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 September 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 November 14, 2016 is 2,758,086.

 

 
 

 

TABLE OF CONTENTS

      Page 
PART I. FINANCIAL INFORMATION    
Item 1.  Financial Statements (unaudited)    
   CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2016 (unaudited) and DECEMBER 31, 2015  3 
   CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015 (unaudited)  4 
   CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015 (unaudited)  5 
   CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015 ( (unaudited)  5 
  

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 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  31 
Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  47 
Item 4.  CONTROLS AND PROCEDURES  49 
PART II. OTHER INFORMATION  49 
Item 1.  LEGAL PROCEEDINGS  49 
Item 1A.  RISK FACTORS  49 
Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  49 
Item 3.  DEFAULTS UPON SENIOR SECURITIES  49 
Item 4.  MINE SAFETY DISCLOSURES  49 
Item 5.  OTHER INFORMATION  49 
Item 6.  EXHIBITS  50 
SIGNATURES  51 

2
 

 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)  September 30, 2016    December 31, 2015  
ASSETS    (unaudited)     
Cash and due from banks  $13,004   $14,891 
Interest bearing demand deposits with other banks   29,634    47,227 
Total cash and cash equivalents   42,638    62,118 
Securities:          
Available-for-sale at fair value   76,801    76,694 
Federal Home Loan Bank of Boston stock at cost   2,937    3,176 
Loans held-for-sale   837    763 
Loans receivable, net (allowance for loan losses: $5,892 and $5,716)   753,623    699,018 
Other real estate owned   2,823    — 
Bank premises and equipment, net   14,573    14,307 
Goodwill   12,552    12,552 
Intangible assets (net of accumulated amortization: $3,364 and $2,909)   1,883    2,338 
Accrued interest receivable   2,260    2,307 
Cash surrender value of life insurance policies   13,952    13,685 
Deferred taxes   2,114    1,989 
Other assets   1,452    2,245 
Total Assets  $928,445   $891,192 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits:          
Demand (non-interest bearing)  $210,396   $201,340 
Demand (interest bearing)   126,064    125,465 
Money market   201,504    183,783 
Savings and other   127,595    119,651 
Certificates of deposit   121,171    124,294 
Total deposits   786,730    754,533 
Repurchase agreements   3,581    3,914 
Federal Home Loan Bank of Boston advances   27,134    26,979 
Subordinated debt(1)   9,782    9,764 
Note payable   351    376 
Capital lease liability   419    422 
Accrued interest and other liabilities   6,894    4,630 
Total Liabilities   834,891    800,618 
Shareholders' Equity          
Common stock - $0.10 per share par value          
Authorized: 5,000,000          
Outstanding: 2,758,086 and 2,733,576   276    273 
Paid-in capital   42,053    41,364 
Retained earnings   50,773    47,922 
Unearned compensation - restricted stock awards   (431)   (110)
Accumulated other comprehensive income   883    1,125 
Total Shareholders' Equity   93,554    90,574 
Total Liabilities and Shareholders' Equity  $928,445   $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  Nine months ended
Periods ended September 30, (in thousands except per share amounts)    2016      2015      2016      2015  
Interest and dividend income                    
Interest and fees on loans  $8,061   $7,955   $23,915   $23,727 
Interest on debt securities:                    
Taxable   341    286    976    910 
Tax exempt   202    351    725    1,098 
Other interest and dividends   60    58    138    132 
Total interest and dividend income   8,664    8,650    25,754    25,867 
Interest expense                    
Deposits   565    463    1,603    1,359 
Repurchase agreements   2    2    4    5 
Capital lease   17    18    52    53 
Note payable   5    1    16    1 
Subordinated debt   156    —    468    — 
Federal Home Loan Bank of Boston advances   237    269    714    832 
Total interest expense   982    753    2,857    2,250 
Net interest and dividend income   7,682    7,897    22,897    23,617 
Provision for loan losses   344    655    1,332    651 
Net interest and dividend income after provision for loan losses   7,338    7,242    21,565    22,966 
Non-interest income                    
Trust and wealth advisory   849    798    2,517    2,510 
Service charges and fees   840    798    2,355    2,307 
Gains on sales of mortgage loans, net   55    47    152    227 
Mortgage servicing, net   28    5    61    (15)
Gains on sales and calls of available-for-sale securities, net   10    6    157    192 
Other   113    115    342    343 
Total non-interest income   1,895    1,769    5,584    5,564 
Non-interest expense                    
Salaries   2,757    2,531    8,017    7,520 
Employee benefits   924    916    2,923    2,881 
Premises and equipment   809    863    2,546    2,683 
Data processing   472    404    1,369    1,276 
Professional fees   459    398    1,403    1,642 
Collections, OREO and loan related   109    125    420    594 
FDIC insurance   164    163    474    494 
Marketing and community support   144    174    524    465 
Amortization of core deposit intangibles   148    161    455    494 
Other   513    467    1,844    1,528 
Total non-interest expense   6,499    6,202    19,975    19,577 
Income before income taxes   2,734    2,809    7,174    8,953 
Income tax provision   812    824    2,009    2,663 
Net income  $1,922   $1,985   $5,165   $6,290 
Net income applicable to common shareholders   $1,907   $1,928   $5,124   $6,116 
Basic earnings per common share  $0.70   $0.71   $1.88   $2.26 
Weighted average common shares outstanding, to calculate basic earnings per share   2,737    2,707    2,732    2,704 
Diluted earnings per common share   0.69    0.71    1.87    2.25 
Weighted average common shares outstanding, to calculate diluted earnings per share   2,751    2,724    2,747    2,721 
Common dividends per share   0.28    0.28    0.84    0.84 

