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NOTE 3 – LOANS
 6 Months Ended
Jun. 30, 2022
Receivables [Abstract]  
NOTE 3 – LOANS

NOTE 3 – LOANS

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

(In thousands)    June 30, 2022     December 31, 2021  
Residential 1-4 family  $398,556   $373,131 
Residential 5+ multifamily   69,272    52,325 
Construction of residential 1-4 family   22,379    19,738 
Home equity lines of credit   23,763    23,270 
Residential real estate   513,970    468,464 
Commercial   338,091    310,923 
Construction of commercial   49,696    58,838 
Commercial real estate   387,787    369,761 
Farm land   3,668    2,807 
Vacant land   15,397    14,182 
Real estate secured   920,822    855,214 
Commercial and industrial ex PPP Loans   189,086    169,543 
PPP Loans   2,894    25,589 
Total Commercial and industrial   191,980    195,132 
Municipal   17,486    16,534 
Consumer   18,155    12,547 
Loans receivable, gross   1,148,443    1,079,427 
Deferred loan origination costs, net   1,018    285 
Allowance for loan losses   (13,703)   (12,962)
Loans receivable, net  $1,135,758   $1,066,750 
Loans held-for-sale          
Residential 1-4 family  $—   $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 June 30, 2022 and December 31, 2021, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $83.4 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 are subject to 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 10% 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 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 187% as of June 30, 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.

At June 30, 2022 Salisbury had gross PPP loan balances of $3 million on its consolidated balance sheet compared with approximately $26 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 June 30, 2022, Salisbury recorded interest income and net origination fees of $22 thousand and $236 thousand, respectively, on PPP loans compared with $204 thousand and $582 thousand, respectively, for the three months ended June 30, 2021. For the six months ended June 30, 2022, Salisbury recorded interest income and net origination fees of $68 thousand and $671 thousand, respectively, on PPP loans compared with $436 thousand and $1.6 million, respectively, for the comparable period ended June 30, 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 $3.7 million of non-performing and under-performing loans during the six-month period ended June 30, 2022 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 presented in the table below. The decrease in substandard loans from year end 2021 primarily reflected management’s upgrade of the internal risk rating on approximately $17 million of loans that were mostly related to the hospitality and entertainment and recreation industries. These loans were previously downgraded due to concerns over COVID-19 but the businesses have since demonstrated a return to pre-pandemic levels of activity and liquidity.

(in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
June 30, 2022                              
Residential 1-4 family  $393,642   $3,093   $1,821   $—   $—   $398,556 
Residential 5+ multifamily   69,117    75    80    —    —    69,272 
Construction of residential 1-4 family   20,279    —    2,100    —    —    22,379 
Home equity lines of credit   23,592    171    —    —    —    23,763 
Residential real estate   506,630    3,339    4,001    —    —    513,970 
Commercial   312,206    20,455    5,430    —    —    338,091 
Construction of commercial   49,696    —    —    —    —    49,696 
Commercial real estate   361,902    20,455    5,430    —    —    387,787 
Farm land   1,963    1,296    409    —    —    3,668 
Vacant land   15,362    35    —    —    —    15,397 
Real estate secured   885,857    25,125    9,840    —    —    920,822 
Commercial and industrial   189,228    920    1,832    —    —    191,980 
Municipal   17,486    —    —    —    —    17,486 
Consumer   18,155    —    —    —    —    18,155 
Loans receivable, gross  $1,110,726   $26,045   $11,672   $—   $—   $1,148,443 
(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
June 30, 2022                        
Residential 1-4 family  $398,234   $152   $155   $—   $15   $322   $—   $350 
Residential 5+ multifamily   69,272    —    —    —    —    —    —    — 
Construction of residential 1-4 family   22,310    —    —    69    —    69    69    2,100 
Home equity lines of credit   23,437    326    —    —    —    326    —    — 
Residential real estate   513,253    478    155    69    15    717    69    2,450 
Commercial   338,006    —    85    —    —    85    —    1,228 
Construction of commercial   49,696    —    —    —    —    —    —    — 
Commercial real estate   387,702    —    85    —    —    85    —    1,228 
Farm land   3,668    —    —    —    —    —    —    409 
Vacant land   15,397    —    —    —    —    —    —    — 
Real estate secured   920,020    478    240    69    15    802    69    4,087 
Commercial and industrial   191,780    189    —    —    11    200    11    62 
Municipal   17,486    —    —    —    —    —    —    — 
Consumer   18,061    87    7    —    —    94    —    — 
Loans receivable, gross  $1,147,347   $754   $247   $69   $26   $1,096   $80   $4,149 

