SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM ________ TO ________

 

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Connecticut   06-1514263
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)
     
5 Bissell Street, Lakeville, CT   06039
(Address of principal executive offices)   (Zip code)

(860) 435-9801

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

 

The number of shares of Common Stock outstanding as of August 12, 2016 is 2,758,186.

 

 
 

 

TABLE OF CONTENTS

Page

  PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (unaudited)
  CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2016 (unaudited) and DECEMBER 31, 2015 3
 

CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2016 AND 2015 (unaudited)

 4
 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2016 AND 2015 (unaudited)

 5
 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2016 AND 2015 ( (unaudited)

 5
 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2016 AND 2015 (unaudited)

 6, 7
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 32
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 51
Item 4. CONTROLS AND PROCEDURES 52
  PART II. OTHER INFORMATION  53
Item 1. LEGAL PROCEEDINGS 53
Item 1A. RISK FACTORS 53
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 53
Item 3. DEFAULTS UPON SENIOR SECURITIES 53
Item 4.  MINE SAFETY DISCLOSURES 53
Item 5.  OTHER INFORMATION 54
Item 6.  EXHIBITS 54
SIGNATURES 55

 

2
 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)  June 30, 2016    December 31, 2015  
ASSETS    (unaudited)     
Cash and due from banks  $10,961   $14,891 
Interest bearing demand deposits with other banks   20,537    47,227 
Total cash and cash equivalents   31,498    62,118 
Securities          
Available-for-sale at fair value   80,438    76,694 
Federal Home Loan Bank of Boston stock at cost   3,436    3,176 
Loans held-for-sale   —    763 
Loans receivable, net (allowance for loan losses: $5,718 and $5,716)   749,523    699,018 
Bank premises and equipment, net   14,507    14,307 
Goodwill   12,552    12,552 
Intangible assets (net of accumulated amortization: $3,216 and $2,909)   2,031    2,338 
Accrued interest receivable   2,217    2,307 
Cash surrender value of life insurance policies   13,862    13,685 
Deferred taxes   1,998    1,989 
Other assets   1,432    2,245 
Total Assets  $913,494   $891,192 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
Demand (non-interest bearing)  $189,182   $201,340 
Demand (interest bearing)   120,142    125,465 
Money market   197,869    183,783 
Savings and other   124,019    119,651 
Certificates of deposit   123,259    124,294 
Total deposits   754,471    754,533 
Repurchase agreements   3,355    3,914 
Federal Home Loan Bank of Boston advances   47,083    26,979 
Subordinated debt(1)   9,776    9,764 
Note payable   358    376 
Capital lease liability   420    422 
Accrued interest and other liabilities   5,447    4,630 
Total Liabilities   820,910    800,618 
Shareholders' Equity          
Common stock - $0.10 per share par value          
Authorized: 5,000,000          
Issued: 2,758,186 and 2,733,576   276    273 
Paid-in capital   42,056    41,364 
Retained earnings   49,627    47,922 
Unearned compensation - restricted stock awards   (483)   (110)
Accumulated other comprehensive income   1,108    1,125 
Total Shareholders' Equity   92,584    90,574 
Total Liabilities and Shareholders' Equity  $913,494   $891,192 

 

(1) Net of issuance costs, which are capitalized and amortized as a component of interest expense over a period of 10 years.

3
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

     Three months ended      Six months ended  
Periods ended June 30, (in thousands except per share amounts)    2016      2015      2016      2015  
Interest and dividend income                    
Interest and fees on loans  $7,930   $7,850   $15,855   $15,772 
Interest on debt securities                    
Taxable   286    298    579    624 
Tax exempt   237    357    523    747 
Other interest and dividends   60    40    134    73 
Total interest and dividend income   8,513    8,545    17,091    17,216 
Interest expense                    
Deposits   529    453    1,037    897 
Repurchase agreements   1    2    2    3 
Capital lease   17    17    35    35 
Note payable   6    —    11    — 
Subordinated debt   156    —    312    — 
Federal Home Loan Bank of Boston advances   245    280    476    562 
Total interest expense   954    752    1,873    1,497 
Net interest and dividend income   7,559    7,793    15,218    15,719 
Provision (benefit) for loan losses   525    196    988    (4)
Net interest and dividend income after provision (benefit) for loan losses   7,034    7,597    14,230    15,723 
Non-interest income                    
Trust and wealth advisory   884    890    1,668    1,712 
Service charges and fees   785    778    1,515    1,509 
Gains on sales of mortgage loans, net   57    87    96    181 
Mortgage servicing, net   21    20    33    (20)
Gains on sales and calls of available-for-sale securities, net   146    11    148    186 
Other   116    114    233    228 
Total non-interest income   2,009    1,900    3,693    3,796 
Non-interest expense                    
Salaries   2,687    2,449    5,261    4,989 
Employee benefits   910    960    1,998    1,965 
Premises and equipment   844    913    1,739    1,821 
Data processing   449    398    896    872 
Professional fees   564    593    944    1,243 
Collections, OREO and loan related   125    228    311    472 
FDIC insurance   176    133    310    331 
Marketing and community support   180    180    380    290 
Amortization of core deposit intangibles   152    164    307    333 
Other   552    522    1,334    1,059 
Total non-interest expense   6,639    6,540    13,480    13,375 
Income before income taxes   2,404    2,957    4,443    6,144 
Income tax provision   669    885    1,196    1,838 
Net income  $1,735   $2,072   $3,247   $4,306 
Net income available to common shareholders   $1,735   $2,032   $3,247   $4,226 
Basic earnings per common share  $0.63   $0.74   $1.18   $1.55 
Weighted average common shares outstanding, to calculate basic earnings per share   2,735    2,706    2,729    2,703 
Diluted earnings per common share   0.63    0.74    1.17    1.54 
Weighted average common shares outstanding, to calculate diluted earnings per share   2,750    2,724    2,745    2,720 
Common dividends per share   0.28    0.28    0.56    0.56 