 

4
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

   Three months ended  Nine months ended
Periods ended September 30, (in thousands)    2016      2015      2016      2015  
Net income  $1,922   $1,985   $5,165   $6,290 
Other comprehensive (loss) income                    
Net unrealized (losses) gains on securities available-for-sale   (331)   116    (211)   (816)
Reclassification of net realized gains in net income (1)   (10)   (6)   (157)   (192)
Unrealized (losses) gains on securities available-for-sale   (341)   110    (368)   (1,008)
Income tax benefit (expense)   116    (37)   126    343 
Unrealized (losses) gains on securities available-for-sale, net of tax   (225)   73    (242)   (665)
Comprehensive income  $1,697   $2,058   $4,923   $5,625 

 

(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) Nine months ended September 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   —    —    —    —    6,290    —    —    6,290 
Other comprehensive loss, net of tax   —    —    —    —    —    —    (665)   (665)
Common stock dividends declared   —    —    —    —    (2,289)   —    —    (2,289)
Preferred stock dividends declared   —    —    —    —    (120)   —    —    (120)
Stock options exercised   9,450    1    —    182    —    —    —    183 
Issuance of common stock for executives   1,000    —    —    29    —    —    —    29 
Forfeiture of restricted common stock   (300)   —    —    (7)   —    7    —    — 
Issuance of common stock for directors   2,660    —    —    81    —    —    —    81 
Stock based compensation – restricted stock awards   —    —    —    —    —    120    —    120 
Balances at September 30, 2015   2,733,576   $273   $16,000   $41,362   $46,558   $(186)  $1,443   $105,450 
Balances at December 31, 2015   2,733,576   $273   $—   $41,364   $47,922   $(110)  $1,125   $90,574 
Net income   —    —    —    —    5,165    —    —    5,165 
Other comprehensive loss, net of tax   —    —    —    —    —    —    (242)   (242)
Common stock dividends declared   —    —    —    —    (2,314)   —    —    (2,314)
Stock options exercised   4,050    —    —    87    —    —    —    87 
Issuance of restricted stock awards   15,800    2    —    464    —    (466)   —    — 
Forfeiture of restricted common stock   (100)   —    —    (3)   —    3    —    — 
Issuance of common stock for directors   4,760    1    —    141    —         —    142 
Stock based compensation – restricted stock awards   —    —    —    —    —    142    —    142 
Balances at September 30, 2016   2,758,086   $276   $—   $42,053   $50,773   $(431)  $883   $93,554 

 

5
 

  

