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NOTE 3 – LOANS
 9 Months Ended
Sep. 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)    September 30, 2022     December 31, 2021  
Residential 1-4 family  $414,957   $373,131 
Residential 5+ multifamily   70,459    52,325 
Construction of residential 1-4 family   21,527    19,738 
Home equity lines of credit   24,895    23,270 
Residential real estate   531,838    468,464 
Commercial   367,257    310,923 
Construction of commercial   45,762    58,838 
Commercial real estate   413,019    369,761 
Farm land   4,225    2,807 
Vacant land   14,796    14,182 
Real estate secured   963,878    855,214 
Commercial and industrial ex PPP Loans   186,527    169,543 
PPP Loans   469    25,589 
Total Commercial and industrial   186,996    195,132 
Municipal   18,607    16,534 
Consumer   20,344    12,547 
Loans receivable, gross   1,189,825    1,079,427 
Deferred loan origination costs, net   1,002    285 
Allowance for loan losses   (14,334)   (12,962)
Loans receivable, net  $1,176,493   $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 September 30, 2022 and December 31, 2021, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $58.5 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 36% 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 9% 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 4% 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 192% as of September 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. Rising interest rates, unemployment and an economic recession may cause the Bank to experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

At September 30, 2022 Salisbury had PPP loan balances, net of deferred fees, of $0.4 million 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 September 30, 2022, Salisbury recorded interest income and net origination fees of $3 thousand and $69 thousand, respectively, on PPP loans compared with $133 thousand and $711 thousand, respectively, for the three months ended September 30, 2021. For the nine months ended September 30, 2022, Salisbury recorded interest income and net origination fees of $71 thousand and $740 thousand, respectively, on PPP loans compared with $569 thousand and $2.5 million, respectively, for the comparable period ended September 30, 2021. As of September 30, 2022, Salisbury has substantially recognized all of the origination fees on PPP 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 Federal Deposit Insurance Corporation (“FDIC”) and the Connecticut Department of Banking (“CTDOB”).

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

(in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
September 30, 2022                              
Residential 1-4 family  $410,458   $3,030   $1,469   $—   $—   $414,957 
Residential 5+ multifamily   70,308    72    79    —    —    70,459 
Construction of residential 1-4 family   21,527    —    —    —    —    21,527 
Home equity lines of credit   24,730    165    —    —    —    24,895 
Residential real estate   527,023    3,267    1,548    —    —    531,838 
Commercial   348,824    13,079    5,354    —    —    367,257 
Construction of commercial   45,762    —    —    —    —    45,762 
Commercial real estate   394,586    13,079    5,354    —    —    413,019 
Farm land   2,402    1,426    397    —    —    4,225 
Vacant land   14,764    32    —    —    —    14,796 
Real estate secured   938,775    17,804    7,299    —    —    963,878 
Commercial and industrial   184,584    696    1,716    —    —    186,996 
Municipal   18,607    —    —    —    —    18,607 
Consumer   20,344    —    —    —    —    20,344 
Loans receivable, gross  $1,162,310   $18,500   $9,015   $—   $—   $1,189,825 
(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
September 30, 2022                        
Residential 1-4 family  $414,910   $20   $12   $—   $15   $47   $—   $137 
Residential 5+ multifamily   70,459    —    —    —    —    —    —    — 
Construction of residential 1-4 family   21,527    —    —    —    —    —    —    — 
Home equity lines of credit   24,778    117    —    —    —    117    —    — 
Residential real estate   531,674    137    12    —    15    164    —    137 
Commercial   367,172    —    85    —    —    85    —    1,199 
Construction of commercial   45,762    —    —    —    —    —    —    — 
Commercial real estate   412,934    —    85    —    —    85    —    1,199 
Farm land   4,225    —    —    —    —    —    —    397 
Vacant land   14,796    —    —    —    —    —    —    — 
Real estate secured   963,629    137    97    —    15    249    —    1,733 
Commercial and industrial   186,861    23    12    100    —    135    100    27 
Municipal   18,607    —    —    —    —    —    —    — 
Consumer   20,223    116    5    —    —    121    —    — 
Loans receivable, gross  $1,189,320   $276   $114   $100   $15   $505   $100   $1,760 

      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)

 

For the three and nine month periods ended September 30, 2022, there were no troubled debt restructurings. For the three and nine month periods ended September 30, 2021, one residential loan with a loan balance of $74 thousand was modified in a troubled debt restructuring for term extension.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

    Three months ended September 30, 2022    Three months ended September 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  $3,286   $127   $(45)  $25   $3,393   $2,377   $393  $(35)  $5   $2,740 
Residential 5+ multifamily   1,157    71    —    —    1,228    545    156   —    —    701 
Construction of residential 1-4 family   333    (103)    (25)    —    205    95    41    —    —    136 
Home equity lines of credit   205    14    —   —    219    190    26   (20)    —    196 
Residential real estate   4,981    109    (70)   25    5,045    3,207    616   (55)   5    3,773 
Commercial   5,169    598    —   —    5,767    6,212    (165)   —    119    6,166 
Construction of commercial   872    (115)   —    —    757    668    118    —   —    786 
Commercial real estate   6,041    483   —   —    6,524    6,880    (47)   —   119    6,952 
Farm land   27    11    —    —    38    32    (1)   —    —    31 
Vacant land   108    4   —    —    112    87    (1)   —    —    87 
Real estate secured   11,157    607    (70)   25    11,719    10,206    567   (55)   125    10,843 
Commercial and industrial   1,480    5    —    —    1,485    1,256    73   —   3    1,332 
Municipal   35    4    —    —    39    32    (1)   —    —    31 
Consumer   130    11    (25)   6    122    66    62    (19)   6    115 
Unallocated   901    68    —    —    969    1,148    (301)   —    —    847 
Totals  $13,703   $695   $(95)  $31   $14,334   $12,708   $400  $(74)  $134   $13,168 