      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 during the second quarter of 2022 or second quarter of 2021 or for the six months ended June 30, 2022 and June 30, 2021, respectively.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

    Three months ended June 30, 2022    Three months ended June 30, 2021   
    Beginning balance    Provision (Benefit)    Charge- offs    Reco- veries    Ending balance    Beginning balance    Provision (Benefit)    Charge- offs    Reco- veries    Ending balance 
Residential 1-4 family  $3,063   $232   $(9)  $—   $3,286   $2,430   $(55)  $(1)  $3   $2,377 
Residential 5+ multifamily   820    337    —    —    1,157    622    (77)   —    —    545 
Construction of residential 1-4 family   195    138    —    —    333    77    18    —    —    95 
Home equity lines of credit   198    16    (9)   —    205    195    (5)   —    —    190 
Residential real estate   4,276    723    (18)   —    4,981    3,324    (119)   (1)   3    3,207 
Commercial   5,196    241    (269)   1    5,169    7,080    (875)   —    7    6,212 
Construction of commercial   1,139    (267)   —    —    872    584    102    (18)   —    668 
Commercial real estate   6,335    (26)   (269)   1    6,041    7,664    (773)   (18)   7    6,880 
Farm land   19    8    —    —    27    50    (18)   —    —    32 
Vacant land   110    (2)   —    —    108    109    (22)   —    —    87 
Real estate secured   10,740    703    (287)   1    11,157    11,147    (932)   (19)   10    10,206 
Commercial and industrial   1,176    304    —    —    1,480    1,369    (27)   (131)   45    1,256 
Municipal   27    8    —    —    35    43    (11)   —    —    32 
Consumer   105    51    (30)   4    130    52    22    (11)   3    66 
Unallocated   867    34    —    —    901    1,275    (127)   —    —    1,148 
Totals  $12,915   $1,100   $(317)  $5   $13,703   $13,886   $(1,075)  $(161)  $58   $12,708 

    Six months ended June 30, 2022    Six months ended June 30, 2021   
    Beginning balance    Provision (Benefit)    Charge- offs    Reco- veries    Ending balance    Beginning balance    Provision (Benefit)    Charge- offs    Reco- veries    Ending balance 
Residential 1-4 family  $2,846   $468   $(28)  $—   $3,286   $2,646   $(264)  $(10)  $5   $2,377 
Residential 5+ multifamily   817    571    (231)   —    1,157    686    (141)   —    —    545 
Construction of residential 1-4 family   186    147    —    —    333    65    30    —    —    95 
Home equity lines of credit   198    18    (11)   —    205    252    (62)   —    —    190 
Residential real estate   4,047    1,204    (270)   —    4,981    3,649    (437)   (10)   5    3,207 
Commercial   5,416    125    (373)   1    5,169    6,546    (345)   (6)   17    6,212 
Construction of commercial   1,025    (153)   —    —    872    596    90    (18)   —    668 
Commercial real estate   6,441    (28)   (373)   1    6,041    7,142    (255)   (24)   17    6,880 
Farm land   21    6    —    —    27    59    (27)   —    —    32 
Vacant land   95    13    —    —    108    180    (93)   —    —    87 
Real estate secured   10,604    1,195    (643)   1    11,157    11,030    (812)   (34)   22    10,206 
Commercial and industrial   1,364    161    (46)   1    1,480    1,397    (55)   (131)   45    1,256 
Municipal   31    4    —    —    35    43    (11)   —    —    32 
Consumer   82    83    (45)   10    130    77    20    (15)   (16)   66 
Unallocated   881    20    —    —    901    1,207    (59)   —    —    1,148 
Totals  $12,962   $1,463   $(734)  $12   $13,703   $13,754   $(917)  $(180)  $51   $12,708 