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Nine months ended September 30, (in thousands)    2016      2015  
Operating Activities          
Net income  $5,165   $6,290 
Adjustments to reconcile net income to net cash provided by operating activities:          
(Accretion), amortization and depreciation:          
Securities   204    178 
Bank premises and equipment   889    917 
Core deposit intangible   455    494 
Mortgage servicing rights   182    282 
Fair value adjustment on loans    (1,429)   (2,031)
Fair value adjustment on deposits   (97)   (355)
(Gains) and losses, including write-downs          
Gain on calls of securities available-for-sale, net   (1)   (40)
Gain on sales of securities available-for-sale, net   (156)   (152)
Gain on sales of loans, excluding capitalized servicing rights   (152)   (102)
Write-downs of other real estate owned   —    238 
Loss on sale/disposals of premises and equipment   13    45 
Provision for loan losses   1,332    651 
Proceeds from loans sold   6,814    4,897 
Loans originated for sale   (6,736)   (4,800)
(Increase) decrease in deferred loan origination costs, net   (91)   25 
Mortgage servicing rights originated   (71)   (125)
Increase in mortgage servicing rights impairment reserve   13    3 
Decrease in interest receivable   47    38 
Deferred tax benefit   —    (17)
Decrease (increase) in prepaid expenses   18    (409)
Increase in cash surrender value of life insurance policies   (267)   (277)
Decrease in income tax receivable   433    — 
Increase in income tax payable   —    271 
Increase (decrease) in other assets   218    (87)
Increase (decrease) in accrued expenses   1,079    (11)
Modification fees on Federal Home Loan Bank advances   173    — 
Amortization of debt issuance costs   18    — 
Decrease in interest payable   (125)   (45)
Increase in other liabilities   1,310    369 
Stock based compensation-restricted stock awards   142    120 
Net cash provided by operating activities   9,380    6,367 
Investing Activities          
Purchase of Federal Home Loan Bank of Boston stock   (319)   — 
Redemption of Federal Home Loan Bank of Boston stock   558    — 
Purchases of securities available-for-sale   (45,317)   (9,322)
Proceeds from sales of securities available-for-sale   3,860    3,861 
Proceeds from calls of securities available-for-sale   11,811    7,995 
Proceeds from maturities of securities available-for-sale   29,125    7,413 
Loan originations and principal collections, net   (57,351)   (13,748)
Recoveries of loans previously charged off   111    613 
Proceeds from sales of other real estate owned   —    698 
Capital expenditures   (1,168)   (739)
Net cash used in investing activities   (58,690)   (3,229)
6
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine months ended September 30, (in thousands)    2016      2015  
Financing Activities          
Increase in deposit transaction accounts, net  35,320   57,607 
Decrease in time deposits, net   (3,026)     (11,199) 
(Decrease) increase in securities sold under agreements to repurchase, net   (333)   47
Principal payments on Federal Home Loan Bank of Boston advances   (18)   (786)
Modification payment on Federal Home Loan Bank of Boston advances   —    (1,099)
Principal payments on note payable   (25)   — 
Decrease in capital lease obligation   (3)   (2)
Stock options exercised   87    183 
Issuance of shares for director fees   142    81 
Issuance of shares for executives   —    29 
Common stock dividends paid   (2,314)   (2,289)
Series B preferred stock dividends paid   —    (120)
Net cash provided by financing activities   29,830    42,452 
Net (decrease) increase in cash and cash equivalents   (19,480)   45,590 
Cash and cash equivalents, beginning of period   62,118    36,105 
Cash and cash equivalents, end of period  $42,638   $81,695 
Cash paid during period          
Interest  $2,714   $2,650 
Income taxes   842    2,409 
Non-cash investing and financing activities          
Transfer from loans to other real estate owned   2,823    101 
Note payable to fund building purchase   —    380 
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 September 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. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments." This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on Salisbury’s Consolidated Financial Statements.

9
 

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 
September 30, 2016                    
Available-for-sale                    
Municipal bonds  $18,252   $352   $—   $18,604 
Mortgage-backed securities                    
U.S. Government agencies and U.S. Government-sponsored enterprises   47,881    372    (77)   48,176 
Collateralized mortgage obligations                    
U.S. Government agencies   1,596    8    —    1,604 
Non-agency   3,619    418    (5)   4,032 
SBA bonds   2,268    18    —    2,286 
CRA mutual funds   828    10    —    838 
Corporate bonds   1,000    20    —    1,020 
Preferred stock   20    221    —    241 
Total securities available-for-sale  $75,464   $1,419   $(82)  $76,801 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $2,937   $—   $—   $2,937 

 

 

