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, 2018
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” , and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☑ Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 8, 2018 is 2,804,881.
TABLE OF CONTENTS
| Page | |||||
| PART I. FINANCIAL INFORMATION | |||||
| Item 1. | Financial Statements (unaudited) | ||||
| CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2018 (unaudited) and DECEMBER 31, 2017 | 3 | ||||
| CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (unaudited) | 4 | ||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (unaudited) | 5 | ||||
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 ( unaudited) | 5 | ||||
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (unaudited) |
6 | ||||
| NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS | 8 | ||||
| Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 27 | |||
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 46 | |||
| Item 4. | CONTROLS AND PROCEDURES | 47 | |||
| PART II. OTHER INFORMATION | |||||
| Item 1. | LEGAL PROCEEDINGS | 48 | |||
| Item 1A. | RISK FACTORS | 48 | |||
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 48 | |||
| Item 3. | DEFAULTS UPON SENIOR SECURITIES | 48 | |||
| Item 4. | MINE SAFETY DISCLOSURES | 48 | |||
| Item 5. | OTHER INFORMATION | 48 | |||
| Item 6. | EXHIBITS | 48 | |||
| SIGNATURES | 49 | ||||
| 2 |
PART I - FINANCIAL INFORMATION
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS (unaudited)
| (dollars in thousands, except share data) | September 30, 2018 | December 31, 2017 | ||||||
| ASSETS | (unaudited) | |||||||
| Cash and due from banks | $ | 5,860 | $ | 9,357 | ||||
| Interest bearing demand deposits with other banks | 36,360 | 39,129 | ||||||
| Total cash and cash equivalents | 42,220 | 48,486 | ||||||
| Securities | ||||||||
| Available-for-sale at fair value | 95,780 | 78,212 | ||||||
| CRA mutual fund | 823 | 835 | ||||||
| Federal Home Loan Bank of Boston stock at cost | 4,988 | 3,813 | ||||||
| Loans held-for-sale | 589 | 669 | ||||||
| Loans receivable, net (allowance for loan losses: $7,745 and $6,776) | 898,625 | 801,703 | ||||||
| Other real estate owned | 340 | 719 | ||||||
| Bank premises and equipment, net | 18,494 | 16,401 | ||||||
| Goodwill | 13,815 | 13,815 | ||||||
| Intangible assets (net of accumulated amortization: $4,390 and $4,043) | 1,490 | 1,837 | ||||||
| Accrued interest receivable | 3,317 | 2,665 | ||||||
| Cash surrender value of life insurance policies | 14,627 | 14,381 | ||||||
| Deferred taxes | 1,454 | 677 | ||||||
| Other assets | 2,153 | 2,771 | ||||||
| Total Assets | $ | 1,098,715 | $ | 986,984 | ||||
| LIABILITIES and SHAREHOLDERS' EQUITY | ||||||||
| Deposits | ||||||||
| Demand (non-interest bearing) | $ | 233,935 | $ | 220,536 | ||||
| Demand (interest bearing) | 151,830 | 142,575 | ||||||
| Money market | 202,308 | 190,953 | ||||||
| Savings and other | 176,415 | 144,600 | ||||||
| Certificates of deposit | 137,673 | 116,831 | ||||||
| Total deposits | 902,161 | 815,495 | ||||||
| Repurchase agreements | 6,658 | 1,668 | ||||||
| Federal Home Loan Bank of Boston advances | 67,596 | 54,422 | ||||||
| Subordinated debt | 9,829 | 9,811 | ||||||
| Note payable | 289 | 313 | ||||||
| Capital lease liability | 3,114 | 1,835 | ||||||
| Accrued interest and other liabilities | 8,301 | 5,926 | ||||||
| Total Liabilities | 997,948 | 889,470 | ||||||
| Shareholders' Equity | ||||||||
| Common stock - $0.10 per share par value | ||||||||
| Authorized: 5,000,000; | ||||||||
| Issued: 2,885,788 and 2,872,578 at September 30, 2018 and December 31, 2017, respectively | ||||||||
| Outstanding: 2,804,881 and 2,785,216 | 280 | 279 | ||||||
| Unearned compensation - restricted stock awards | (857 | ) | (606 | ) | ||||
| Paid-in capital | 43,757 | 42,998 | ||||||
| Retained earnings | 58,561 | 54,664 | ||||||
| Accumulated other comprehensive (loss) income, net | (974 | ) | 179 | |||||
| Total Shareholders' Equity | 100,767 | 97,514 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 1,098,715 | $ | 986,984 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 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 data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Interest and dividend income | ||||||||||||||||
| Interest and fees on loans | $ | 9,570 | $ | 8,196 | $ | 27,226 | $ | 24,544 | ||||||||
| Interest on debt securities | ||||||||||||||||
| Taxable | 596 | 443 | 1,588 | 1,115 | ||||||||||||
| Tax exempt | 28 | 68 | 89 | 345 | ||||||||||||
| Other interest and dividends | 322 | 175 | 662 | 351 | ||||||||||||
| Total interest and dividend income | 10,516 | 8,882 | 29,565 | 26,355 | ||||||||||||
| Interest expense | ||||||||||||||||
| Deposits | 1,323 | 682 | 3,098 | 1,776 | ||||||||||||
| Repurchase agreements | 4 | 2 | 6 | 4 | ||||||||||||
| Capital lease | 48 | 29 | 130 | 66 | ||||||||||||
| Note payable | 4 | 6 | 14 | 13 | ||||||||||||
| Subordinated debt | 156 | 156 | 468 | 468 | ||||||||||||
| Federal Home Loan Bank of Boston advances | 481 | 241 | 1,314 | 769 | ||||||||||||
| Total interest expense | 2,016 | 1,116 | 5,030 | 3,096 | ||||||||||||
| Net interest and dividend income | 8,500 | 7,766 | 24,535 | 23,259 | ||||||||||||
| Provision for loan losses | 378 | 237 | 1,171 | 953 | ||||||||||||
| Net interest and dividend income after provision for loan losses | 8,122 | 7,529 | 23,364 | 22,306 | ||||||||||||
| Non-interest income | ||||||||||||||||
| Trust and wealth advisory | 936 | 874 | 2,779 | 2,620 | ||||||||||||
| Service charges and fees | 932 | 935 | 2,693 | 2,799 | ||||||||||||
| Gains on sales of mortgage loans, net | 21 | 25 | 38 | 104 | ||||||||||||
| Mortgage servicing, net | 84 | 104 | 251 | 180 | ||||||||||||
| Losses on CRA mutual fund | (6 | ) | — | (26 | ) | — | ||||||||||
| Gain(Losses) on available-for-sale securities, net | — | — | 16 | (14 | ) | |||||||||||
| Other | 121 | 142 | 370 | 365 | ||||||||||||
| Total non-interest income | 2,088 | 2,080 | 6,121 | 6,054 | ||||||||||||
| Non-interest expense | ||||||||||||||||
| Salaries | 3,078 | 2,829 | 8,864 | 8,266 | ||||||||||||
| Employee benefits | 1,065 | 1,004 | 3,192 | 2,923 | ||||||||||||
| Premises and equipment | 1,036 | 995 | 3,161 | 2,797 | ||||||||||||
| Data processing | 519 | 545 | 1,561 | 1,521 | ||||||||||||