 

4
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

     Three months ended      Six months ended  
Periods ended June 30, (in thousands)    2016      2015      2016      2015  
Net income  $1,735   $2,072   $3,247   $4,306 
Other comprehensive income (loss)                    
Net unrealized gains (losses) on securities available-for-sale   190    (739)   122    (932)
Reclassification of net realized gains in net income(1)   (146)   (11)   (148)   (186)
Unrealized gains (losses) on securities available-for-sale   44    (750)   (26)   (1,118)
Income tax (expense) benefit   (15)   252    9    380 
Unrealized gains (losses) on securities available-for-sale, net of tax   29    (498)   (17)   (738)
Comprehensive income  $1,764   $1,574   $3,230   $3,568 

 

(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of other comprehensive income (loss) and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains on sales and calls of available-for-sale securities, net, the tax effect is included in the income tax provision and the after tax amount is included in net income.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) Six months ended June 30, 2016 and 2015

(dollars in thousands)  Common Stock 

Preferred

stock

 

Paid-in

capital

 

Retained

earnings

 

Unearned

compensation – restricted

stock

awards

 

Accumulated

other comp-

rehensive

income

 

Total

share-

holders'

equity

   Shares  Amount                  
Balances at December 31, 2014   2,720,766   $272   $16,000   $41,077   $42,677   $(313)  $2,108   $101,821 
Net income for period   —    —    —    —    4,306    —    —    4,306 
Other comprehensive loss, net of tax   —    —    —    —    —    —    (738)   (738)
Common stock dividends declared   —    —    —    —    (1,525)   —    —    (1,525)
Preferred stock dividends declared   —    —    —    —    (80)   —    —    (80)
Stock options exercised   6,750    1    —    125    —    —    —    126 
Issuance of common stock for executives   1,000    —    —    29    —    —    —    29 
Issuance of common stock for directors   2,660    —    —    81    —    —    —    81 
Stock based compensation – restricted stock awards   —    —    —    —    —    84    —    84 
Balances at June 30, 2015   2,731,176   $273   $16,000   $41,312   $45,378   $(229)  $1,370   $104,104 
Balances at December 31, 2015   2,733,576   $273   $—   $41,364   $47,922   $(110)  $1,125   $90,574 
Net income for period   —    —    —    —    3,247    —    —    3,247 
Other comprehensive loss, net of tax   —    —    —    —    —    —    (17)   (17)
Common stock dividends declared   —    —    —    —    (1,542)   —    —    (1,542)
Stock options exercised   4,050    —    —    87    —    —    —    87 
Issuance of restricted stock awards   15,800    2    —    464    —    (466)   —    — 
Issuance of common stock for directors   4,760    1    —    141    —         —    142 
Stock based compensation – restricted stock awards   —    —    —    —    —    93    —    93 
Balances at June 30, 2016   2,758,186   $276   $—   $42,056   $49,627   $(483)  $1,108   $92,584 

 

5
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Six months ended June 30, (in thousands)    2016      2015  
Operating Activities          
Net income  $3,247   $4,306 
Adjustments to reconcile net income to net cash provided by operating activities:          
(Accretion), amortization and depreciation:          
Securities   133    111 
Bank premises and equipment   604    610 
Core deposit intangible   307    333 
Mortgage servicing rights   116    197 
Fair value adjustment on loans    (988)   (1,305)
Fair value adjustment on deposits   (72)   (258)
(Gains) and losses, including write-downs          
Gain on calls of securities available-for-sale, net   (2)   (34)
Gain on sales of securities available-for-sale, net   (146)   (152)
Gain on sales of loans, excluding capitalized servicing rights   (96)   (78)
Write-downs of other real estate owned   —    230 
Loss on sale/disposals of premises and equipment   13    45 
Provision (benefit) for loan losses   988    (4)
Proceeds from loans sold   2,048    5,146 
Loans originated for sale   (1,189)   (4,800)
Increase in deferred loan origination costs, net   (81)   (13)
Mortgage servicing rights originated   (45)    (102)
Increase in mortgage servicing rights impairment reserve   21    3 
Decrease in interest receivable   90    42 
Deferred tax benefit   —    (26)
Decrease in prepaid expenses   64    116 
Increase in cash surrender value of life insurance policies   (177)   (185)
Decrease (increase) in income tax receivable   414    (91)
Decrease in other assets   234    129 
Decrease in accrued expenses   (32)   (146)
Modification fees on Federal Home Loan Bank advances   116    — 
Amortization of debt issuance costs   12    — 
Decrease in interest payable   (32)    (8)
Increase in other liabilities   890    103 
Stock based compensation-restricted stock awards   93    84 
Net cash provided by operating activities   6,530    4,253 
Investing Activities          
Purchase of Federal Home Loan Bank of Boston stock   (319)   — 
Redemption of Federal Home Loan Bank of Boston stock   59    — 
Purchases of securities available-for-sale   (32,536)   (4,319)
Proceeds from sales of securities available-for-sale   3,800    3,861 
Proceeds from calls of securities available-for-sale   9,661    6,480 
Proceeds from maturities of securities available-for-sale   15,320    4,830 
Loan originations and principal collections, net   (50,488)   (3,652)
Recoveries of loans previously charged off   64    477 
Proceeds from sales of other real estate owned   —    605 
Capital expenditures   (817)   (244)
Net cash (used in) provided by investing activities   (55,256)   8,038 