(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 nine month period ended September 30, 2016, and sold $3.7 million in securities available-for-sale during the nine month period ended September 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, 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
September 30, 2016                              
Available-for-sale                              
Mortgage-backed securities  $27,770   $(71)  $310   $(6)  $28,080   $(77)
Collateralized mortgage obligations:                              
Non-agency   203    (1)   175    (4)   378    (5)
Total temporarily impaired  securities  $27,973   $(72)  $485   $(10)  $28,458   $(82)

 

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

Unrealized

losses

  Fair
value		 

Unrealized

losses

  Fair
value		  Unrealized losses
December 31, 2015                              
Available-for-sale                              
Mortgage-backed securities  $14,750   $(83)  $53   $—  $14,803   $(83)
Collateralized mortgage obligations:                              
Non-agency   237    —    226    (7)   463    (7)
   CRA mutual funds   764    (2)   —    —    764    (2)
Total temporarily impaired  securities  $15,751   $(85) $279   $(7)  $16,030   $(92)

 

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 September 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 September 30, 2016.

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at September 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 September 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.

11
 

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:

  Nine months ended September 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 September 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:

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

Acquired

Loans

  Total  Business Activities  Loans 

Acquired

Loans

  Total
Residential 1-4 family  $286,663   $7,022   $293,685   $261,495   $7,799   $269,294 
Residential 5+ multifamily   7,690    5,864    13,554    6,411    6,136    12,547 
Construction of residential 1-4 family   9,824    —    9,824    7,998    —    7,998 
Home equity lines of credit   35,470    —    35,470    35,017    —    35,017 
Residential real estate   339,647    12,886    352,533    310,921    13,935    324,856 
Commercial   162,602    81,741    244,343    129,446    88,829    218,275 
Construction of commercial   4,066    2,139    6,205    6,525    4,874    11,399 
Commercial real estate   166,668    83,880    250,548    135,971    93,703    229,674 
Farm land   4,033    —    4,033    3,193    —    3,193 
Vacant land   5,830    —    5,830    8,563    —    8,563 
Real estate secured   516,178    96,766    612,944    458,648    107,638    566,286 
Commercial and industrial   101,146    30,009    131,155    74,657    46,764    121,421 
Municipal   8,475    —    8,475    9,566    —    9,566 
Consumer   5,593    68    5,661    6,195    77    6,272 
Loans receivable, gross   631,392    126,843    758,235    549,066    154,479    703,545 
Deferred loan origination costs, net   1,280    —    1,280    1,189    —    1,189 
Allowance for loan losses   (5,613)   (279)   (5,892)   (5,481)   (235)   (5,716)
Loans receivable, net  $627,059   $126,564   $753,623   $544,774   $154,244   $699,018 
Loans held-for-sale                              
Residential 1-4 family  $837   $—   $837   $763   $—   $763 

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.

12
 

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
September 30, 2016                              
Residential 1-4 family  $276,508   $6,111   $3,955   $89   $—   $286,663 
Residential 5+ multifamily   5,611    1,912    167    —    —    7,690 
Construction of residential 1-4 family   9,824    —    —    —    —    9,824 
Home equity lines of credit   34,102    528    840    —    —    35,470 
Residential real estate   326,045    8,551    4,962    89    —    339,647 
Commercial   152,026    3,541    7,035    —    —    162,602 
Construction of commercial   3,949    —    117    —    —    4,066 
Commercial real estate   155,975    3,541    7,152    —    —    166,668 
Farm land   3,025    —    1,008    —    —    4,033 
Vacant land   5,739    63    28    —    —    5,830 
Real estate secured   490,784    12,155    13,150    89    —    516,178 
Commercial and industrial   98,795    1,716    635    —    —    101,146 
Municipal   8,475    —    —    —    —    8,475 
Consumer   5,566    27    —    —    —    5,593 
Loans receivable, gross  $603,620   $13,898   $13,785   $89   $—   $631,392 

 

Acquired Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
September 30, 2016                              
Residential 1-4 family  $6,133   $110   $779   $—   $—   $7,022 
Residential 5+ multifamily   5,741    —    123    —    —    5,864 
Construction of residential 1-4 family   —    —    —    —    —    — 
Home equity lines of credit   —    —    —    —    —    — 
Residential real estate   11,874    110    902    —    —    12,886 
Commercial   72,288    4,082    5,371    —    —    81,741 
Construction of commercial   1,881    —    258    —    —    2,139 
Commercial real estate   74,169    4,082    5,629    —    —    83,880 
Farm land   —    —    —    —    —    — 
Vacant land   —    —    —    —    —    — 
Real estate secured   86,043    4,192    6,531    —    —    96,766 
Commercial and industrial   28,566    1,238    205    —    —    30,009 
Municipal   —    —    —    —    —    — 
Consumer   65    3    —    —    —    68 
Loans receivable, gross  $114,674   $5,433   $6,736   $—   $—   $126,843 