| Professional fees | 496 | 481 | 1,725 | 1,962 | ||||||||||||
| OREO gains, (losses) and (write-downs) | 38 | 218 | 91 | 362 | ||||||||||||
| Collections and other real estate owned | 116 | 201 | 432 | 513 | ||||||||||||
| FDIC insurance | 141 | 106 | 394 | 354 | ||||||||||||
| Marketing and community support | 167 | 220 | 630 | 623 | ||||||||||||
| Amortization of intangibles | 111 | 142 | 347 | 395 | ||||||||||||
| Other | 562 | 479 | 1,528 | 1,561 | ||||||||||||
| Total non-interest expense | 7,329 | 7,220 | 21,925 | 21,277 | ||||||||||||
| Income before income taxes | 2,881 | 2,389 | 7,560 | 7,083 | ||||||||||||
| Income tax provision | 537 | 695 | 1,301 | 1,903 | ||||||||||||
| Net income | $ | 2,344 | $ | 1,694 | $ | 6,259 | $ | 5,180 | ||||||||
| Net income available to common stock | $ | 2,311 | $ | 1,678 | $ | 6,185 | $ | 5,139 | ||||||||
| Basic earnings per common share | $ | 0.84 | $ | 0.61 | $ | 2.24 | $ | 1.87 | ||||||||
| Weighted average common shares outstanding, to calculate basic earnings per share | 2,764 | 2,759 | 2,762 | 2,755 | ||||||||||||
| Diluted earnings per common share | $ | 0.83 | $ | 0.60 | $ | 2.23 | $ | 1.85 | ||||||||
| Weighted average common shares outstanding, to calculate diluted earnings per share | 2,779 | 2,779 | 2,780 | 2,774 | ||||||||||||
| Common dividends per share | $ | 0.28 | $ | 0.28 | $ | 0.84 | $ | 0.84 | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| Periods ended September 30, (in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Net income | $ | 2,344 | $ | 1,694 | $ | 6,259 | $ | 5,180 | ||||||||
| Other comprehensive (loss) income | ||||||||||||||||
| Net unrealized (losses) gains on securities available-for-sale | (162 | ) | (16 | ) | (1,475 | ) | 106 | |||||||||
| Reclassification of net realized (gains) losses and write-downs in net income (1) | — | — | (16 | ) | 14 | |||||||||||
| Unrealized (losses) gains on securities available-for-sale | (162 | ) | (16 | ) | (1,491 | ) | 120 | |||||||||
| Income tax benefit (expense) | 34 | 5 | 322 | (41 | ) | |||||||||||
| Other comprehensive (loss) income | (128 | ) | (11 | ) | (1,169 | ) | 79 | |||||||||
| Comprehensive income | $ | 2,216 | $ | 1,683 | $ | 5,090 | $ | 5,259 | ||||||||
(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. The net tax effect for the nine months ending September 30, 2018 and 2017 are ($3) thousand and $5 thousand, respectively.
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) Nine months ended September 30, 2018 and 2017
| (dollars in thousands) | Common Stock | Paid-in | Retained | Unearned compensation restricted stock | Accumulated other comp- rehensive | Total shareholders' | ||||||||||||||||||||||
| Shares | Amount | capital | earnings | awards | income (loss) | equity | ||||||||||||||||||||||
| Balances at December 31, 2016 | 2,758,086 | $ | 276 | $ | 42,085 | $ | 51,521 | $ | (352 | ) | $ | 477 | $ | 94,007 | ||||||||||||||
| Net income for period | — | — | — | 5,180 | — | — | 5,180 | |||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 79 | 79 | |||||||||||||||||||||
| Common stock dividends declared | — | — | — | (2,333 | ) | — | — | (2,333 | ) | |||||||||||||||||||
| Stock options exercised | 12,150 | 1 | 311 | — | — | — | 312 | |||||||||||||||||||||
| Issuance of restricted common stock | 11,800 | 2 | 426 | — | (428 | ) | — | — | ||||||||||||||||||||
| Forfeiture of restricted common stock | (200 | ) | — | (3 | ) | — | 3 | — | — | |||||||||||||||||||
| Issuance of vested common stock for directors | 2,056 | — | 81 | — | — | — | 81 | |||||||||||||||||||||
| Issuance of director’s restricted stock awards | 2,024 | — | 83 | — | (83 | ) | — | — | ||||||||||||||||||||
| Stock based compensation-restricted stock awards | — | — | — | — | 200 | — | 200 | |||||||||||||||||||||
| Balances at September 30, 2017 | 2,785,916 | $ | 279 | $ | 42,983 | $ | 54,368 | $ | (660 | ) | $ | 556 | $ | 97,526 | ||||||||||||||
| Balances at December 31, 2017 | 2,785,216 | $ | 279 | $ | 42,998 | $ | 54,664 | $ | (606 | ) | $ | 179 | $ | 97,514 | ||||||||||||||
| Net income for period | — | — | — | 6,259 | — | — | 6,259 | |||||||||||||||||||||
| Adoption of ASU 2016-01 | — | — | — | (16 | ) | — | 16 | — | ||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (1,169 | ) | (1,169 | ) | ||||||||||||||||||||
| Common stock dividends declared | — | — | — | (2,346 | ) | — | — | (2,346 | ) | |||||||||||||||||||
| Stock options exercised | 6,455 | — | 175 | — | — | — | 175 | |||||||||||||||||||||
| Issuance of restricted common stock | 9,250 | 1 | 409 | — | (410 | ) | — | — | ||||||||||||||||||||
| Issuance of director’s restricted stock awards | 3,960 | — | 175 | — | (175 | ) | — | — | ||||||||||||||||||||
| Stock based compensation-restricted stock awards | — | — | — | — | 334 | — | 334 | |||||||||||||||||||||
| Balances at September 30, 2018 | 2,804,881 | $ | 280 | $ | 43,757 | $ | 58,561 | $ | (857 | ) | $ | (974 | ) | $ | 100,767 | |||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| Nine months ended September 30, (in thousands) | 2018 | 2017 | ||||||
| Operating Activities | ||||||||
| Net income | $ | 6,259 | $ | 5,180 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
| (Accretion), amortization and depreciation | ||||||||
| Securities | 32 | 116 | ||||||
| Bank premises and equipment | 1,249 | 979 | ||||||
| Core deposit intangible | 347 | 395 | ||||||
| Modification fees on Federal Home Loan Bank of Boston advances | 174 | 176 | ||||||
| Subordinated debt issuance costs | 18 | 17 | ||||||
| Mortgage servicing rights | 34 | 149 | ||||||
| Fair value adjustment on loans | (658 | ) | (969 | ) | ||||
| Fair value adjustment on deposits | (30 | ) | (64 | ) | ||||
| (Gains) and losses, including write-downs | ||||||||
| Sales and calls of securities available-for-sale, net | (16 | ) | 14 | |||||
| CRA Mutual Fund | 26 | — | ||||||
| Sales of loans, excluding capitalized servicing rights | (28 | ) | (79 | ) | ||||
| Other real estate owned | 91 | 395 | ||||||
| Sales/disposals of premises and equipment | 1 | 1 | ||||||
| Provision for loan losses | 1,171 | 953 | ||||||
| Proceeds from loans sold | 1,946 | 4,495 | ||||||
| Loans originated for sale | (1,838 | ) | (4,977 | ) | ||||
| Increase in deferred loan origination fees and costs, net | (179 | ) | (38 | ) | ||||
