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NOTE 3 – LOANS
 3 Months Ended
Mar. 31, 2022
Receivables [Abstract]  
NOTE 3 – LOANS

NOTE 3 – LOANS

The composition of loans receivable is as follows:

(In thousands)    March 31, 2022     December 31, 2021  
Residential 1-4 family  $381,207   $373,131 
Residential 5+ multifamily   53,376    52,325 
Construction of residential 1-4 family   20,818    19,738 
Home equity lines of credit   23,276    23,270 
Residential real estate   478,677    468,464 
Commercial   310,815    310,923 
Construction of commercial   65,273    58,838 
Commercial real estate   376,088    369,761 
Farm land   2,778    2,807 
Vacant land   14,710    14,182 
Real estate secured   872,253    855,214 
Commercial and industrial ex PPP Loans   163,832    169,543 
PPP Loans   13,666    25,589 
Total Commercial and industrial   177,498    195,132 
Municipal   14,263    16,534 
Consumer   14,356    12,547 
Loans receivable, gross   1,078,370    1,079,427 
Deferred loan origination costs, net   761    285 
Allowance for loan losses   (12,915)   (12,962)
Loans receivable, net  $1,066,216   $1,066,750 
Loans held-for-sale          
Residential 1-4 family  $1,070   $2,684 

 

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, 2022 and December 31, 2021, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $77.3 million and $77.5 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 12% 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 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 181% as of March 31, 2022 and 179% at December 31, 2021 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.

At March 31, 2022 Salisbury had gross PPP loan balances of $13 million, net of deferred fees, on its consolidated balance sheet compared with approximately $25 million at December 31, 2021. The PPP loans are reported on Salisbury’s balance sheet 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 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, 2022, Salisbury recorded net interest income of $46 thousand and net origination fees of $0.4 million on PPP loans compared with interest income and net origination fees of $232 thousand and $1.1 million, respectively, for the three months ended March 31, 2021.

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 considered not criticized and are aggregated as pass rated, 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. Salisbury sold approximately $3.8 million of non-performing and under-performing loans during the first quarter to further manage the Bank’s credit risk proactively.

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
March 31, 2022                              
Residential 1-4 family  $376,063   $3,132   $2,012   $—   $—   $381,207 
Residential 5+ multifamily   53,214    77    85    —    —    53,376 
Construction of residential 1-4 family   20,818    —    —    —    —    20,818 
Home equity lines of credit   23,055    221    —    —    —    23,276 
Residential real estate   473,150    3,430    2,097    —    —    478,677 
Commercial   274,294    15,949    20,572    —    —    310,815 
Construction of commercial   65,273    —    —    —    —    65,273 
Commercial real estate   339,567    15,949    20,572    —    —    376,088 
Farm land   1,152    1,206    420    —    —    2,778 
Vacant land   14,673    37    —    —    —    14,710 
Real estate secured   828,542    20,622    23,089    —    —    872,253 
Commercial and industrial   174,968    584    1,946    —    —    177,498 
Municipal   14,263    —    —    —    —    14,263 
Consumer   14,354    —    2    —    —    14,356 
Loans receivable, gross  $1,032,127   $21,206   $25,037   $—   $—   $1,078,370 
(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 

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, 2022                        
Residential 1-4 family  $379,534   $1,599   $59   $—   $15   $1,673   $—   $417 
Residential 5+ multifamily   53,376    —    —    —    —    —    —    — 
Construction of residential 1-4 family   20,818    —    —    —    —    —    —    — 
Home equity lines of credit   23,210    66    —    —    —    66    —    — 
Residential real estate   476,938    1,665    59    —    15    1,739    —    417 
Commercial   310,356    —    205    —    254    459    —    1,887 
Construction of commercial   65,273    —    —    —    —    —    —    — 
Commercial real estate   375,629    —    205    —    254    459    —    1,887 
Farm land   2,778    —    —    —    —    —    —    420 
Vacant land   14,710    —    —    —    —    —    —    — 
Real estate secured   870,055    1,665    264    —    269    2,198    —    2,724 
Commercial and industrial   177,050    —    437    —    11    448    11    28 
Municipal   14,263    —    —    —    —    —    —    — 
Consumer   14,312    22    20    2    —    44    2    — 
Loans receivable, gross  $1,075,680   $1,687   $721   $2   $280   $2,690   $13   $2,752 

 

      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, 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 

 

Troubled Debt Restructurings (TDRs)