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 of 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  
September 30, 2016                           
Residential 1-4 family  $281,558   $1,892   $313   $679   $74   $2,147   $3,213   $—   $3,017 
Residential 5+ multifamily   7,690    —    —    —    —    —    —    —    167 
Construction of residential 1-4 family   9,824    —    —    —    —    —    —    —    — 
Home equity lines of credit   34,949    69    151    90    54    157    452    —    681 
Residential real estate   334,021    1,961    464    769    128    2,304    3,665    —    3,865 
Commercial   158,272    1,251    1,917    252    —    910    3,079    —    2,993 
Construction of commercial   4,066    —    —    —    —    —    —    —    — 
Commercial real estate   162,338    1,251    1,917    252    —    910    3,079    —    2,993 
Farm land   2,514    795    —    —    —    724    724    —    1,009 
Vacant land   5,784    46    —    —    —    —    —    —    28 
Real estate secured   504,657    4,053    2,381    1,021   128    3,938    7,468    —    7,895 
Commercial and industrial   99,230    1,105    627    161    —    23    811    —    23 
Municipal   8,475    —    —    —    —    —    —    —    — 
Consumer   5,555    19    9    10    —    —    19    —    — 
Loans receivable, gross  $617,917   $5,177   $3,017   $1,192   $128   $3,961   $8,298   $—   $7,918 

Acquired Loans

September 30, 2016                           
Residential 1-4 family  $5,961   $282   $—   $—   $—   $779   $779   $—   $779 
Residential 5+ multifamily   5,299    —    442    —    —    123    565    —    123 
Construction of residential 1-4 family   —    —    —    —    —    —    —    —    — 
Home equity credit lines of credit   —    —    —    —    —    —    —    —    — 
Residential real estate   11,260    282    442    —    —    902    1344    —    902 
Commercial   74,978    2,695    1,503    —    974    1,591    4,068    365    2,199 
Construction of commercial   1,881    —    —    —    —    258    258    —    258 
Commercial real estate   76,859    2,695    1,503    —    974    1,849    4,326    365    2,457 
Farm land   —    —    —    —    —    —    —    —    — 
Vacant land   —    —    —    —    —    —    —    —    — 
Real estate secured   88,119    2,977    1,945    —    974    2,751    5,670    365    3,359 
Commercial and industrial   27,711    622    543    1,103    30    —    1,676    30    — 
Municipal   —    —    —    —    —    —    —    —    — 
Consumer   68    —    —    —    —    —    —    —    — 
Loans receivable, gross  $115,898   $3,599   $2,488   $1,103   $1,004   $2,751   $7,346   $395   $3,359 

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 30, 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 30, 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 nine months ended September 30, 2016 and 2015 had the loans been current in accordance with their original terms totaled $666,000 and $609,000, respectively.

16
 

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

Business Activities Loans

   Nine months ended
   September 30, 2016  September 30, 2015
  (in thousands)  Quantity 

Pre-

modification balance

 

Post-

modification balance

  Quantity 

Pre-

modification balance

 

Post-

modification balance

Residential real estate   4   $683   $683    2   $923   $923 
Commercial real estate   2    2,123    2,123    1    294    294 
Home equity lines of credit   —    —    —    1    35    35 
Troubled debt restructurings   6   $2,806   $2,806    4    1,252    1,252 
Rate reduction and term extension   1   $174   $174    1   $294   $294 
Interest only and term extension   —    —    —    —    —    — 
Debt consolidation   1    1,863    1,863    —    —    — 
Debt consolidation and term extension   1    260    260    —    —    — 
Note bifurcation   —    —    —    1    48    48 
Term extension   3    509    509    2    910    910 
Troubled debt restructurings   6   $2,806   $2,806    4    1,252    1,252 

Acquired Loans

   Nine months ended
   September 30, 2016  September 30, 2015
  (in thousands)  Quantity 