| Mortgage servicing rights originated | (18 | ) | (53 | ) | ||||
| (Decrease) increase in mortgage servicing rights impairment reserve | — | (24 | ) | |||||
| Increase in interest receivable | (647 | ) | (84 | ) | ||||
| Deferred tax benefit | (471 | ) | — | |||||
| Increase in prepaid expenses | (167 | ) | (59 | ) | ||||
| Increase in cash surrender value of life insurance policies | (246 | ) | (259 | ) | ||||
| Decrease in income tax receivable | 839 | 43 | ||||||
| (Increase) decrease in other assets | (48 | ) | 920 | |||||
| Increase (decrease) in accrued expenses | 496 | (384 | ) | |||||
| Increase in interest payable | 283 | 157 | ||||||
| Increase (decrease) in other liabilities | 1,596 | (16 | ) | |||||
| Stock based compensation-restricted stock awards | 334 | 200 | ||||||
| Net cash provided by operating activities | 10,550 | 7,184 | ||||||
| Investing Activities | ||||||||
| (Purchases) redemption of Federal Home Loan Bank of Boston stock | (1,175 | ) | 173 | |||||
| Purchases of securities available-for-sale | (40,035 | ) | (36,654 | ) | ||||
| Proceeds from sales of securities available-for-sale | 8,410 | — | ||||||
| Proceeds from calls of securities available-for-sale | 995 | 11,141 | ||||||
| Proceeds from maturities of securities available-for-sale | 11,554 | 19,618 | ||||||
| Reinvestment of CRA Mutual Fund | (14 | ) | — | |||||
| Loan originations and principal collections, net | (89,457 | ) | (14,776 | ) | ||||
| Recoveries of loans previously charged off | 50 | 232 | ||||||
| Proceeds from sales of other real estate owned | 288 | 177 | ||||||
| Capital expenditures | (1,209 | ) | (1,306 | ) | ||||
| Cash and cash equivalents (paid) acquired from acquisition | (298 | ) | 22,387 | |||||
| Net cash (used by) provided by investing activities | (110,891 | ) | 992 | |||||
| Financing Activities | ||||||||
| Increase in deposit transaction accounts, net | 57,502 | 18,714 | ||||||
| Increase in time deposits, net | 20,872 | 136 | ||||||
| Increase (decrease) in securities sold under agreements to repurchase, net | 4,990 | (1,006 | ) | |||||
| Federal Home Loan Bank of Boston advances | 82,000 | — | ||||||
| Principal payments on Federal Home Loan Bank of Boston advances | (69,000 | ) | (10,000 | ) | ||||
| Principal payments on note payable | (24 | ) | (23 | ) | ||||
| Decrease in capital lease obligation | (94 | ) | (139 | ) | ||||
| Proceeds from exercise of stock options | 175 | 312 | ||||||
| Issuance of shares for directors’ fees | — | 81 | ||||||
| Common stock dividends paid | (2,346 | ) | (2,333 | ) | ||||
| Net cash provided by financing activities | 94,075 | 5,742 | ||||||
| Net (decrease) increase in cash and cash equivalents | (6,266 | ) | 13,918 | |||||
| Cash and cash equivalents, beginning of period | 48,486 | 35,485 | ||||||
| Cash and cash equivalents, end of period | $ | 42,220 | $ | 49,403 | ||||
| The accompanying notes are an integral part of these unaudited consolidated financial statements. | ||||||||
| 6 |
| Salisbury Bancorp, Inc. and Subsidiary | ||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | ||||||||
| Supplemental Cash Flow Information: | ||||||||
| Cash paid for interest | $ | 4,585 | $ | 2,810 | ||||
| Cash paid for income taxes | 665 | 1,958 | ||||||
| Non-cash investing and financing activity: | ||||||||
| Transfers from loans to other real estate owned | — | 743 | ||||||
| Assets acquired under capital lease | 1,373 | — | ||||||
| Adoption of ASU 2016-01 | 16 | — | ||||||
| Branch Acquisitions (1) | ||||||||
| Cash and cash equivalents (paid) acquired | (298 | ) | 22,387 | |||||
| Net loans acquired | 7,849 | 7,097 | ||||||
| Fixed assets acquired (including capital leases) | 761 | 1,605 | ||||||
| Accrued interest receivable acquired | 5 | 12 | ||||||
| Other assets acquired | 5 | 20 | ||||||
| Core deposit intangible | — | 632 | ||||||
| Goodwill | — | 1,263 | ||||||
| Deposits assumed | 8,322 | 31,433 | ||||||
| Capital lease assumed | — | 1,580 | ||||||
| Other liabilities assumed | — | 3 |
| (1) | Includes branch acquisitions of Empire State Bank’s New Paltz, New York Branch in 2017 and Orange Bank & Trust Company’s Fishkill, New York Branch in 2018. |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 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, changes in 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, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2017 Annual Report on Form 10-K for the year ended December 31, 2017.
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 May 2014, August 2015, May 2016, and December 2016, respectively, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, 2015-14, 2016-12, and 2016-20, “Revenue from Contracts with Customers (Topic 606).” The objective of ASU 2014-09 is to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Bank completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, and merchant income. Salisbury’s revenue recognition policies conformed to Topic 606. As a result, no changes were required to be made to prior period financial statements due to the adoption of this ASU and no changes in revenue recognition were required in the three and nine month periods ending September 30, 2018.
In January 2016, the FASB issued ASU 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 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Salisbury adopted the provisions of this ASU effective January 1, 2018. Adoption of this ASU did not have a material impact on Salisbury’s financial statements. In accordance with (5) above, Salisbury measured the fair value of its loan portfolio as of September 30, 2018 using an exit price notion (see note 10).
| 8 |
In February 2016, the FASB issued ASU 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 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 does not expect ASU 2016-02 to have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 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. Salisbury has opted to recognize forfeitures as they occur as the impact is not expected to be material. Salisbury adopted ASU 2016-09 as of January 1, 2017. Adoption contributed a $105 thousand benefit to the tax provision in the second quarter 2017 and did not have a material effect on the financial results for the twelve month period ended December 31, 2017.
