LOANS

12 Months Ended

Dec. 31, 2018

Receivables [Abstract]

LOANS

NOTE 4 - LOANS

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

December 31,		2018			2017
(in thousands)		Total Loans			Total Loans
Residential 1-4 family	$	345,862		$	317,639
Residential 5+ multifamily		36,510			18,108
Construction of residential 1-4 family		12,041			11,197
Home equity lines of credit		34,433			33,771
Residential real estate		428,846			380,715
Commercial		283,599			249,311
Construction of commercial		8,976			9,988
Commercial real estate		292,575			259,299
Farm land		4,185			4,274
Vacant land		8,322			7,883
Real estate secured		733,928			652,171
Commercial and industrial		162,905			132,731
Municipal		14,344			17,494
Consumer		4,512			4,794
Loans receivable, gross		915,689			807,190
Deferred loan origination fees and costs, net		1,421			1,289
Allowance for loan losses		(7,831	)		(6,776	)
Loans receivable, net	$	909,279		$	801,703
Loans held-for-sale
Residential 1-4 family	$	—		$	669

Salisbury has entered into loan participation agreements with other banks and transferred a portion of its originated loans to the participating banks. Transferred amounts are accounted for as sales and excluded from Salisbury’s loans receivable. Salisbury and its participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. Salisbury services the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties.

Salisbury also has entered into loan participation agreements with other banks and purchased a portion of the other banks’ originated loans.  Purchased amounts are accounted for as loans without recourse to the originating bank.  Salisbury and its originating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan.  The originating banks service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties. 

At December 31, 2018 and 2017, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $66.4 million and $57.2 million, respectively.

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, installment loans and collateral loans. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in Salisbury’s market area.

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 CTDOB.

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

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2018
Residential 1-4 family	$	337,520	$	4,281	$	4,061	$	—	$	—	$	345,862
Residential 5+ multifamily		34,726		784		1,000		—		—		36,510
Construction of residential 1-4 family		12,041		—		—		—		—		12,041
Home equity lines of credit		33,728		265		440		—		—		34,433
Residential real estate		418,015		5,330		5,501		—		—		428,846
Commercial		270,461		4,530		8,608		—		—		283,599
Construction of commercial		8,482		—		494		—		—		8,976
Commercial real estate		278,943		4,530		9,102		—		—		292,575
Farm land		3,969		—		216		—		—		4,185
Vacant land		8,253		69		—		—		—		8,322
Real estate secured		709,180		9,929		14,819		—		—		733,928
Commercial and industrial		159,127		2,672		1,106		—		—		162,905
Municipal		14,344		—		—		—		—		14,344
Consumer		4,502		10		—		—		—		4,512
Loans receivable, gross	$	887,153	$	12,611	$	15,925	$	—	$	—	$	915,689

(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

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

			Past due
(In thousands)		Current		30-59 days		60-89 days		90-179 days		180 days and over		30 days and over		Accruing 90 days and over		Non- accrual
December 31, 2018
Residential 1-4 family	$	342,881	$	1,100	$	521	$	—	$	1,360	$	2,981	$	—	$	2,092
Residential 5+ multifamily		35,648		—		—		633		229		862		—		1,000
Construction of residential 1-4 family		12,041		—		—		—		—		—		—		—
Home equity lines of credit		33,806		235		33		—		359		627		—		411
Residential real estate		424,376		1,335		554		633		1,948		4,470		—		3,503
Commercial		281,053		264		240		833		1,209		2,546		654		1,388
Construction of commercial		8,835		—		—		141		—		141		141		252
Commercial real estate		289,888		264		240		974		1,209		2,687		795		1,640
Farm land		4,185		—		—		—		—		—		—		216
Vacant land		8,280		42		—		—		—		42		—		—
Real estate secured		726,729		1,641		794		1,607		3,157		7,199		795		5,359
Commercial and industrial		162,507		—		38		—		360		398		—		360
Municipal		14,344		—		—		—		—		—		—		—
Consumer		4,504		2		6		—		—		8		—		—
Loans receivable, gross	$	908,084	$	1,643	$	838	$	1,607	$	3,517	$	7,605	$	795	$	5,719

			Past due
(In thousands)		Current		30-59 days		60-89 days		90-179 days		180 days and over		30 days and over		Accruing 90 days and over		Non- 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		1400		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

Troubled Debt Restructurings (TDRs)