Pre-

modification balance

 

Post-

modification balance

  Quantity 

Pre-

modification balance

 

Post-

modification balance

Residential real estate   1   $88   $88    —   $—   $— 
Commercial real estate   —    —    —    1    184    184 
Home equity lines of credit   —    —    —    —    —    — 
Troubled debt restructurings   1   $88   $88    1   $184   $184 
Rate reduction and term extension   1   $88   $88    1   $184   $184 
Interest only and term extension   —    —    —    —    —    — 
Interest only   —    —    —    —    —    — 
Debt consolidation and term extension   —    —    —    —    —    — 
Term extension   —    —    —    —    —    — 
Troubled debt restructurings   1   $88   $88    1   $184   $184 

Seven loans were modified in troubled debt restructurings during 2016, one of which was past due at September 30, 2016.

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

As of September 30, 2016, the Bank had $2,793,000 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 September 30, 2016  Three months ended September 30, 2016
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,248   $224   $(155)  $8   $2,325   $69   $5   $—   $—   $74 
Commercial   1,734    29    (1)   —    1,762    134    37    —    —    171 
Land   166    82    (42)   —    206    —    —    —    —    — 
Real estate   4,148    335    (198)   8    4,293    203    42    —    —    245 
Commercial and industrial   851    (16)   (2)   25    858    37    (11)   —    8    34 
Municipal   56    (3)   —    —    53    —    —    —    —    — 
Consumer   89    17    (17)   5    94    —    —    —    —    — 
Unallocated   334    (19)   —    —    315    —    —    —    —    — 
Totals  $5,478   $314   $(217)  $38   $5,613   $240   $31   $—   $8   $279 
   Business Activities Loans  Acquired Loans
  (in thousands)  Nine months ended September 30, 2016  Nine months ended September 30, 2016
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,477   $370   $(550)  $28   $2,325   $79   $(5)  $—   $—   $74 
Commercial   1,466    332    (37)   1    1,762    132    133    (98)   4    171 
Land   188    106    (88)   —    206    —    —    —    —    — 
Real estate   4,131    808    (675)   29    4,293    211    128    (98)   4    245 
Commercial and industrial   683    167    (32)   40    858    24    403    (416)   23    34 
Municipal   61    (8)   —    —    53    —    —    —    —    — 
Consumer   124    1    (46)   15    94    —    —    —    —    — 
Unallocated   482    (167)   —    —    315    —    —    —    —    — 
Totals  $5,481   $801   $(753)  $84   $5,613   $235   $531   $(514)  $27   $279 
   Business Activities Loans  Acquired Loans
  (in thousands)  Three months ended September 30, 2015  Three months ended September 30, 2015
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,147   $632   $(92)  $111   $2,798   $15   $55   $—   $—   $70 
Commercial   1,339    (102)   (10)   —    1,227    77    81    —    5    163 
Land   182    168    (72)   —    278    —    —    —    —    — 
Real estate   3,668    698    (174)   111    4,303    92    136    —    5    233 
Commercial and industrial   691    (197)   —    4    498    52    (22)   —    10    40 
Municipal   64    (16)   —    —    48    —    —    —    —    — 
Consumer   123    1    (17)   6    113    —    —    —    —    — 
Unallocated   369    55    —    —    424    —    —    —    —    — 
Totals  $4,915   $541   $(191)  $121   $5,386   $144   $114   $—   $15   $273 
   Business Activities Loans  Acquired Loans
  (in thousands)  Nine months ended September 30, 2015  Nine months ended September 30, 2015
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,306   $952   $(573)  $113   $2,798   $—   $70   $—   $—   $70 
Commercial   1,697    (256)   (214)   —    1,227    7    151    —    5    163 
Land   164    186    (72)   —    278    —    —    —    —    — 
Real estate   4,167    882    (859)   113    4,303    7    221    —    5    233 
Commercial and industrial   583    (484)   (56)   455    498    14    —    —    26    40 
Municipal   61    (13)   —    —    48    —    —    —    —    — 
Consumer   117    30    (47)   13    113    —    —    —    —    — 
Unallocated   409    15    —    —    424    —    —    —    —    — 
Totals  $5,337   $430   $(962)  $581   $5,386   $21   $221   $—   $31   $273 