6
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Six months ended June 30, (in thousands)    2016      2015  
Financing Activities          
Increase in deposit transaction accounts, net  973   12,284 
Decrease in time deposits, net   (963)     (6,718) 
Decrease in securities sold under agreements to repurchase, net   (559)   (1,392)
Advances from Federal Home Loan Bank of Boston   19,994    — 
Principal payments on Federal Home Loan Bank of Boston advances   (6)   (780)
Principal payments on note payable   (18)   — 
Decrease in capital lease obligation   (2)   (1)
Stock options exercised   87    126 
Issuance of shares for director fees   142    81 
Issuance of shares for executives   —    29 
Common stock dividends paid   (1,542)   (1,525)
Series B preferred stock dividends paid   —    (80)
Net cash Provided by financing activities   18,106    2,024 
Net (decrease) increase in cash and cash equivalents   (30,620)   14,315 
Cash and cash equivalents, beginning of period   62,118    36,105 
Cash and cash equivalents, end of period  $31,498   $50,420 
Cash paid during period          
Interest  $1,977   $1,763 
Income taxes   782    1,955 
Non-cash investing and financing activities          
Transfer from loans to other real estate owned   —    101 

 

7
 

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position of Salisbury and the consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the interim periods presented.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, expected cash flows from loans acquired in a business combination, other-than-temporary impairment of securities and impairment of goodwill and intangibles.

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2015 Annual Report on Form 10-K for the year ended December 31, 2015.

The allowance for loan losses is a significant accounting policy and is presented in the Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis, which provides information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

Impact of New Accounting Pronouncements Issued

In January 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – overall (subtopic 825-10): "Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. Salisbury does not expect ASU No. 2016-01 to have a material impact on its Consolidated Financial Statements; however, Salisbury will continue to closely monitor developments and additional guidance.

8
 

In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. Salisbury is currently evaluating this ASU to determine the impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation–Stock Compensation (Topic 718): "Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. Salisbury is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on Salisbury’s Consolidated Financial Statements.

In June 2016 the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods with those fiscal years beginning after December 15, 2019. Salisbury is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on Salisbury’s Consolidated Financial Statements.

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NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)

Amortized

cost (1)

 

Gross un-

realized gains

 

Gross un-

realized losses

 Fair Value 
June 30, 2016                    
Available-for-sale                    
U.S. Treasury notes  $9,998   $17   $—   $10,015 
Municipal bonds   20,459    490    —    20,949 
Mortgage-backed securities                    
U.S. Government agencies and U.S. Government-sponsored enterprises   38,220    430    (9)   38,641 
Collateralized mortgage obligations                    
U.S. Government agencies   1,732    8    —    1,740 
Non-agency   3,928    395    (11)   4,312 
SBA bonds   2,628    26    —    2,654 
CRA mutual funds   774    14    —    788 
Corporate bonds   1,000    —    (3)   997 
Preferred stock   20    322    —    342 
Total securities available-for-sale  $78,759   $1,702   $(23)  $80,438 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,436   $—   $—   $3,436 

 

(in thousands)

Amortized

cost (1)

 

Gross un-

realized gains

 

Gross un-

realized losses

 Fair Value 
December 31, 2015                    
Available-for-sale                    
U.S. Treasury notes  $2,499   $42   $—   $2,541 
U.S. Government agency notes   498    —    —    498 
Municipal bonds   29,752    633    —    30,385 
Mortgage-backed securities                    
U.S. Government agencies and U.S. Government-sponsored enterprises   31,900    385    (83)   32,202 
Collateralized mortgage obligations                    
U.S. Government agencies   2,002    12    —    2,014 
Non-agency   4,487    468    (7)   4,948 
SBA bonds   3,065    31    —    3,096 
CRA mutual funds   766    —    (2)   764 
Preferred stock   20    226    —    246 
Total securities available-for-sale  $74,989   $1,797   $(92)  $76,694 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,176   $—   $—   $3,176 
(1)Net of other-than-temporary impairment write-downs recognized in earnings.

Salisbury sold $3.6 million in securities available-for-sale during the six month period ended June 30, 2016, and sold $3.7 million in securities available-for-sale during the six month period ended June 30, 2015.

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The following table summarizes, for all securities in an unrealized loss position, including debt securities for which a portion of other-than-temporary impairment (OTTI) has been recognized in other comprehensive income, the aggregate fair value and gross unrealized loss of securities that have been in a continuous unrealized loss position as of the date presented:

  (in thousands)  Less than 12 Months  12 Months or Longer  Total
   Fair
value		 

Unrealized

losses

  Fair
value		 

Unrealized

losses

  Fair
value		  Unrealized losses
June 30, 2016                              
Available-for-sale                              
Mortgage-backed securities  $255   $(3)  $218   $(6)  $473   $(9)
Collateralized mortgage obligations:                              
Non-agency   323    (2)   192    (4)   515    (6)
Corporate bonds   498    (3)   —    —    498    (3)
Total temporarily impaired securities   1,076    (8)   410    (10)   1,486    (18)
Other-than-temporarily impaired securities                              
Collateralized mortgage obligations:                              
Non-agency   207    (5)   —    —    207    (5)
Total temporarily impaired and other-than-temporarily impaired securities  $1,283   $(13)  $410   $(10)  $1,693   $(23)

 

Salisbury evaluates securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers whether it has the intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI.