Troubled debt restructurings occurring during the years ended December 31, 2018 and 2017:

Business Activities Loans	December 31, 2018						December 31, 2017
(in thousands)	Quantity		Pre-modification balance		Post-modification balance		Quantity		Pre-modification balance		Post-modification balance
Residential real estate		1	$	68	$	68		1	$	222	$	222
Commercial real estate		1		566		566		1		600		600
Commercial and industrial		—		—		—		2		182		182
Troubled debt restructurings		2	$	634	$	634		4	$	1,004	$	1,004
Rate reduction and term extension		—	$	—	$	—		3	$	404	$	404
Rate reduction		2		634		634		—		—		—
Term extension		—		—		—		1		600		600
Troubled debt restructurings		2	$	634	$	634		4	$	1,004	$	1,004

For the twelve months ended December 2018, there were two troubled debt restructurings. No concessions have been made with respect to loans that subsequently defaulted in the current reporting period. Salisbury currently does not have any commitments to lend additional funds to TDR loans.

The following table discloses the recorded investment and number of modifications for TDRs within the last year where a concession has been made, that then defaulted in the current reporting period. All TDR loans are included in the Impaired Loan schedule and are individually evaluated.

	Modifications that Subsequently Defaulted
	For the twelve months ending December 31, 2018				For the twelve months ending December 31, 2017
	Quantity		Balance		Quantity		Balance
Troubled Debt Restructurings
Residential 1-4 family		1		67		—		—
Total		1		67		—		—

Impaired loans

Loans individually evaluated for impairment (impaired loans) are loans for which Salisbury does not expect to collect all principal and interest in accordance with the contractual terms of the loan. Impaired loans include all modified loans classified as TDRs and loans on non-accrual status. The components of impaired loans are as follows:

December 31, (in thousands)		2018		2017
Non-accrual loans, excluding troubled debt restructured loans	$	4,430	$	5,450
Non-accrual troubled debt restructured loans		1,289		1,154
Accruing troubled debt restructured loans		6,801		7,482
Total impaired loans	$	12,520	$	14,086
Commitments to lend additional amounts to impaired borrowers	$	—	$	—

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	December 31, 2018												December 31, 2017
(In thousands)		Beginning					Charge-			Reco-		Ending		Beginning					Charge-			Reco-		Ending
		balance		Provision			offs			veries		balance		balance		Provision			offs			veries		balance
Residential 1-4 family	$	1,862	$	580		$	(299	)	$	6	$	2,149	$	1,926	$	100		$	(197	)	$	33	$	1,862
Residential 5+ multifamily		155		258			—			—		413		62		93			—			—		155
Construction of residential 1-4 family		75		8			—			—		83		91		(16	)		—			—		75
Home equity lines of credit		236		(18	)		—			1		219		348		(115	)		(4	)		7		236
Residential real estate		2,328		828			(299	)		7		2,864		2,427		62			(201	)		40		2,328
Commercial		2,547		756			(259	)		4		3,048		1,920		836			(453	)		244		2,547
Construction of commercial		80		42			—			—		122		38		42			—			—		80
Commercial real estate		2,627		798			(259	)		4		3,170		1,958		878			(453	)		244		2,627
Farm land		32		(6	)		—			7		33		28		45			(43	)		2		32
Vacant land		132		(32	)		—			—		100		170		(2	)		(36	)		—		132
Real estate secured		5,119		1,588			(558	)		18		6,167		4,583		983			(733	)		286		5,119
Commercial and industrial		984		255			(108	)		27		1,158		1,079		(229	)		(162	)		296		984
Municipal		30		(18	)		—			—		12		53		(23	)		—			—		30
Consumer		80		28			(81	)		29		56		75		63			(76	)		18		80
Unallocated		563		(125	)		—			—		438		337		226			—			—		563
Totals	$	6,776	$	1,728		$	(747	)	$	74	$	7,831	$	6,127	$	1,020		$	(971	)	$	600	$	6,776