 

 

    Nine months ended September 30, 2022    Nine months ended September 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   $595   $(73)  $25   $3,393   $2,646   $129  $(44)  $9   $2,740 
Residential 5+ multifamily   817    642    (231)   —    1,228    686    15   —    —    701 
Construction of residential 1-4 family   186    44    (25)    —    205    65    71    —    —    136 
Home equity lines of credit   198    32    (11)   —    219    252    (36)   (20)    —    196 
Residential real estate   4,047    1,313    (340)   25    5,045    3,649    179   (64)   9    3,773 
Commercial   5,416    722    (372)   1    5,767    6,546    (509)   (7)   136    6,166 
Construction of commercial   1,025    (268)   —    —    757    596    208    (18)   —    786 
Commercial real estate   6,441    454   (372)   1    6,524    7,142    (301)   (25)   136    6,952 
Farm land   21    17    —    —    38    59    (28)   —    —    31 
Vacant land   95    17    —    —    112    180    (94)   —    1    87 
Real estate secured   10,604    1,801    (712)   26    11,719    11,030    (244)   (89)   146    10,843 
Commercial and industrial   1,364    166    (46)   1    1,485    1,397    17   (131)   49    1,332 
Municipal   31    8    —    —    39    43    (12)   —    —    31 
Consumer   82    95    (70)   15    122    77    82    (34)   (10)   115 
Unallocated   881    88    —    —    969    1,207    (360)   —    —    847 
Totals  $12,962   $2,158   $(828)  $42   $14,334   $13,754   $(517)  $(254)  $185   $13,168 

 

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 
September 30, 2022                              
Residential 1-4 family  $413,456   $3,393   $1,501   $—   $414,957   $3,393 
Residential 5+ multifamily   70,380    1,228    79    —    70,459    1,228 
Construction of residential 1-4 family   21,527    205    —    —    21,527    205 
Home equity lines of credit   24,895    219    —    —    24,895    219 
Residential real estate   530,258    5,045    1,580    —    531,838    5,045 
Commercial   364,729    5,745    2,528    22    367,257    5,767 
Construction of commercial   45,762    757    —    —    45,762    757 
Commercial real estate   410,491    6,502    2,528    22    413,019    6,524 
Farm land   3,828    38    397    —    4,225    38 
Vacant land   14,796    112    —    —    14,796    112 
Real estate secured   959,373    11,697    4,505    22    963,878    11,719 
Commercial and industrial   186,969    1,485    27    —    186,996    1,485 
Municipal   18,607    39    —    —    18,607    39 
Consumer   20,344    122    —    —    20,344    122 
Unallocated allowance   —    969    —    —    —    969 
Totals  $1,185,293   $14,312   $4,532   $22   $1,189,825   $14,334 

 

  (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:

  September 30, 2022 (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
Performing loans  $1,178,589   $12,928   $—   $—   $1,178,589   $12,928 
Potential problem loans 1   6,704    415    —    —    6,704    415 
Impaired loans   —    —    4,532    22    4,532    22 
Unallocated allowance   —    969    —    —    —    969 
Totals  $1,185,293   $14,312   $4,532   $22   $1,189,825   $14,334 

 

  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 
September 30, 2022                           
Residential  $—   $—   $398   $—   $—   $1,580   $1,677   $2,321   $40 
Home equity lines of credit   —    —    —    —    —    —    —    11    — 
Residential real estate   —    —    398    —    —    1,580    1,677    2,332    40 
Commercial   572    572    616    22    22    1,956    2,467    2,397    32 
Construction of commercial   —    —    —    —    —    —    —    —    — 
Farm land   —    —    —    —    —    397    447    415    — 
Vacant land   —    —    —    —    —    —    —    —    — 
Real estate secured   572    572    1,014    22    22    3,933    4,591    5,144    72 
Commercial and industrial   —    —    84    —    —    27    30    55    — 
Consumer   —    —    —    —    —    —    —    —    — 
Totals  $572   $572   $1,098   $22   $22   $3,960   $4,621   $5,199   $72 

Note: The income recognized is for the nine month period ended September 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 
September 30, 2021                           
Residential  $45   $47   $1,120   $3   $2   $3,989   $4,404   $3,642   $52 
Home equity lines of credit   —    —    22    —    —    86    127    156    — 
Residential real estate   45    47    1,142    3    2    4,075    4,531    3,798    52 
Commercial   1,007    1,033    1,921    43    33    2,866    3,377    3,002    47 
Construction of commercial   —    —    —    —    —    —    —    —    — 
Farm land   —    —    —    —    —    576    756    415    — 
Vacant land   —    —    73    —    —    35    39    52    — 
Real estate secured   1,052    1,080    3,136    46    35    7,552    8,703    7,267    99 
Commercial and industrial   221    228    336    44    3    100    270    91    — 
Consumer   —    —    8    —    —    18    18    15    1 
Totals  $1,273   $1,308   $3,480   $90   $38   $7,670   $8,991   $7,373   $100 

Note: The income recognized is for the nine month period ended September 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