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at June 30, 2016.

U.S. Government agency mortgage-backed securities: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these securities to be OTTI at June 30, 2016.

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at June 30, 2016, to assess whether any of the securities were OTTI. Salisbury uses cash flow forecasts for each security based on a variety of market driven assumptions and securitization terms, including prepayment speed, default or delinquency rate, and default severity for losses including interest, legal fees, property repairs, expenses and realtor fees, that, together with the loan amount are subtracted from collateral sales proceeds to determine severity. In 2009, Salisbury determined that five non-agency CMO securities reflected OTTI and recognized losses for deterioration in credit quality of $1,128,000. Salisbury judged the four remaining securities not to have additional OTTI and all other CMO securities not to be OTTI as of June 30, 2016. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI for further deterioration in credit quality. Salisbury evaluates these securities for strategic fit and depending upon such factor could reduce its position in these securities, although it has no present intention to do so, and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis.

Corporate Bonds: There is one corporate bond, which was purchased in June 2016, with an unrealized loss due to changes in interest rates. No loss on this bond is currently expected if held to maturity.

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The following table presents activity related to credit losses recognized into earnings on the non-agency CMOs held by Salisbury for which a portion of an OTTI charge was recognized in accumulated other comprehensive income:

  Six months ended June 30 (in thousands)    2016      2015  
Balance, beginning of period  $1,128   $1,128 
Credit component on debt securities in which OTTI was not previously recognized   —    — 
Balance, end of period  $1,128   $1,128 

 

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank’s FHLBB stock as of June 30, 2016. Deterioration of the FHLBB’s capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

NOTE 3 – LOANS

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

   June 30, 2016  December 31, 2015
  (In thousands)  Business Activities  Loans 

Acquired

Loans

  Total  Business Activities  Loans 

Acquired

Loans

  Total
Residential 1-4 family  $280,253   $7,249   $287,502   $261,495   $7,799   $269,294 
Residential 5+ multifamily   7,230    5,960    13,190    6,411    6,136    12,547 
Construction of residential 1-4 family   10,343    —    10,343    7,998    —    7,998 
Home equity lines of credit   34,767    —    34,767    35,017    —    35,017 
Residential real estate   332,593    13,209    345,802    310,921    13,935    324,856 
Commercial   150,669    84,115    234,784    129,446    88,829    218,275 
Construction of commercial   9,350    4,110    13,460    6,525    4,874    11,399 
Commercial real estate   160,019    88,225    248,244    135,971    93,703    229,674 
Farm land   4,036    —    4,036    3,193    —    3,193 
Vacant land   8,149    —    8,149    8,563    —    8,563 
Real estate secured   504,797    101,434    606,231    458,648    107,638    566,286 
Commercial and industrial   101,109    31,941    133,050    74,657    46,764    121,421 
Municipal   9,005    —    9,005    9,566    —    9,566 
Consumer   5,617    68    5,685    6,195    77    6,272 
Loans receivable, gross   620,528    133,443    753,971    549,066    154,479    703,545 
Deferred loan origination costs, net   1,270    —    1,270    1,189    —    1,189 
Allowance for loan losses   (5,478)   (240)   (5,718)   (5,481)   (235)   (5,716)
Loans receivable, net  $616,320   $133,203   $749,523   $544,774   $154,244   $699,018 
Loans held-for-sale                              
Residential 1-4 family  $—   $—   $—   $763   $—   $763 


12
 

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in northwestern Connecticut, New York and Massachusetts towns, 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, and installment 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.

Loan Credit Quality

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

Business Activities Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
June 30, 2016                              
Residential 1-4 family  $269,086   $6,418   $4,659   $90   $—   $280,253 
Residential 5+ multifamily   5,219    1,922    89    —    —    7,230 
Construction of residential 1-4 family   10,343    —    —    —    —    10,343 
Home equity credit   33,341    573    853    —    —    34,767 
Residential real estate   317,989    8,913    5,601    90    —    332,593 
Commercial   139,570    3,707    7,392    —    —    150,669 
Construction of commercial   9,232    —    118    —    —    9,350 
Commercial real estate   148,802    3,707    7,510    —    —    160,019 
Farm land   3,018    —    1,018    —    —    4,036 
Vacant land   5,232    65    2,852    —    —    8,149 
Real estate secured   475,041    12,685    16,981    90    —    504,797 
Commercial and industrial   97,051    3,402    654    2    —    101,109 
Municipal   9,005    —    —    —    —    9,005 
Consumer   5,582    34    1    —    —    5,617 
Loans receivable, gross  $586,679   $16,121   $17,636   $92   $—   $620,528 

 