	December 31, 2016
(in thousands)	Beginning balance		Provision			Charge-offs			Reco-veries		Ending balance
Residential 1-4 family	$	2,132	$	475		$	(706	)	$	25	$	1,926
Residential 5+ multifamily		33		32			(3	)		—		62
Construction of residential 1-4 family		37		54			—			—		91
Home equity lines of credit		354		37			(47	)		4		348
Residential real estate		2,556		598			(756	)		29		2,427
Commercial		1,507		597			(187	)		3		1,920
Construction of commercial		92		(54	)		—			—		38
Commercial real estate		1,599		543			(187	)		3		1,958
Farm land		37		15			(24	)		—		28
Vacant land		152		82			(64	)		—		170
Real estate secured		4,344		1,238			(1,031	)		32		4,583
Commercial and industrial		705		754			(452	)		72		1,079
Municipal		61		(8	)		—			—		53
Consumer		124		(4	)		(67	)		22		75
Unallocated		482		(145	)		—			—		337
Totals	$	5,716	$	1,835		$	(1,550	)	$	126	$	6,127

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
December 31, 2018
Residential 1-4 family	$	340,946	$	2,042	$	4,916	$	107	$	345,862	$	2,149
Residential 5+ multifamily		34,835		413		1,675		—		36,510		413
Construction of residential 1-4 family		12,041		83		—		—		12,041		83
Home equity lines of credit		33,975		213		458		6		34,433		219
Residential real estate		421,797		2,751		7,049		113		428,846		2,864
Commercial		279,389		2,907		4,210		141		283,599		3,048
Construction of commercial		8,622		106		354		16		8,976		122
Commercial real estate		288,011		3,013		4,564		157		292,575		3,170
Farm land		3,969		33		216		—		4,185		33
Vacant land		8,132		98		190		2		8,322		100
Real estate secured		721,909		5,895		12,019		272		733,928		6,167
Commercial and industrial		162,404		1,158		501		—		162,905		1,158
Municipal		14,344		12		—		—		14,344		12
Consumer		4,512		56		—		—		4,512		56
Unallocated allowance		—		438		—		—		—		438
Totals	$	903,169	$	7,559	$	12,520	$	272	$	915,689	$	7,831

(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 ASC 310-30 loans and allowance of $1.7 million and $0, respectively for 2018 and $2.4 million and $92,000, respectively for 2017.

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

December 31, 2018 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
Performing loans	$	895,527	$	6,989	$	—	$	—	$	895,527	$	6,989
Potential problem loans 1		7,642		132		—		—		7,642		132
Impaired loans		—		—		12,520		272		12,520		272
Unallocated allowance		—		438		—		—		—		438
Totals	$	903,169	$	7,559	$	12,520	$	272	$	915,689	$	7,831

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, included in this total are purchased loans net of any purchase marks remaining on the loan.

A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the present value of expected cash flows or collateral, in accordance with the most likely means of recovery. Certain data with respect to loans individually evaluated for impairment is as follows:

	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
December 31, 2018
Residential	$	2,792	$	2,842	$	3,429	$	107	$	101	$	3,799	$	5,140	$	3,726	$	102
Home equity lines of credit		47		47		158		6		2		411		498		114		2
Residential real estate		2,839		2,889		3,587		113		103		4,210		5,638		3,840		104
Commercial		1,808		1,808		2,001		141		88		2,403		3,989		2,992		75
Construction of commercial		252		252		67		16		—		102		110		295		7
Farm land		—		—		—		—		—		216		432		232		—
Vacant land		42		42		43		2		3		147		168		151		10
Real estate secured		4,941		4,991		5,698		272		194		7,078		10,337		7,510		196
Commercial and industrial		—		—		40		—		—		501		596		469		5
Totals	$	4,941	$	4,991	$	5,738	$	272	$	194	$	7,579	$	10,933	$	7,979	$	201

	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
December 31, 2017
Residential	$	3,532	$	3,651	$	3,376	$	104	$	109	$	3,398	$	4,279	$	3,597	$	119
Home equity lines of credit		47		47		79		1		2		66		117		155		—
Residential real estate		3,579		3,698		3,455		105		111		3,464		4,396		3,752		119
Commercial		2,336		2,563		2,688		115		102		3,373		4,567		3,699		305
Construction of commercial		108		114		59		—		7		258		274		310		—
Farm land		—		—		—		—		—		250		450		869		—
Vacant land		44		44		45		3		3		155		179		159		11
Real estate secured		6,067		6,419		6,247		223		223		7,500		9,866		8,789		435
Commercial and industrial		110		117		59		32		—		409		502		181		15
Consumer		—		—		—		—		—		—		6		1		—
Totals	$	6,177	$	6,536	$	6,306	$	255	$	223	$	7,909	$	10,374	$	8,971	$	450

¹ Income recognized on impaired loans for the year ending December 31, 2016 was $200 thousand.