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 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 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 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those years. Entities are 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. Salisbury adopted ASU 2016-15 on January 1, 2018. ASU 2016-15 did not have a material impact on Salisbury’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business." This ASU is intended to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide a screen to determine when a set of inputs, processes, and outputs is not a business. ASU 2017-01 is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance, or for transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. Entities should apply the guidance prospectively on or after the effective date. Salisbury adopted ASU 2017-01 on January 1, 2018. ASU 2017-01 did not impact Salisbury’s Consolidated Financial Statements.
| 9 |
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU is intended to allow companies to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The FASB is researching whether similar amendments should be considered for other entities, including public business entities. ASU 2017-04 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019 and interim periods within those years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Entities should apply the guidance prospectively. Salisbury is currently evaluating the provisions of ASU 2017-04 to determine the potential impact the new standard will have on Salisbury’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This ASU will amend the amortization period for certain purchased callable debt securities held at a premium. The Board is shortening the amortization period for the premium to the earliest call date. Under current generally accepted accounting principles, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. Entities should apply the guidance on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Salisbury is currently evaluating the provisions of ASU 2017-08 and does not expect that the adoption of the new standard will have a material impact on Salisbury’s Consolidated Financial Statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU provides clarity in the accounting guidance regarding a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Entities should apply the guidance prospectively to an award modified on or after the adoption date. Salisbury adopted ASU 2017-09 on January 1, 2018. ASU 2017-09 did not impact Salisbury’s Consolidated Financial Statements.
| 10 |
NOTE 2 - SECURITIES
The composition of securities is as follows:
| (in thousands) | Amortized cost basis (1) | Gross un-realized gains | Gross un-realized losses | Fair value | ||||||||||||
| September 30, 2018 | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| U.S. Government Agency notes | $ | 4,991 | $ | — | $ | 28 | $ | 4,963 | ||||||||
| Municipal bonds | 5,392 | 5 | 7 | 5,390 | ||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. Government agencies and U.S. Government- sponsored enterprises | 34,845 | 21 | 467 | 34,399 | ||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| U.S. Government agencies | 18,255 | 1 | 404 | 17,852 | ||||||||||||
| Non-agency | 1,423 | 395 | 21 | 1,797 | ||||||||||||
| SBA bonds | 28,607 | — | 757 | 27,850 | ||||||||||||
| Corporate bonds | 3,500 | 29 | — | 3,529 | ||||||||||||
| Total securities available-for-sale | $ | 97,013 | $ | 451 | $ | 1,684 | $ | 95,780 | ||||||||
| CRA mutual fund | $ | 823 | $ | — | $ | — | $ | 823 | ||||||||
| Non-marketable securities | ||||||||||||||||
| Federal Home Loan Bank of Boston stock | $ | 4,988 | $ | — | $ | — | $ | 4,988 | ||||||||
| (in thousands) | Amortized cost basis (1) | Gross un-realized gains | Gross un-realized losses | Fair value | ||||||||||||
| December 31, 2017 | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| Municipal bonds | $ | 3,476 | $ | 11 | $ | 1 | $ | 3,486 | ||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. Government agencies and U.S. Government- sponsored enterprises | 45,983 | 152 | 267 | 45,868 | ||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| U.S. Government agencies | 10,462 | 2 | 87 | 10,377 | ||||||||||||
| Non-agency | 2,271 | 410 | 17 | 2,664 | ||||||||||||
| SBA bonds | 12,278 | 9 | 20 | 12,267 | ||||||||||||
| Corporate bonds | 3,500 | 59 | 9 | 3,550 | ||||||||||||
| Total securities available-for-sale | $ | 77,970 | $ | 643 | $ | 401 | $ | 78,212 | ||||||||
| CRA mutual fund | $ | 835 | $ | — | $ | — | $ | 835 | ||||||||
| Non-marketable securities | ||||||||||||||||
| Federal Home Loan Bank of Boston stock | $ | 3,813 | $ | — | $ | — | $ | 3,813 |
| (1) | Net of other-than-temporary impairment write-downs recognized in earnings. |
Salisbury sold $8.4 million in securities available-for-sale during the nine month period ended September 30, 2018 realizing a pre-tax gain of $16 thousand and related tax expense of $3 thousand. Salisbury did not sell any available-for-sale securities during the three month period ended September 30, 2018 or the nine month period ended September 30, 2017.
| 11 |
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 (loss), the aggregate fair value and gross unrealized loss of securities that have been in a continuous unrealized loss position as of the dates presented:
| September 30, 2018 (in thousands) | Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||||
| U.S. Government Agency notes | $ | 4,963 | $ | 28 | $ | — | $ | — | $ | 4,963 | $ | 28 | |||||||||||||
| Municipal bonds | 1,674 | 7 | — | — | 1,674 | 7 | |||||||||||||||||||
| Mortgage-backed securities | 12,694 | 210 | 19,584 | 257 | 32,278 | 467 | |||||||||||||||||||
| Collateralized mortgage obligations: | |||||||||||||||||||||||||
| U.S. Government Agencies | 13,546 | 225 | 3,949 | 179 | 17,495 | 404 | |||||||||||||||||||
| Non-agency | 94 | 4 | — | — | 94 | 4 | |||||||||||||||||||
| SBA bonds | 25,346 | 643 | 2,428 | 114 | 27,774 | 757 | |||||||||||||||||||
| Total -temporarily impaired securities | $ | 58,317 | $ | 1,117 | $ | 25,961 | $ | 550 | $ | 84,278 | $ | 1,667 | |||||||||||||
| Other-than-temporarily impaired securities | |||||||||||||||||||||||||
| Collateralized mortgage obligations | |||||||||||||||||||||||||
| Non-agency | — | — | 75 | 17 | 75 | 17 | |||||||||||||||||||
| Total temporarily impaired and other-than-temporarily impaired securities | $ | 58,317 | $ | 1,117 | $ | 26,036 | $ | 567 | $ | 84,343 | $ | 1,684 | |||||||||||||
| December 31, 2017 (in thousands) | Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||||
| Municipal bonds | $ | 479 | $ | 1 | $ | — | $ | — | $ | 479 | $ | 1 | |||||||||||||
| Mortgage-backed securities | 15,914 | 99 | 17,892 | 168 | 33,806 | 267 | |||||||||||||||||||
| Collateralized mortgage obligations | |||||||||||||||||||||||||
| U.S. Government Agencies | 9,317 | 87 | — | — | 9,317 | 87 | |||||||||||||||||||
| Non-agency | — | — | 77 | 3 | 77 | 3 | |||||||||||||||||||
| SBA bonds | 8,519 | 20 | — | — | 8,519 | 20 | |||||||||||||||||||
| Corporate bonds | 1,491 | 9 | — | — | 1,491 | 9 | |||||||||||||||||||
| Total temporarily impaired securities | 35,720 | 216 | 17,969 | 171 | 53,689 | 387 | |||||||||||||||||||
| Other-than-temporarily impaired securities | |||||||||||||||||||||||||
| Collateralized mortgage obligations | |||||||||||||||||||||||||
| Non-agency | 101 | 14 | — | — | 101 | 14 | |||||||||||||||||||
| Total temporarily impaired and other-than-temporarily impaired securities | $ | 35,821 | $ | 230 | $ | 17,969 | $ | 171 | $ | 53,790 | $ | 401 | |||||||||||||
The amortized cost, fair value and tax equivalent yield of securities, by maturity, are as follows:
| September 30, 2018 (in thousands) | Maturity | Amortized cost | Fair value | Yield(1) | ||||||||||
| U.S. Government agency notes | After 5 years but within 10 years | $ | 4,991 | $ | 4,963 | 3.59 | % | |||||||
| Total | 4,991 | 4,963 | 3.59 | |||||||||||
| Municipal bonds | Within 1 year | 347 | 347 | 2.37 | ||||||||||
| After 1 year but within 5 years | 137 | 137 | 2.78 | |||||||||||
| After 10 years but within 15 years | 4,373 | 4,374 | 4.55 | |||||||||||
| After 15 years | 535 | 532 | 3.35 | |||||||||||
| Total | 5,392 | 5,390 | 4.29 | |||||||||||
| Mortgage-backed securities | U.S. Government agency and U.S. Government-sponsored enterprises | 34,845 | 34,399 | 2.43 | ||||||||||
| Collateralized mortgage obligations | U.S. Government agency and U.S. Government-sponsored enterprises | 18,255 | 17,852 | 3.00 | ||||||||||
| Non-agency | 1,423 | 1,797 | 5.36 | |||||||||||
| SBA bonds | 28,607 | 27,850 | 3.06 | |||||||||||
| Corporate bonds | After 5 years but within 10 years | 3,500 | 3,529 | 5.57 | ||||||||||
| Securities available-for-sale | $ | 97,013 | $ | 95,780 | 3.05 | % | ||||||||
(1) Yield is based on amortized cost.