Acquired Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
June 30, 2016                              
Residential 1-4 family  $6,470   $1   $778   $—   $—   $7,249 
Residential 5+ multifamily   5,837    —    123    —    —    5,960 
Construction of residential 1-4 family   —    —    —    —    —    — 
Home equity credit   —    —    —    —    —    — 
Residential real estate   12,307    1    901    —    —    13,209 
Commercial   76,876    2,631    4,608    —    —    84,115 
Construction of commercial   3,852    —    258    —    —    4,110 
Commercial real estate   80,728    2,631    4,866    —    —    88,225 
Farm land   —    —    —    —    —    — 
Vacant land   —    —    —    —    —    — 
Real estate secured   93,035    2,632    5,767    —    —    101,434 
Commercial and industrial   31,652    233    56    —    —    31,941 
Municipal   —    —    —    —    —    — 
Consumer   65    3    —    —    —    68 
Loans receivable, gross  $124,752   $2,868   $5,823   $—   $—   $133,443 

13
 

Business Activities Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2015                              
Residential 1-4 family  $248,027   $6,933   $6,444   $91   $—   $261,495 
Residential 5+ multifamily   4,507    1,815    89    —    —    6,411 
Construction of residential 1-4 family   7,111    887    —    —    —    7,998 
Home equity lines credit   33,687    545    785    —    —    35,017 
Residential real estate   293,332    10,180    7,318    91    —    310,921 
Commercial   120,903    4,801    3,742    —    —    129,446 
Construction of commercial   6,525    —    —    —    —    6,525 
Commercial real estate   127,428    4,801    3,742    —    —    135,971 
Farm land   2,162    —    1,031    —    —    3,193 
Vacant land   5,567    69    2,927    —    —    8,563 
Real estate secured   428,489    15,050    15,018    91    —    458,648 
Commercial and industrial   72,887    1,214    555    1    —    74,657 
Municipal   9,566    —    —    —    —    9,566 
Consumer   6,171    18    6    —    —    6,195 
Loans receivable, gross  $517,113   $16,282   $15,579   $92   $—   $549,066 

Acquired Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2015                              
Residential 1-4 family  $6,824   $199   $776   $—   $—   $7,799 
Residential 5+ multifamily   6,136    —    —    —    —    6,136 
Construction of residential 1-4 family   —    —    —    —    —    — 
Home equity lines of credit   —    —    —    —    —    — 
Residential real estate   12,960    199    776    —    —    13,935 
Commercial   80,406    4,005    4,418    —    —    88,829 
Construction of commercial   4,612    —    262    —    —    4,874 
Commercial real estate   85,018    4,005    4,680    —    —    93,703 
Farm land   —    —    —    —    —    — 
Vacant land   —    —    —    —    —    — 
Real estate secured   97,978    4,204    5,456    —    —    107,638 
Commercial and industrial   45,363    875    443    83    —    46,764 
Municipal   —    —    —    —    —    — 
Consumer   71    6    —    —    —    77 
Loans receivable, gross  $143,412   $5,085   $5,899   $83   $—   $154,479 

 

14
 

The composition of loans receivable by delinquency status is as follows:

Business Activities Loans

    Past due   
                  180  30      
  (in thousands)  Current  1-29  30-59  60-89  90-179  days  days  Accruing  Non-
      days  days  days  days  and  and90 days accrual
                  over  overand over  
June 30, 2016                           
Residential 1-4 family  $272,795   $2,791   $1,102   $521   $605   $2,439   $4,667   $—   $3,801 
Residential 5+ multifamily   7,086    54    —    —    1    89    90    —    — 
Construction of residential 1-4 family   10,343    —    —    —    —    —    —    —    — 
Home equity lines of credit    33,739    345    453    60    10    160    683    10    693 
Residential real estate   323,963    3,190    1,555    581    616    2,688    5,440    10    4,494 
Commercial   148,166    918    20    254    288    1,023    1,585    288    2,869 
Construction of commercial   9,350    —    —    —    —    —    —    —    — 
Commercial real estate   157,516    918    20    254    288    1,023    1,585    288    2,869 
Farm land   3,027    —    286    —    —    723    1,009    —    1,018 
Vacant land   5,318    —    8    —    —    2,823    2,831    —    2,852 
Real estate secured   489,824    4,108    1,869    835    904    7,257    10,865    298    11,233 
Commercial and industrial   100,049    826    106    106    4    18    234    —    25 
Municipal   9,005    —    —    —    —    —    —    —    — 
Consumer   5,565    37    12    3    —    —    15    —    — 
Loans receivable, gross  $604,443   $4,971   $1,987   $944   $908   $7,275   $11,114   $298   $11,258 

Acquired Loans

June 30, 2016                           
Residential 1-4 family  $6,379   $91   $—   $—   $—   $779   $779   $—   $902 
Residential 5+ multifamily   5,836    —    —    —    —    124    124         — 
Construction of residential 1-4 family   —    —    —    —    —    —    —         — 
Home equity lines of credit   —    —    —    —    —    —    —    —    — 
Residential real estate   12,215    91    —    —    —    903    903    —    902 
Commercial   78,259    2,753    —    1,241    321    1,541    3,103    322    1,541 
Construction of commercial   3,852    —    —    —    —    258    258         258 
Commercial real estate   82,111    2,753    —    1,241    321    1,799    3,361    322    1,799 
Farm land   —    —    —    —    —    —    —         — 
Vacant land   —    —    —    —    —    —    —    —    — 
Real estate secured   94,326    2,844    —    1,241    321    2,702    4,264    322    2,701 
Commercial and industrial   31,484    271    136    50    —    —    186    —    — 
Municipal   —    —    —    —    —    —    —         — 
Consumer   53    15    —    —    —    —    —         — 
Loans receivable, gross  $125,863   $3,130   $136   $1,291   $321   $2,702   $4,450   $322   $2,701 