There were no troubled debt restructurings in the first quarter of 2022 or in the three months ended March 31, 2021. 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, 2022   Three months ended March 31, 2021
(in thousands)     Beginning balance     Provision     Charge- offs     Reco- veries     Ending balance     Beginning balance     Provision     Charge- offs     Reco- veries     Ending balance
Residential 1-4 family   $ 2,846     $ 236     $ (19 )   $ —     $ 3,063     $ 2,646     $ 208     $ (9 )   $ 1     $ 2,430  
Residential 5+ multifamily     817       234       (231 )     —       820       686       (64 )      —       —       622  
Construction of residential 1-4 family     186       9       —       —       195       65       12       —       —       77  
Home equity lines of credit     198       2       (2 )      —       198       252       (57 )     —       —       195  
Residential real estate     4,047       481       (252 )     —     4,276       3,649       (317 )      (9 )     1     3,324  
Commercial     5,416       (117 )      (103 )     —       5,196       6,546       530       (6 )     10       7,080  
Construction of commercial     1,025       114       —       —       1,139       596       (12 )      —       —       584  
Commercial real estate     6,441       (3 )      (103 )     —       6,335       7,142       518       (6 )     10       7,664  
Farm land     21       (2 )      —       —       19       59       (9 )      —       —       50  
Vacant land     95       15       —       —       110       180       (71 )     —       —       109  
Real estate secured     10,604       491       (355 )     —       10,740       11,030       121       (15 )     11       11,147  
Commercial and industrial     1,364       (143 )      (46 )      1       1,176       1,397       (28 )     —     —       1,369  
Municipal     31       (4 )     —       —       27       43       —       —       —       43  
Consumer     82       33       (15 )     5       105       77       (3 )      (24 )     2       52  
Unallocated     881       (14 )      —       —       867       1,207       68       —       —       1,275  
Totals   $ 12,962     $ 363     $ (416 )   $ 6     $ 12,915     $ 13,754     $ 158     $ (39 )   $ 13     $ 13,886  

 

Charge-offs for first quarter 2022 included a write-down of $374 thousand to reduce the carrying value on $3.8 million of non-performing and under-performing loans, which Salisbury sold during the quarter, to the initial bid prices. The proceeds from the sale of these loans subsequently increased by approximately $239 thousand due to higher final bids. This increase was recorded in mortgage banking activities, net in Salisbury’s consolidated statement of income.

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, 2022                              
Residential 1-4 family  $379,269   $3,063   $1,938   $—   $381,207   $3,063 
Residential 5+ multifamily   53,291    820    85    —    53,376    820 
Construction of residential 1-4 family   20,818    195    —    —    20,818    195 
Home equity lines of credit   23,276    198    —    —    23,276    198 
Residential real estate   476,654    4,276    2,023    —    478,677    4,276 
Commercial   307,548    5,173    3,267    23    310,815    5,196 
Construction of commercial   65,273    1,139    —    —    65,273    1,139 
Commercial real estate   372,821    6,312    3,267    23    376,088    6,335 
Farm land   2,358    19    420    —    2,778    19 
Vacant land   14,710    110    —    —    14,710    110 
Real estate secured   866,543    10,717    5,710    23    872,253    10,740 
Commercial and industrial   177,394    1,173    104    3    177,498    1,176 
Municipal   14,263    27    —    —    14,263    27 
Consumer   14,356    105    —    —    14,356    105 
Unallocated allowance   —    867    —    —    —    867 
Totals  $1,072,556   $12,889   $5,814   $26   $1,078,370   $12,915 

 

  (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   847,694    10,575    7,520    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 

 

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

March 31, 2022 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $1,051,041   $10,740   $—   $—   $1,051,041   $10,740 
Potential problem loans 1   21,515    1,282    —    —    21,515    1,282 
Impaired loans   —    —    5,814    26    5,814    26 
Unallocated allowance   —    867    —    —    —    867 
Totals  $1,072,556   $12,889   $5,814   $26   $1,078,370   $12,915 

 

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 

1 Potential 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, 2022                           
Residential  $—   $—   $21   $—   $—   $2,023   $2,144   $2,944   $14 
Home equity lines of credit   —    —    —    —    —    —    —    15    — 
Residential real estate   —    —    21    —    —    2,023    2,144    2,959    14 
Commercial   598    598    602    23    7    2,669    3,214    2,856    11 
Construction of commercial   —    —    —    —    —    —    —    —    — 
Farm land   —    —    —    —    —    420    447    426    — 
Vacant land   —    —    —    —    —    —    —    —    — 
Real estate secured   598    598    623    23    7    5,112    5,805    6,241    25 
Commercial and industrial   76    76    146    3    1    28    25    79    — 
Consumer   —    —    —    —    —    —    —    —    — 
Totals  $674   $674   $769   $26   $8   $5,140   $5,830   $6,320   $25 

 

For the three months ended March 31, 2021, Salisbury recognized income of $32 thousand on impaired loans with a specific allowance and $57 thousand on impaired loans without a specific allowance.

 

Certain data with respect to loans individually evaluated for impairment is as follows as of and for the year ended December 31, 2021:

   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 
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