| 12 |
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, 2018.
U.S. Government agency notes: The contractual cash flows are guaranteed by U.S. government agencies. Two securities had unrealized losses at September 30, 2018, which approximated 0.57% of their amortized cost. 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 investments to be other-than-temporarily impaired at September 30, 2018.
Municipal bonds: Salisbury regularly monitors and analyzes its municipal bond portfolio for credit quality. Eight securities had unrealized losses at September 30, 2018, which approximated 0.44% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread 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 evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature and does not consider these investments to be other-than temporarily impaired at September 30, 2018.
U.S. Government agency mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Thirty-four securities had unrealized losses at September 30, 2018, which approximated 1.72% of their amortized cost. 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 investments to be other-than-temporarily impaired at September 30, 2018.
SBA bonds: The contractual cash flows are guaranteed by the U.S. government. Sixteen securities had unrealized losses at September 30, 2018, which approximated 2.65% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. 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. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2018.
Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at September 30, 2018, to assess whether any of the securities were OTTI. Four securities had unrealized losses at September 30, 2018, which approximated 11.20% of its amortized cost. 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 other non-agency CMO securities not to have additional OTTI and all other CMO securities not to be OTTI as of September 30, 2018. 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.
| 13 |
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) | 2018 | 2017 | ||||||
| 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, 2018. 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, 2018 | December 31, 2017 | |||||||
| (In thousands) | Total Loans | Total Loans | ||||||
| Residential 1-4 family | $ | 348,218 | $ | 317,639 | ||||
| Residential 5+ multifamily | 30,715 | 18,108 | ||||||
| Construction of residential 1-4 family | 13,125 | 11,197 | ||||||
| Home equity lines of credit | 34,863 | 33,771 | ||||||
| Residential real estate | 426,921 | 380,715 | ||||||
| Commercial | 280,640 | 249,311 | ||||||
| Construction of commercial | 10,685 | 9,988 | ||||||
| Commercial real estate | 291,325 | 259,299 | ||||||
| Farm land | 4,222 | 4,274 | ||||||
| Vacant land | 8,726 | 7,883 | ||||||
| Real estate secured | 731,194 | 652,171 | ||||||
| Commercial and industrial | 150,715 | 132,731 | ||||||
| Municipal | 18,388 | 17,494 | ||||||
| Consumer | 4,605 | 4,794 | ||||||
| Loans receivable, gross | 904,902 | 807,190 | ||||||
| Deferred loan origination fees and costs, net | 1,468 | 1,289 | ||||||
| Allowance for loan losses | (7,745 | ) | (6,776 | ) | ||||
| Loans receivable, net | $ | 898,625 | $ | 801,703 | ||||
| Loans held-for-sale | ||||||||
| Residential 1-4 family | $ | 589 | $ | 669 |
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.
| 14 |
Credit Quality
Salisbury uses credit risk ratings as part of its determination of the allowance for loan losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. The rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are pass ratings and 5 through 8 are criticized as defined by the regulatory agencies. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.
Loans rated as "special mention" possess credit deficiencies or potential weaknesses deserving management’s close attention that if left uncorrected may result in deterioration of the repayment prospects for the loans at some future date.
Loans rated as "substandard" are loans where the Bank’s position is clearly not protected adequately by borrower current net worth or payment capacity. These loans have well defined weaknesses based on objective evidence and include loans where future losses to the Bank may result if deficiencies are not corrected, and loans where the primary source of repayment such as income is diminished and the Bank must rely on sale of collateral or other secondary sources of collection.
Loans rated "doubtful" have the same weaknesses as substandard loans with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, to be highly improbable. The possibility of loss is high, but due to certain important and reasonably specific pending factors, which may work to strengthen the loan, its reclassification as an estimated loss is deferred until its exact status can be determined.
Loans classified as "loss" are considered uncollectible and of such little value that continuance as Bank assets is unwarranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this loan even though partial recovery may be made in the future.
Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank’s loan portfolio is examined periodically by its regulatory agencies, the FDIC and the Connecticut Department of Banking.