 

15
 

Business Activities Loans

    Past due   
                  180  30      
  (in thousands)  Current  1-29  30-59  60-89  90-179  days  days  Accruing  Non-
      days  days  days  days  and  and90 days accrual
                  over  overand over  
December 31, 2015                           
Residential 1-4 family  $254,152   $1,781   $1,931   $683   $973   $1,975   $5,562   $—   $5,671 
Residential 5+ multifamily   6,254    —    68    —    —    89    157    —    89 
Construction of residential 1-4 family   7,826    172    —    —    —    —    —    —    — 
Home equity lines of credit   33,744    363    306    101    113    390    910    —    601 
Residential real estate   301,976    2,316    2,305    784    1,086    2,454    6,629    —    6,361 
Commercial   126,440    1,618    474    —    233    681    1,388    —    2,349 
Construction of commercial   6,525    —    —    —    —    —    —    —    — 
Commercial real estate   132,965    1,618    474    —    233    681    1,388    —    2,349 
Farm land   2,172    298    —    —    —    723    723    —    1,031 
Vacant land   5,734    —    6    —    —    2,823    2,829    —    2,855 
Real estate secured   442,847    4,232    2,785    784    1,319    6,681    11,569    —    12,596 
Commercial and industrial   73,698    906    35    —    —    18    53    —    461 
Municipal   9,566    —    —    —    —    —    —    —    — 
Consumer   6,096    61    21    17    —    —    38    —    80 
Loans receivable, gross  $532,207   $5,199   $2,841   $801   $1,319   $6,699   $11,660   $—   $13,137 

Acquired Loans

December 31, 2015                        
Residential 1-4 family  $6,823   $—   $—   $110   $—   $866   $976   $90   $776 
Residential 5+ multifamily   6,136    —    —    —    —    —    —    —    — 
Construction of residential 1-4 family   —    —    —    —    —    —    —    —    — 
Home equity lines of credit   —    —    —    —    —    —    —    —    — 
Residential real estate   12,959    —    —    110    —    866    976    90    776 
Commercial   81,140    4,848    916    —    —    1,925    2,841    —    2,000 
Construction of commercial   4,612    —    —    —    —    262    262    —    262 
Commercial real estate   85,752    4,848    916    —    —    2,187    3,103    —    2,262 
Farm land   —    —    —    —    —    —    —    —    — 
Vacant land   —    —    —    —    —    —    —    —    — 
Real estate secured   98,711    4,848    916    110    —    3,053    4,079    90    3,038 
Commercial and industrial   46,128    471    83    82    —    —    165    —    — 
Municipal   —    —    —    —    —    —    —    —    — 
Consumer   77    —    —    —    —    —    —    —    — 
Loans receivable, gross  $144,916   $5,319   $999   $192   $—   $3,053   $4,244   $90   $3,038 


Interest on non-accrual loans that would have been recorded as additional interest income for the six months ended June 30, 2016 and 2015 had the loans been current in accordance with their original terms totaled $578,000 and $511,000, respectively.

16
 

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

Business Activities Loans

   Six months ended
   June 30, 2016  June 30, 2015
  (in thousands)  Quantity 

Pre-

modification balance

 

Post-

modification balance

  Quantity 

Pre-

modification balance

 

Post-

modification balance

Residential real estate   3   $316   $316    1   $875   $875 
Commercial real estate   1    1,863    1,863    1    184    184 
Home equity lines of credit   —    —    —    —    —    — 
Troubled debt restructurings   4   $2,179   $2,179    2   $1,059   $1,059 
Rate reduction and term extension   2   $262   $262    1   $184   $184 
Interest only and term extension   —    —    —    —    —    — 
Interest only   —    —    —    —    —    — 
Debt consolidation   1    1,863    1,863    —    —    — 
Term extension   1    54    54    1    875    875 
Troubled debt restructurings   4   $2,179   $2,179    2   $1,059   $1,059 

Acquired Loans

   Six months ended
   June 30, 2016  June 30, 2015
  (in thousands)  Quantity 

Pre-

modification balance

 

Post-

modification balance

  Quantity 

Pre-

modification balance

 

Post-

modification balance

Residential real estate   —   $—   $—    —   $—   $— 
Commercial real estate   —    —    —    —    —    — 
Home equity lines of credit   —    —    —    —    —    — 
Troubled debt restructurings   —   $—   $—    —   $—   $— 
Rate reduction and term extension   —   $—   $—    —   $—   $— 
Interest only and term extension   —    —    —    —    —    — 
Interest only   —    —    —    —    —    — 
Debt consolidation and term extension   —    —    —    —    —    — 
Term extension   —    —    —    —    —    — 
Troubled debt restructurings   —   $—   $—    —   $—   $— 


Four loans were modified in troubled debt restructurings during 2016, none of which were past due at June 30, 2016.

As of June 30, 2016, there were no commitments to lend additional amounts on troubled debt restructurings.

As of June 30, 2016, the Bank had $2,736,000 in loans collateralized by residential real estate property in the process of foreclosure.