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 
June 30, 2022                              
Residential 1-4 family  $396,703   $3,286   $1,853   $—   $398,556   $3,286 
Residential 5+ multifamily   69,192    1,157    80    —    69,272    1,157 
Construction of residential 1-4 family   20,279    192    2,100    141    22,379    333 
Home equity lines of credit   23,763    205    —    —    23,763    205 
Residential real estate   509,937    4,840    4,033    141    513,970    4,981 
Commercial   335,508    5,145    2,583    24    338,091    5,169 
Construction of commercial   49,696    872    —    —    49,696    872 
Commercial real estate   385,204    6,017    2,583    24    387,787    6,041 
Farm land   3,259    27    409    —    3,668    27 
Vacant land   15,397    108    —    —    15,397    108 
Real estate secured   913,797    10,992    7,025    165    920,822    11,157 
Commercial and industrial   191,844    1,478    136    2    191,980    1,480 
Municipal   17,486    35    —    —    17,486    35 
Consumer   18,155    130    —    —    18,155    130 
Unallocated allowance   —    901    —    —    —    901 
Totals  $1,141,282   $13,536   $7,161   $167   $1,148,443   $13,703 

 

 

  (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:

June 30, 2022 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $1,134,514   $12,228   $—   $—   $1,134,514   $12,228 
Potential problem loans 1   6,768    407    —    —    6,768    407 
Impaired loans   —    —    7,161    167    7,161    167 
Unallocated allowance   —    901    —    —    —    901 
Totals  $1,141,282   $13,536   $7,161   $167   $1,148,443   $13,703 

 

 

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 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:

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Recorded Investment    Note    Average    allowance    recognized    Recorded Investment    Note    Average    recognized 
June 30, 2022                           
Residential  $2,100   $2,106   $568   $141   $24   $1,933   $2,056   $2,531   $29 
Home equity lines of credit   —    —    —    —    —    —    —    15    — 
Residential real estate   2,100    2,106    568    141    24    1,933    2,056    2,546    29 
Commercial   584    584    633    24    15    1,999    2,494    2,579    21 
Construction of commercial   —    —    —    —    —    —    —    —    — 
Farm land   —    —    —    —    —    409    447    420    — 
Vacant land   —    —    —    —    —    —    —    —    — 
Real estate secured   2,684    2,690    1,201    165    39    4,341    4,997    5,545    50 
Commercial and industrial   73    73    115    2    2    63    60    62    1 
Consumer   —    —    —    —    —    —    —    —    — 
Totals  $2,757   $2,763   $1,316   $167   $41   $4,404   $5,057   $5,607   $51 

Note: The income recognized is for the six-month period ended June 30, 2022.

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Recorded Investment    Note    Average    allowance    recognized    Recorded Investment    Note    Average    recognized 
June 30, 2021                           
Residential  $47   $49   $1,580   $3   $1   $4,326   $4,776   $3,401   $40 
Home equity lines of credit   —    —    32    —    —    147    188    168    — 
Residential real estate   47    49    1,612    3    1    4,473    4,964    3,569    40 
Commercial   1,140    1,164    2,294    45    25    3,341    3,984    3,024    44 
Construction of commercial   —    —    —    —    —    —    —    —    — 
Farm land   —    —    —    —    —    594    764    344    — 
Vacant land   —    —    104    —    —    160    178    60    4 
Real estate secured   1,187    1,213    4,010    48    26    8,568    9,890    6,997    88 
Commercial and industrial   364    377    365    115    2    86    243    92    1 
Consumer   —    —    11    —    —    21    21    13    1 
Totals  $1,551   $1,590   $4,386   $163   $28   $8,675   $10,154   $7,102   $90 

Note: The income recognized is for the six-month period ended June 30, 2021. 

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 
    Recorded Investment    Note    Average    allowance    recognized    Recorded Investment    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