| 15 |
The composition of loans receivable by risk rating grade is as follows:
| (in thousands) | Pass | Special mention | Substandard | Doubtful | Loss | Total | ||||||||||||||||||
| September 30, 2018 | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 337,510 | $ | 4,330 | $ | 6,378 | $ | — | $ | — | $ | 348,218 | ||||||||||||
| Residential 5+ multifamily | 28,925 | 787 | 1,003 | — | — | 30,715 | ||||||||||||||||||
| Construction of residential 1-4 family | 13,125 | — | — | — | — | 13,125 | ||||||||||||||||||
| Home equity lines of credit | 34,039 | 311 | 513 | — | — | 34,863 | ||||||||||||||||||
| Residential real estate | 413,599 | 5,428 | 7,894 | — | — | 426,921 | ||||||||||||||||||
| Commercial | 266,678 | 3,195 | 10,767 | — | — | 280,640 | ||||||||||||||||||
| Construction of commercial | 10,324 | — | 361 | — | — | 10,685 | ||||||||||||||||||
| Commercial real estate | 277,002 | 3,195 | 11,128 | — | — | 291,325 | ||||||||||||||||||
| Farm land | 3,998 | — | 224 | — | — | 4,222 | ||||||||||||||||||
| Vacant land | 8,655 | 71 | — | — | — | 8,726 | ||||||||||||||||||
| Real estate secured | 703,254 | 8,694 | 19,246 | — | — | 731,194 | ||||||||||||||||||
| Commercial and industrial | 147,897 | 1,850 | 968 | — | — | 150,715 | ||||||||||||||||||
| Municipal | 18,388 | — | — | — | — | 18,388 | ||||||||||||||||||
| Consumer | 4,572 | 33 | — | — | — | 4,605 | ||||||||||||||||||
| Loans receivable, gross | $ | 874,111 | $ | 10,577 | $ | 20,214 | $ | — | $ | — | $ | 904,902 | ||||||||||||
| (in thousands) | Pass | Special mention | Substandard | Doubtful | Loss | Total | ||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 307,240 | $ | 6,452 | $ | 3,947 | $ | — | $ | — | $ | 317,639 | ||||||||||||
| Residential 5+ multifamily | 16,129 | 957 | 1,022 | — | — | 18,108 | ||||||||||||||||||
| Construction of residential 1-4 family | 11,197 | — | — | — | — | 11,197 | ||||||||||||||||||
| Home equity lines of credit | 32,891 | 710 | 170 | — | — | 33,771 | ||||||||||||||||||
| Residential real estate | 367,457 | 8,119 | 5,139 | — | — | 380,715 | ||||||||||||||||||
| Commercial | 232,492 | 4,456 | 12,363 | — | — | 249,311 | ||||||||||||||||||
| Construction of commercial | 9,622 | — | 366 | — | — | 9,988 | ||||||||||||||||||
| Commercial real estate | 242,114 | 4,456 | 12,729 | — | — | 259,299 | ||||||||||||||||||
| Farm land | 4,024 | — | 250 | — | — | 4,274 | ||||||||||||||||||
| Vacant land | 7,806 | 77 | — | — | — | 7,883 | ||||||||||||||||||
| Real estate secured | 621,401 | 12,652 | 18,118 | — | — | 652,171 | ||||||||||||||||||
| Commercial and industrial | 129,219 | 2,536 | 976 | — | — | 132,731 | ||||||||||||||||||
| Municipal | 17,494 | — | — | — | — | 17,494 | ||||||||||||||||||
| Consumer | 4,744 | 50 | — | — | — | 4,794 | ||||||||||||||||||
| Loans receivable, gross | $ | 772,858 | $ | 15,238 | $ | 19,094 | $ | — | $ | — | $ | 807,190 | ||||||||||||
| 16 |
The composition of loans receivable by delinquency status is as follows:
| Past due | ||||||||||||||||||||||||||||||||
| 180 | 30 | Accruing | ||||||||||||||||||||||||||||||
| (in thousands) | days | days | 90 days | |||||||||||||||||||||||||||||
| 30-59 | 60-89 | 90-179 | and | and | and | Non- | ||||||||||||||||||||||||||
| Current | days | days | days | over | over | over | accrual | |||||||||||||||||||||||||
| September 30, 2018 | ||||||||||||||||||||||||||||||||
| Residential 1-4 family | $ | 344,342 | $ | 909 | $ | 32 | $ | 1,511 | $ | 1,424 | $ | 3,876 | $ | — | $ | 3,599 | ||||||||||||||||
| Residential 5+ multifamily | 29,828 | 658 | — | 229 | — | 887 | — | 1,003 | ||||||||||||||||||||||||
| Construction of residential 1-4 family | 13,125 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Home equity lines of credit | 34,357 | 107 | 40 | — | 359 | 506 | — | 413 | ||||||||||||||||||||||||
| Residential real estate | 421,652 | 1,674 | 72 | 1,740 | 1,783 | 5,269 | — | 5,015 | ||||||||||||||||||||||||
| Commercial | 277,924 | 774 | 179 | — | 1,763 | 2,716 | — | 2,221 | ||||||||||||||||||||||||
| Construction of commercial | 10,428 | — | — | — | 257 | 257 | — | 257 | ||||||||||||||||||||||||
| Commercial real estate | 288,352 | 774 | 179 | — | 2,020 | 2,973 | — | 2,478 | ||||||||||||||||||||||||
| Farm land | 4,005 | 217 | — | — | — | 217 | — | 224 | ||||||||||||||||||||||||
| Vacant land | 8,726 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Real estate secured | 722,735 | 2,665 | 251 | 1,740 | 3,803 | 8,459 | — | 7,717 | ||||||||||||||||||||||||
| Commercial and industrial | 150,176 | 53 | 30 | 96 | 360 | 539 | 96 | 360 | ||||||||||||||||||||||||
| Municipal | 18,388 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Consumer | 4,584 | 11 | 10 | — | — | 21 | — | — | ||||||||||||||||||||||||
| Loans receivable, gross | $ | 895,883 | $ | 2,729 | $ | 291 | $ | 1,836 | $ | 4,163 | $ | 9,019 | $ | 96 | $ | 8,077 | ||||||||||||||||
| Past due | ||||||||||||||||||||||||||||||||
| 180 | 30 | Accruing | ||||||||||||||||||||||||||||||
| (in thousands) | days | days | 90 days | |||||||||||||||||||||||||||||
| 30-59 | 60-89 | 90-179 | and | and | and | Non- | ||||||||||||||||||||||||||
| Current | days | days | days | over | over | over | accrual | |||||||||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||||||||||||||
| Residential 1-4 family | $ | 314,798 | $ | 1,410 | $ | 165 | $ | 156 | $ | 1,110 | $ | 2,841 | $ | — | $ | 2,045 | ||||||||||||||||
| Residential 5+ multifamily | 18,108 | — | — | — | — | — | — | 151 | ||||||||||||||||||||||||
| Construction of residential 1-4 family | 11,197 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Home equity lines of credit | 33,219 | 75 | 477 | — | — | 552 | — | 66 | ||||||||||||||||||||||||
| Residential real estate | 377,322 | 1,485 | 642 | 156 | 1,110 | 3,393 | — | 2,262 | ||||||||||||||||||||||||
| Commercial | 244,869 | 1,888 | 758 | — | 1,796 | 4,442 | — | 3,364 | ||||||||||||||||||||||||
| Construction of commercial | 9,730 | — | — | — | 258 | 258 | — | 258 | ||||||||||||||||||||||||
| Commercial real estate | 254,599 | 1,888 | 758 | — | 2,054 | 4,700 | — | 3,622 | ||||||||||||||||||||||||
| Farm land | 4,032 | 242 | — | — | — | 242 | — | 250 | ||||||||||||||||||||||||
| Vacant land | 7,883 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Real estate secured | 643,836 | 3,615 | 1,400 | 156 | 3,164 | 8,335 | — | 6,134 | ||||||||||||||||||||||||
| Commercial and industrial | 131,991 | 131 | 218 | 391 | — | 740 | 31 | 470 | ||||||||||||||||||||||||
| Municipal | 17,494 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Consumer | 4,752 | 34 | 8 | — | — | 42 | — | — | ||||||||||||||||||||||||
| Loans receivable, gross | $ | 798,073 | $ | 3,780 | $ | 1,626 | $ | 547 | $ | 3,164 | $ | 9,117 | $ | 31 | $ | 6,604 | ||||||||||||||||
There were no troubled debt restructurings in the third quarter of 2018 or 2017. For the nine months ended September 2018, there was one troubled debt restructuring with a loan balance of $686 thousand and for the same period in 2017 there was one loan with a balance of $600 thousand.