17
 

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

   Business Activities Loans  Acquired Loans
  (in thousands)  Three months ended June 30, 2016  Three months ended June 30, 2016
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,458   $59   $(287)  $18   $2,248   $69   $—   $—   $—   $69 
Commercial   1,585    149    —    —    1,734    94    40    (1)   1    134 
Land   164    25    (23)   —    166    —    —    —    —    — 
Real estate   4,207    233    (310)   18    4,148    163    40    (1)   1    203 
Commercial and industrial   781    60    —    10    851    141    299    (414)   11    37 
Municipal   59    (3)   —    —    56    —    —    —    —    — 
Consumer   114    (26)   (7)   8    89    —    —    —    —    — 
Unallocated   412    (78)   —    —    334    —    —    —    —    — 
Totals  $5,573   $186   $(317)  $36   $5,478   $304   $339   $(415)  $12   $240 
   Business Activities Loans  Acquired Loans
  (in thousands)  Six months ended June 30, 2016  Six months ended June 30, 2016
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,477   $146   $(394)  $19   $2,248   $79   $(10)  $—   $—   $69 
Commercial   1,466    302    (35)   1    1,734    132    96    (98)   4    134 
Land   188    24    (46)   —    166    —    —    —    —    — 
Real estate   4,131    472    (475)   20    4,148    211    86    (98)   4    203 
Commercial and industrial   683    185    (32)   15    851    24    413    (415)   15    37 
Municipal   61    (5)   —    —    56    —    —    —    —    — 
Consumer   124    (15)   (30)   10    89    —    —    —    —    — 
Unallocated   482    (148)   —    —    334    —    —    —    —    — 
Totals  $5,481   $489   $(537)  $45   $5,478   $235   $499   $(513)  $19   $240 

  

   Business Activities Loans  Acquired Loans
  (in thousands)  Three months ended June 30, 2015  Three months ended June 30, 2015
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,386   $(52)  $(188)  $1   $2,147   $—   $15   $—   $—   $15 
Commercial   1,355    116    (132)   —    1,339    18    59    —   —    77 
Land   176    6    —   —    182    —    —    —    —    — 
Real estate   3,917    70    (320)   1    3,668    18    74    —   —    92 
Commercial and industrial   637    52    —    2    691    45    (3)   —   10    52 
Municipal   61    3   —    —    64    —    —    —    —    — 
Consumer   120    15   (16)   4    123    —    —    —    —    — 
Unallocated   384    (15)   —    —    369    —    —    —    —    — 
Totals  $5,119   $125   $(336)  $7   $4,915   $63   $71   $—  $10   $144 
   Business Activities Loans  Acquired Loans
  (in thousands)  Six months ended June 30, 2015  Six months ended June 30, 2015
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,306   $320   $(481)  $2   $2,147   $—   $15  $—   $—   $15 
Commercial   1,697    (154)   (204)   —    1,339    7    70    —   —    77 
Land   164    18    —   —    182    —    —    —    —    — 
Real estate   4,167    184    (685)   2    3,668    7    85    —   —    92 
Commercial and industrial   583    (288)   (56)   452    691    14    21    —   17    52 
Municipal   61    3   —    —    64    —    —    —    —    — 
Consumer   117    31   (31)   6    123    —    —    —    —    — 
Unallocated   409    (40)   —    —    369    —    —    —    —    — 
Totals  $5,337   $(110)  $(772)  $460   $4,915   $21   $106   $—  $17   $144 
18
 

The composition of loans receivable and the allowance for loan losses is as follows:

Business Activities Loans

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
June 30, 2016                              
Residential 1-4 family  $273,585   $1,574   $6,668   $230   $280,253   $1,804 
Residential 5+ multifamily   5,471    39    1,759    —    7,230    39 
Construction of residential 1-4 family   10,343    77    —    —    10,343    77 
Home equity lines of credit   33,958    312    809    16    34,767    328 
Residential real estate   323,357    2,002    9,236    246    332,593    2,248 
Commercial   146,144    1,538    4,525    76    150,669    1,614 
Construction of commercial   9,232    120    118    —    9,350    120 
Commercial real estate   155,376    1,658    4,643    76    160,019    1,734 
Farm land   3,018    25    1,018    6    4,036    31 
Vacant land   5,080    121    3,069    14    8,149    135 
Real estate secured   486,831    3,806    17,966    342    504,797    4,148 
Commercial and industrial   101,024    850    85    1    101,109    851 
Municipal   9,005    56    —    —    9,005    56 
Consumer   5,617    89    —    —    5,617    89 
Unallocated allowance   —    334    —    —    —    334 
Totals  $602,477   $5,135   $18,051   $343   $620,528   $5,478 

Acquired Loans

(in thousands)  Collectively evaluated  Individually evaluated  ASC 310-30 loans   Total portfolio 
    Loans    Allowance    Loans    Allowance    Loans    Allowance    Loans    Allowance 
June 30, 2016                                        
Residential 1-4 family  $6,470   $—   $779   $69   $—   $—   $7,249   $69 
Residential 5+ multifamily   5,837    —    123    —    —    —    5,960    — 
Construction of residential 1-4 family   —    —    —    —    —    —    —    — 
Home equity lines of credit   —    —    —    —    —    —    —    — 
Residential real estate   12,307    —    902    69    —    —    13,209    69 
Commercial   77,041    24    2,291    26    4,783    81    84,115    131 
Construction of commercial   3,852    3    258    —    —    —    4,110    3 
Commercial real estate   80,893    27    2,549    26    4,783    81    88,225    134 
Farm land   —    —    —    —    —    —    —    — 
Vacant land   —    —    —    —    —    —    —    — 
Real estate secured   93,200    27    3,451    95    4,783    81    101,434    203 
Commercial and industrial   31,592    27    —    —    349    10    31,941    37 
Municipal   —    —    —    —    —    —    —    — 
Consumer   52    —    —    —    16    —    68    — 
Unallocated allowance   —    —    —    —    —    —    —    — 
Totals  $124,844   $54   $3,451   $95   $5,148   $91   $133,443   $240 