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 
September 30, 2016                              
Residential 1-4 family  $280,711   $1,698   $5,952   $147   $286,663   $1,845 
Residential 5+ multifamily   5,860    54    1,830    —    7,690    54 
Construction of residential 1-4 family   9,824    85    —    —    9,824    85 
Home equity lines of credit   34,674    324    796    17    35,470    341 
Residential real estate   331,069    2,161    8,578    164    339,647    2,325 
Commercial   158,185    1,646    4,417    69    162,602    1,715 
Construction of commercial   3,949    48    117    —    4,066    48 
Commercial real estate   162,134    1,694    4,534    69    166,668    1,763 
Farm land   3,025    27    1,008    9    4,033    36 
Vacant land   5,589    166    241    4    5,830    170 
Real estate secured   501,817    4,048    14,361    246    516,178    4,294 
Commercial and industrial   101,063    853    83    4    101,146    857 
Municipal   8,475    53    —    —    8,475    53 
Consumer   5,593    94    —    —    5,593    94 
Unallocated allowance   —    315    —    —    —    315 
Totals  $616,948   $5,363   $14,444   $250   $631,392   $5,613 

Acquired Loans

(in thousands)  Collectively evaluated  Individually evaluated  ASC 310-30 loans   Total portfolio 
    Loans    Allowance    Loans    Allowance    Loans    Allowance    Loans    Allowance 
September 30, 2016                                        
Residential 1-4 family  $6,244   $—   $779   $74   $—   $—   $7,023   $74 
Residential 5+ multifamily   5,741    —    123    —    —    —    5,864    — 
Construction of residential 1-4 family   —    —    —    —    —    —    —    — 
Home equity lines of credit   —    —    —    —    —    —    —    — 
Residential real estate   11,985    —    902    74    —    —    12,887    74 
Commercial   74,858    22    2,955    82    3,928    64    81,741    168 
Construction of commercial   1,881    3    258    —    —    —    2,139    3 
Commercial real estate   76,739    25    3,213    82    3,928    64    83,880    171 
Farm land   —    —    —    —    —    —    —    — 
Vacant land   —    —    —    —    —    —    —    — 
Real estate secured   88,724    25    4,115    156    3,928    64    96,767    245 
Commercial and industrial   29,676    26    —    —    332    8    30,008    34 
Municipal   —    —    —    —    —    —    —    — 
Consumer   52    —    —    —    16    —    68    — 
Unallocated allowance   —    —    —    —    —    —    —    — 
Totals  $118,452   $51   $4,115   $156   $4,276   $72   $126,843   $279 

 

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

  September 30, 2016 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $612,039   $4,849   $—   $—   $612,039   $4,849 
Potential problem loans   4,909    200    —    —    4,909    200 
Impaired loans   —    —    14,444    250    14,444    250 
Unallocated allowance   —    315    —    —    —    315 
Totals  $616,948   $5,364   $14,444   $250   $631,392   $5,614 

Acquired Loans

  September 30, 2016 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $120,106   $70   $—   $—   $120,106   $70 
Potential problem loans   2,622    53    —    —    2,622    53 
Impaired loans   —    —    4,115    156    4,115    156 
Totals  $122,728   $123   $4,115   $156   $126,843   $279 

Business Activities Loans

  December 30, 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 30, 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 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:

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 
September 30, 2016                                             
Residential  $5,530   $6,080   $6,418   $147   $72   $2,252   $2,409   $2,683   $69 
Home equity lines of credit   410    436    463    17    1    386    419    346    5 
Residential real estate   5,940    6,516    6,881    164    73    2,638    2,828    3,029    74 
Commercial   3,568    3,958    3,393    69    73    849    1,106    996    17 
Construction of commercial   —    —    72    —    —    117    123    47    5 
Farm land   723    784    440    9    —    286    358    580    — 
Vacant land   46    46    2,305    4    2    195    232    201    8 
Real estate secured   10,277    11,304    13,091    246    148    4,085    4,647    4,853    104 
Commercial and industrial   4    4    40    4    —    78    106    217    2 
Consumer   —    —    —    —    —    —    —    8    — 
Totals  $10,281   $11,308   $13,131   $250   $148   $4,163   $4,753   $5,078   $106 

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    Note    Average    recognized 
September 30, 2016                                             
Residential 1-4 family  $779   $893   $637   $74   $3   $123   $123   $267   $— 
Home equity lines of credit   —    —    —    —