| 17 |
Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
| Three months ended September 30, 2018 | Three months ended September 30, 2017 | |||||||||||||||||||||||||||||||||||||||
| (in thousands) | Beginning balance | Provision | Charge- offs | Reco- veries | Ending balance | Beginning balance | Provision | Charge- offs | Reco- veries | Ending balance | ||||||||||||||||||||||||||||||
| Residential 1-4 family | $ | 2,007 | $ | 201 | $ | — | $ | 2 | $ | 2,210 | $ | 1,917 | $ | (1 | ) | $ | (88 | ) | $ | 4 | $ | 1,832 | ||||||||||||||||||
| Residential 5+ multifamily | 258 | 80 | — | — | 338 | 116 | 9 | — | — | 125 | ||||||||||||||||||||||||||||||
| Construction of residential 1-4 family | 82 | 8 | — | — | 90 | 71 | 5 | — | — | 76 | ||||||||||||||||||||||||||||||
| Home equity lines of credit | 234 | 21 | — | — | 255 | 249 | 21 | (5 | ) | — | 265 | |||||||||||||||||||||||||||||
| Residential real estate | $ | 2,581 | $ | 310 | $ | — | $ | 2 | $ | 2,893 | $ | 2,353 | $ | 34 | $ | (93 | ) | $ | 4 | $ | 2,298 | |||||||||||||||||||
| Commercial | 2,776 | 211 | (26 | ) | 1 | 2,962 | 2,338 | 78 | (190 | ) | 117 | 2,343 | ||||||||||||||||||||||||||||
| Construction of commercial | 102 | 12 | — | — | 114 | 46 | 25 | — | — | 71 | ||||||||||||||||||||||||||||||
| Commercial real estate | 2,878 | 223 | (26 | ) | 1 | 3,076 | 2,384 | 103 | (190 | ) | 117 | 2,414 | ||||||||||||||||||||||||||||
| Farm land | 37 | (12 | ) | — | 7 | 32 | 23 | 32 | (27 | ) | — | 28 | ||||||||||||||||||||||||||||
| Vacant land | 134 | (27 | ) | — | — | 107 | 131 | 19 | — | — | 150 | |||||||||||||||||||||||||||||
| Real estate secured | 5,630 | 494 | (26 | ) | 10 | 6,108 | 4,891 | 188 | (310 | ) | 121 | 4,890 | ||||||||||||||||||||||||||||
| Commercial and industrial | 1,144 | (173 | ) | (2 | ) | 7 | 976 | 1,001 | (28 | ) | (41 | ) | 7 | 939 | ||||||||||||||||||||||||||
| Municipal | 29 | (11 | ) | — | — | 18 | 18 | 2 | — | — | 20 | |||||||||||||||||||||||||||||
| Consumer | 63 | (9 | ) | (10 | ) | 7 | 51 | 69 | 12 | (17 | ) | 4 | 68 | |||||||||||||||||||||||||||
| Unallocated | 515 | 77 | — | — | 592 | 514 | 63 | — | — | 577 | ||||||||||||||||||||||||||||||
| Totals | $ | 7,381 | $ | 378 | $ | (38 | ) | $ | 24 | $ | 7,745 | $ | 6,493 | $ | 237 | $ | (368 | ) | $ | 132 | $ | 6,494 | ||||||||||||||||||
| Nine months ended September 30, 2018 | Nine months ended September 30, 2017 | |||||||||||||||||||||||||||||||||||||||
| (in thousands) | Beginning balance | Provision | Charge- offs | Reco- veries | Ending balance | Beginning balance | Provision | Charge- offs | Reco- veries | Ending balance | ||||||||||||||||||||||||||||||
| Residential 1-4 family | $ | 1,862 | $ | 355 | $ | (10 | ) | $ | 3 | $ | 2,210 | $ | 1,925 | $ | 67 | $ | (167 | ) | $ | 7 | $ | 1,832 | ||||||||||||||||||
| Residential 5+ multifamily | 155 | 183 | — | — | 338 | 62 | 63 | — | — | 125 | ||||||||||||||||||||||||||||||
| Construction of residential 1-4 family | 75 | 15 | — | — | 90 | 91 | (15 | ) | — | — | 76 | |||||||||||||||||||||||||||||
| Home equity lines of credit | 236 | 18 | — | 1 | 255 | 348 | (79 | ) | (5 | ) | 1 | 265 | ||||||||||||||||||||||||||||
| Residential real estate | $ | 2,328 | $ | 571 | $ | (10 | ) | $ | 4 | $ | 2,893 | $ | 2,426 | $ | 36 | $ | (172 | ) | $ | 8 | $ | 2,298 | ||||||||||||||||||
| Commercial | 2,547 | 589 | (175 | ) | 1 | 2,962 | 1,919 | 656 | (378 | ) | 146 | 2,343 | ||||||||||||||||||||||||||||
| Construction of commercial | 80 | 34 | — | — | 114 | 38 | 33 | — | — | 71 | ||||||||||||||||||||||||||||||
| Commercial real estate | 2,627 | 623 | (175 | ) | 1 | 3,076 | 1,957 | 689 | (378 | ) | 146 | 2,414 | ||||||||||||||||||||||||||||
| Farm land | 32 | (7 | ) | — | 7 | 32 | 28 | 43 | (43 | ) | — | 28 | ||||||||||||||||||||||||||||
| Vacant land | 131 | (24 | ) | — | — | 107 | 170 | (20 | ) | — | — | 150 | ||||||||||||||||||||||||||||
| Real estate secured | 5,118 | 1,163 | (185 | ) | 12 | 6,108 | 4,581 | 748 | (593 | ) | 154 | 4,890 | ||||||||||||||||||||||||||||
| Commercial and industrial | 984 | (14 | ) | (12 | ) | 18 | 976 | 1,080 | (44 | ) | (162 | ) | 65 | 939 | ||||||||||||||||||||||||||
| Municipal | 30 | (12 | ) | — | — | 18 | 53 | (33 | ) | — | — | 20 | ||||||||||||||||||||||||||||
| Consumer | 81 | 5 | (55 | ) | 20 | 51 | 76 | 42 | (63 | ) | 13 | 68 | ||||||||||||||||||||||||||||
| Unallocated | 563 | 29 | — | — | 592 | 337 | 240 | — | — | 577 | ||||||||||||||||||||||||||||||
| Totals | $ | 6,776 | $ | 1,171 | $ | (252 | ) | $ | 50 | $ | 7,745 | $ | 6,127 | $ | 953 | $ | (818 | ) | $ | 232 | $ | 6,494 | ||||||||||||||||||
| 18 |
The composition of loans receivable and the allowance for loan losses is as follows:
| (in thousands) | Collectively evaluated 1 | Individually evaluated | Total portfolio | |||||||||||||||||||||
| Loans | Allowance | Loans | Allowance | Loans | Allowance | |||||||||||||||||||
| September 30, 2018 | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 341,775 | $ | 2,087 | $ | 6,443 | $ | 123 | $ | 348,218 | $ | 2,210 | ||||||||||||
| Residential 5+ multifamily | 29,037 | 338 | 1,678 | — | 30,715 | 338 | ||||||||||||||||||
| Construction of residential 1-4 family | 13,125 | 90 | — | — | 13,125 | 90 | ||||||||||||||||||
| Home equity lines of credit | 34,402 | 234 | 461 | 21 | 34,863 | 255 | ||||||||||||||||||
| Residential real estate | 418,339 | 2,749 | 8,582 | 144 | 426,921 | 2,893 | ||||||||||||||||||
| Commercial | 275,564 | 2,808 | 5,076 | 154 | 280,640 | 2,962 | ||||||||||||||||||
| Construction of commercial | 10,324 | 114 | 361 | — | 10,685 | 114 | ||||||||||||||||||