 

19
 

Business Activities Loans

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2015                              
Residential 1-4 family  $253,156   $1,415   $8,339   $610   $261,495   $2,025 
Residential 5+ multifamily   4,640    33    1,771    —    6,411    33 
Construction of residential 1-4 family   7,998    65    —    —    7,998    65 
Home equity lines of credit   34,298    286    719    68    35,017    354 
Residential real estate   300,092    1,799    10,829    678    310,921    2,477 
Commercial   125,173    1,265    4,273    113    129,446    1,378 
Construction of commercial   6,403    87    122    1    6,525    88 
Commercial real estate   131,576    1,352    4,395    114    135,971    1,466 
Farm land   2,162    23    1,031    14    3,193    37 
Vacant land   5,486    122    3,077    29    8,563    151 
Real estate secured   439,316    3,296    19,332    835    458,648    4,131 
Commercial and industrial   74,131    673    526    10    74,657    683 
Municipal   9,566    61    —    —    9,566    61 
Consumer   6,115    124    80    —    6,195    124 
Unallocated allowance   —    482    —    —    —    482 
Totals  $529,128   $4,636   $19,938   $845   $549,066   $5,481 

Acquired Loans

(in thousands)  Collectively evaluated  Individually evaluated  ASC 310-30 loans   Total portfolio 
    Loans    Allowance    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2015                                        
Residential 1-4 family  $7,023   $—   $776   $79   $—   $—   $7,799   $79 
Residential 5+ multifamily   6,136    —    —    —    —    —    6,136    — 
Construction of residential 1-4 family   —    —    —    —    —    —    —    — 
Home equity lines of credit   —    —    —    —    —    —    —    — 
Residential real estate   13,159    —    776    79    —    —    13,935    79 
Commercial   81,300    19    2,742    107    4,787    2    88,829    128 
Construction of commercial   4,612    4    262    —    —    —    4,874    4 
Commercial real estate   85,912    23    3,004    107    4,787    2    93,703    132 
Farm land   —    —    —    —    —    —    —    — 
Vacant land   —    —    —    —    —    —    —    — 
Real estate secured   99,071    23    3,780    186    4,787    2    107,638    211 
Commercial and industrial   45,650    24    —    —    1,114    —    46,764    24 
Municipal   —    —    —    —    —    —    —    — 
Consumer   61    —    —    —    16    —    77    — 
Unallocated allowance   —    —    —    —    —    —    —    — 
Totals  $144,782   $47   $3,780   $186   $5,917   $2   $154,479   $235 

 

20
 

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

Business Activities Loans

  June 30, 2016 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance  
Performing loans  $597,508   $4,601   $—   $—   $597,508   $4,601 
Potential problem loans   4,969    200    —    —    4,969    200 
Impaired loans   —    —    18,051    343    18,051    343 
Unallocated allowance   —    334    —    —    —    334 
Totals  $602,477   $5,135   $18,051   $343   $620,528   $5,478 

Acquired Loans

  June 30, 2016 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance  
Performing loans  $127,619   $70   $—   $—   $127,619   $70 
Potential problem loans   2,373    75    —    —    2,373    75 
Impaired loans   —    —    3,451    95    3,451    95 
Totals  $129,992   $145   $3,451   $95   $133,443   $240 

Business Activities Loans

  December 31, 2015 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance  
Performing loans  $527,905   $4,110   $—   $—   $527,905   $4,110 
Potential problem loans   1,223    44    —    —    1,223    44 
Impaired loans   —    —    19,938    845    19,938    845 
Unallocated allowance   —    482    —    —    —    482 
Totals  $529,128   $4,636   $19,938   $845   $549,066   $5,481 
                               

Acquired Loans

  December 31, 2015 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance  
Performing loans  $148,580   $46   $—   $—   $148,580   $46 
Potential problem loans   2,119    2    —    —    2,119    2 
Impaired loans   —    —    3,780    187    3,780    187 
Unallocated allowance   —    —    —    —    —    — 
Totals  $150,699   $48   $3,780   $187   $154,479   $235 

 

21
 

A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the fair 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:

Business Activities Loans

   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 
June 30, 2016                                             
Residential 1-4 family  $5,760   $6,209   $6,738   $230   $42   $2,667   $2,883   $2,748   $39 
Home equity lines of credit   416    436    485    16    1    393    421    329    2 
Residential real estate   6,176    6,645    7,223    246    43    3,060    3,304    3,077    41 
Commercial   3,629    3,993    3,309    76    45    896    1,152    1,068    15 
Construction of commercial   —    —    103    —    —    118    125    17    4 
Farm land   722    760    319    6    —    296    361    706    — 
Vacant land   2,870    3,881    2,870    14    1    199    235    203    — 
Real estate secured   13,397    15,279    13,824    342    89    4,569    5,177    5,071    60 
Commercial and industrial   4    4    55    1    —    81    109    276    1 
Consumer   —    —    —    —    —    —    —    11    — 
Totals  $13,401   $15,283   $13,879   $343   $89   $4,650   $5,286   $5,358   $61 

Acquired Loans

   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