaluated.

Modifications that Subsequently Defaulted

For the twelve months ending

December 31, 2021

For the twelve months ending

December 31, 2020

Quantity Balance Quantity Balance
Troubled Debt Restructurings
Residential 1-4 family 1 74 1 178
Commercial real estate — — — —
Total 1 74 1 178

 

Impaired loans

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

December 31, (in thousands)    2021      2020  
Non-accrual loans, excluding troubled debt restructured loans  $2,838   $4,091 
Non-accrual troubled debt restructured loans   1,350    1,546 
Accruing troubled debt restructured loans   3,609    6,272 
Total impaired loans  $7,797   $11,909 
Commitments to lend additional amounts to impaired borrowers  $—   $— 

Allowance for Loan Losses

                   
    Year Ended December 31, 2021   Year Ended December 31, 2020
(in thousands)   Beginning balance   Provision (release)   Charge- offs   Reco- veries   Ending balance   Beginning balance   Provision (release)   Charge- offs   Reco- veries   Ending balance
Residential 1-4 family   $ 2,646     $ 225     $ (44 )   $ 19     $ 2,846     $ 2,393     $ 255     $ (11 )   $ 9     $ 2,646  
Residential 5+ multifamily     686       131       —     —       817       446       282       (42 )      —       686  
Construction of residential 1-4 family     65       121       —       —       186       75       (10 )      —       —       65  
Home equity lines of credit     252       (34 )      (21 )      1       198       197       (197 )     —       252       252  
Residential real estate     3,649       443       (65 )     20     4,047       3,111       330       (53 )     261     3,649  
Commercial     6,546       (1,260 )      (6 )     136       5,416       3,742       2,776       (17 )     45       6,546  
Construction of commercial     596       447       (18 )      —       1,025       104       492       —       —       596  
Commercial real estate     7,142       (813 )      (24 )     136       6,441       3,846       3,268       (17 )     45       7,142  
Farm land     59       (39 )      (2 )      3       21       47       12       —       —       59  
Vacant land     180       (86 )      —       1       95       71       109     —       —       180  
Real estate secured     11,030       (495 )      (91 )     160       10,604       7,075       3,719       (70 )     306       11,030  
Commercial and industrial     1,397       45       (131 )      53       1,364       1,145       612     (362 )     2       1,397  
Municipal     43       (12 )     —       —       31       46       (3 )      —       —       43  
Consumer     77       68       (59 )     (4 )      82       60       72       (70 )     15       77  
Unallocated     1,207       (326 )      —       —       881       569       638       —       —       1,207  
Totals   $ 13,754     $ (720 )    $ (281 )   $ 209     $ 12,962     $ 8,895     $ 5,038     $ (502 )   $ 323     $ 13,754  
                 
    December 31, 2019
(in thousands)   Beginning balance     Acquisition Discount Transfer     Provision (release)   Charge- offs   Reco- veries   Ending balance
Residential 1-4 family   $ 2,149     $ 10     $ 367     $ (136 )   $ 3     $ 2,393  
Residential 5+ multifamily     413       —       33       —       —       446  
Construction of residential 1-4 family     83       —       (8 )      —       —       75  
Home equity lines of credit     219       1       258     (281 )      —       197  
Residential real estate     2,864       11       650       (417 )     3     3,111  
Commercial     3,048       488       248       (44 )     2       3,742  
Construction of commercial     122       —       (18 )     —       —       104  
Commercial real estate     3,170       488       230       (44 )     2       3,846  
Farm land     33       —       14       —       —       47  
Vacant land     100       —       (29 )     —       —       71  
Real estate secured     6,167       499       865       (461 )     5       7,075  
Commercial and industrial     1,158       164       (78 )     (145 )     46       1,145  
Municipal     12       —       34     —       —       46  
Consumer     56       —       3       (36 )     37       60  
Unallocated     438       —       131       —       —       569  
Totals   $ 7,831     $ 663     $ 955     $ (642 )   $ 88     $ 8,895  

 

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, 2021                              
Residential 1-4 family  $370,558   $2,845   $2,573   $1   $373,131   $2,846 
Residential 5+ multifamily   51,376    817    949    —    52,325    817 
Construction of residential 1-4 family   19,738    186    —    —    19,738    186 
Home equity lines of credit   23,249    198    21    —    23,270    198 
Residential real estate   464,921    4,046    3,543    1    468,464    4,047 
Commercial   307,377    5,388    3,546    28    310,923    5,416 
Construction of commercial   58,838    1,025    —    —    58,838    1,025 
Commercial real estate   366,215    6,413    3,546    28    369,761    6,441 
Farm land   2,375    21    432    —    2,807    21 
Vacant land   14,182    95    —    —    14,182    95 
Real estate secured   847,693    10,575    7,521    29    855,214    10,604 
Commercial and industrial   194,856    1,297    276    67    195,132    1,364 
Municipal   16,534    31    —    —    16,534    31 
Consumer   12,547    82    —    —    12,547    82 
Unallocated allowance   —    881    —    —    —    881 
Totals  $1,071,630   $12,866   $7,797   $96   $1,079,427   $12,962 

 

  (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:

  December 31, 2021 (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
Performing loans  $1,046,614   $10,456   $—   $—   $1,046,614   $10,456 
Potential problem loans 1   25,016    1,529    —    —    25,016    1,529 
Impaired loans   —    —    7,797    96    7,797    96 
Unallocated allowance   —    881    —    —    —    881 
Totals  $1,071,630   $12,866   $7,797   $96   $1,079,427   $12,962 

 

  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 

1 Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired, included in this total are purchased loans net of any purchase marks remaining on the loan.

 

A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the present 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 
(In thousands)  Loan balance           Loan balance     
    Recorded Investment    Note    Average    Specific allowance    Income recognized    Recorded Investment    Note    Average    Income recognized 
December 31, 2021                           
Residential  $43   $44   $872   $1   $3   $3,480   $3,817   $3,689   $75 
Home equity lines of credit   —    —    17    —    —    21    23    131    — 
Residential real estate   43    44    889    1    3    3,501    3,840    3,820    75 
Commercial   608    608    1,678    28    32    2,938    3,493    2,974    62 
Construction of commercial   —    —    —    —    —    —    —    —    — 
Farm land   —    —    —    —    —    431    447    440    — 
Vacant land   —    —    56    —    —    —    —    45    — 
Real estate secured   651    652    2,623    29    35    6,870    7,780    7,279    137 
Commercial and industrial   216    224    309    67    3    60    72    90    — 
Consumer   —    —    6    —    —    —    —    13    — 
Totals  $867   $876   $2,938   $96   $38   $6,930   $7,852   $7,382   $137 

 

   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