| Commercial real estate | 285,888 | 2,922 | 5,437 | 154 | 291,325 | 3,076 | ||||||||||||||||||
| Farm land | 3,998 | 32 | 224 | — | 4,222 | 32 | ||||||||||||||||||
| Vacant land | 8,534 | 104 | 192 | 3 | 8,726 | 107 | ||||||||||||||||||
| Real estate secured | 716,759 | 5,807 | 14,435 | 301 | 731,194 | 6,108 | ||||||||||||||||||
| Commercial and industrial | 150,210 | 976 | 505 | — | 150,715 | 976 | ||||||||||||||||||
| Municipal | 18,388 | 18 | — | — | 18,388 | 18 | ||||||||||||||||||
| Consumer | 4,605 | 51 | — | — | 4,605 | 51 | ||||||||||||||||||
| Unallocated allowance | — | 592 | — | — | — | 592 | ||||||||||||||||||
| Totals | $ | 889,962 | $ | 7,444 | $ | 14,940 | $ | 301 | $ | 904,902 | $ | 7,745 | ||||||||||||
| (in thousands) | Collectively evaluated 1 | Individually evaluated | Total portfolio | |||||||||||||||||||||
| Loans | Allowance | Loans | Allowance | Loans | Allowance | |||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 312,456 | $ | 1,759 | $ | 5,183 | $ | 103 | $ | 317,639 | $ | 1,862 | ||||||||||||
| Residential 5+ multifamily | 16,361 | 154 | 1,747 | 1 | 18,108 | 155 | ||||||||||||||||||
| Construction of residential 1-4 family | 11,197 | 75 | — | — | 11,197 | 75 | ||||||||||||||||||
| Home equity lines of credit | 33,658 | 235 | 113 | 1 | 33,771 | 236 | ||||||||||||||||||
| Residential real estate | 373,672 | 2,223 | 7,043 | 105 | 380,715 | 2,328 | ||||||||||||||||||
| Commercial | 243,602 | 2,432 | 5,709 | 115 | 249,311 | 2,547 | ||||||||||||||||||
| Construction of commercial | 9,622 | 80 | 366 | — | 9,988 | 80 | ||||||||||||||||||
| Commercial real estate | 253,224 | 2,512 | 6,075 | 115 | 259,299 | 2,627 | ||||||||||||||||||
| Farm land | 4,024 | 32 | 250 | — | 4,274 | 32 | ||||||||||||||||||
| Vacant land | 7,684 | 129 | 199 | 3 | 7,883 | 132 | ||||||||||||||||||
| Real estate secured | 638,604 | 4,896 | 13,567 | 223 | 652,171 | 5,119 | ||||||||||||||||||
| Commercial and industrial | 132,212 | 952 | 519 | 32 | 132,731 | 984 | ||||||||||||||||||
| Municipal | 17,494 | 30 | — | — | 17,494 | 30 | ||||||||||||||||||
| Consumer | 4,794 | 80 | — | — | 4,794 | 80 | ||||||||||||||||||
| Unallocated allowance | — | 563 | — | — | — | 563 | ||||||||||||||||||
| Totals | $ | 793,104 | $ | 6,521 | $ | 14,086 | $ | 255 | $ | 807,190 | $ | 6,776 | ||||||||||||
1 Includes amounts reflecting ASC 310-30 accounting for purchased loans with deteriorated credit quality with respect to deterioration in credit quality that occurs subsequent to origination and which makes it probable that the Company will be unable to collect all contractually required payments from the borrower. ASC 310-30 loans and allowance were $1.7 million and $0, respectively for September 30, 2018 and $2.4 million and $92,000, respectively for December 31, 2017.
The credit quality segments of loans receivable and the allowance for loan losses are as follows:
| September 30, 2018 (in thousands) | Collectively evaluated | Individually evaluated | Total portfolio | |||||||||||||||||||||
| Loans | Allowance | Loans | Allowance | Loans | Allowance | |||||||||||||||||||
| Performing loans | $ | 880,412 | $ | 6,671 | $ | — | $ | — | $ | 880,412 | $ | 6,671 | ||||||||||||
| Potential problem loans 1 | 9,550 | 181 | — | — | 9,550 | 181 | ||||||||||||||||||
| Impaired loans | — | — | 14,940 | 301 | 14,940 | 301 | ||||||||||||||||||
| Unallocated allowance | — | 592 | — | — | — | 592 | ||||||||||||||||||
| Totals | $ | 889,962 | $ | 7,444 | $ | 14,940 | $ | 301 | $ | 904,902 | $ | 7,745 | ||||||||||||
| 19 |
| December 31, 2017 (in thousands) | Collectively evaluated | Individually evaluated | Total portfolio | |||||||||||||||||||||
| Loans | Allowance | Loans | Allowance | Loans | Allowance | |||||||||||||||||||
| Performing loans | $ | 783,206 | $ | 5,619 | $ | — | $ | — | $ | 783,206 | $ | 5,619 | ||||||||||||
| Potential problem loans 1 | 9,898 | 339 | — | — | 9,898 | 339 | ||||||||||||||||||
| Impaired loans | — | — | 14,086 | 255 | 14,086 | 255 | ||||||||||||||||||
| Unallocated allowance | — | 563 | — | — | — | 563 | ||||||||||||||||||
| Totals | $ | 793,104 | $ | 6,521 | $ | 14,086 | $ | 255 | $ | 807,190 | $ | 6,776 | ||||||||||||
1 Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired.
A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the present value of expected cash flows or fair value of collateral, if the loan is collateral dependent. Certain data with respect to loans individually evaluated for impairment is as follows:
| Impaired loans with specific allowance | Impaired loans with no specific allowance | |||||||||||||||||||||||||||||||||||
| (in thousands) | Loan balance | Specific | Income | Loan balance | Income | |||||||||||||||||||||||||||||||
| Book | Note | Average | allowance | recognized | Book | Note | Average | recognized | ||||||||||||||||||||||||||||
| September 30, 2018 | ||||||||||||||||||||||||||||||||||||
| Residential | $ | 2,818 | $ | 2,864 | $ | 3,633 | $ | 123 | $ | 74 | $ | 5,303 | $ | 6,358 | $ | 3,540 | $ | 83 | ||||||||||||||||||
| Home equity lines of credit | 406 | 437 | 155 | 21 | 2 | 55 | 110 | 61 | — | |||||||||||||||||||||||||||
| Residential real estate | 3,224 | 3,301 | 3,788 | 144 | 76 | 5,358 | 6,468 | 3,601 | 83 | |||||||||||||||||||||||||||
| Commercial | 2,286 | 2,304 | 2,012 | 154 | 48 | 2,790 | 4,295 | 3,075 | 53 | |||||||||||||||||||||||||||
| Construction of commercial | — | — | 11 | — | — | 361 | 384 | 352 | 5 | |||||||||||||||||||||||||||
| Farm land | — | — | — | — | — | 224 | 435 | 236 | — | |||||||||||||||||||||||||||
| Vacant land | 43 | 43 | 43 | 3 | ||||||||||||||||||||||||||||||||