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NOTE 4 - LOANS

12 Months Ended

Dec. 31, 2020

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

December 31,		2020			2019
(in thousands)		Total Loans			Total Loans
Residential 1-4 family	$	352,001		$	346,299
Residential 5+ multifamily		37,058			35,455
Construction of residential 1-4 family		8,814			11,889
Home equity lines of credit		27,804			33,798
Residential real estate		425,677			427,441
Commercial		310,841			289,795
Construction of commercial		31,722			8,466
Commercial real estate		342,563			298,261
Farm land		3,198			3,641
Vacant land		14,079			7,893
Real estate secured		785,517			737,236
Commercial and industrial		227,148			169,411
Municipal		21,512			21,914
Consumer		7,687			6,385
Loans receivable, gross		1,041,864			934,946
Deferred loan origination (fees) and costs, net		(372	)		1,362
Allowance for loan losses		(13,754	)		(8,895	)
Loans receivable, net	$	1,027,738		$	927,413
Loans held-for-sale
Residential 1-4 family	$	2,735		$	332

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, 2020 and 2019, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $65.3 million and $67.0 million, respectively.

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts, which constitute Salisbury's service area. Salisbury offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, equipment loans, and a variety of consumer loans, including home equity lines of credit, installment loans and collateral loans. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in Salisbury’s market area.

Salisbury’s commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges from the economic downturn caused by the COVID-19 virus pandemic (“virus”). Approximately 40% of the Bank’s commercial loan portfolio are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 14% of the Bank’s commercial loans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 8% of the Bank’s commercial loans are to educational institutions and approximately 6% of Salisbury’s commercial loans are to entertainment and recreation related businesses, which include a ski resort, bowling alleys and amusement parks. Salisbury’s commercial real estate exposure as a percentage of the Bank’s total risk-based capital, which represents Tier 1 plus Tier 2 capital, was approximately 182% as of December 31, 2020 and 169% at December 31, 2019 compared to the regulatory monitoring guideline of 300%.

Salisbury’s commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration (“SBA”) guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors. The duration of the economic shutdown and the time required for businesses to recover may adversely affect the ability of some borrowers to make timely loan payments. During such economic shutdown and recovery, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses. Management is currently unable to predict the extent to which the COVID-19 pandemic will impact these and other borrowers.

Salisbury processed 932 applications for loans of nearly $100 million under the SBA’s PPP program. The PPP loans are reported in the Commercial and Industrial category at their outstanding principal balance, net of unamortized deferred loan origination fees and costs on originated loans. Interest income is accrued on the unpaid principal balance. Deferred loan origination fees and costs are amortized as an adjustment to yield over the lives of the related loans, which is predominately two years. For the twelve months ended December 31, 2020, Salisbury recorded net interest income of $683 thousand and net origination fees of approximately $1.4 million. Management will participate in the SBA’s 2021 PPP program which launched in January 2021. Management anticipates that the volume of applications it processes will be lower than the number processed in 2020 in part due to eligibility thresholds implemented by the SBA.

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. Salisbury is currently evaluating certain enhancements to its credit risk rating model to further refine the assessment of credit risk in the loan portfolio.

Loans rated as "special mention" (5) possess credit deficiencies or potential weaknesses deserving management’s close attention that if left uncorrected may result in deterioration of the repayment prospects for the loans at some future date.

Loans rated as "substandard" (6) are loans where the Bank’s position is clearly not protected adequately by borrower current net worth or payment capacity. These loans have well defined weaknesses based on objective evidence and include loans where future losses to the Bank may result if deficiencies are not corrected, and loans where the primary source of repayment such as income is diminished and the Bank must rely on sale of collateral or other secondary sources of collection.

Loans rated "doubtful" (7) have the same weaknesses as substandard loans with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, to be highly improbable. The possibility of loss is high, but due to certain important and reasonably specific pending factors, which may work to strengthen the loan, its reclassification as an estimated loss is deferred until its exact status can be determined.

Loans classified as "loss" (8) are considered uncollectible and of such little value that continuance as Bank assets is unwarranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this loan even though partial recovery may be made in the future.

Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank’s loan portfolio is examined periodically by its regulatory agencies, the 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, 2020
Residential 1-4 family	$	342,243	$	5,615	$	4,143	$	-	$	-	$	352,001
Residential 5+ multifamily		35,272		90		1,696		-		-		37,058
Construction of residential 1-4 family		8,814		-		-		-		-		8,814
Home equity lines of credit		27,393		257		154		-		-		27,804
Residential real estate		413,722		5,962		5,993		-		-		425,677
Commercial		276,866		15,565		18,410		-		-		310,841
Construction of commercial		31,493		-		229		-		-		31,722
Commercial real estate		308,359		15,565		18,639		-		-		342,563
Farm land		1,612		-		1,586		-		-		3,198
Vacant land		13,992		50		37		-		-		14,079
Real estate secured		737,685		21,577		26,255		-		-		785,517
Commercial and industrial		224,906		1,271		632		339		-		227,148
Municipal		21,512		-		-		-		-		21,512
Consumer		7,660		-		27		-		-		7,687
Loans receivable, gross	$	991,763	$	22,848	$	26,914	$	339	$	-	$	1,041,864

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2019
Residential 1-4 family	$	337,302	$	4,278	$	4,719	$	-	$	-	$	346,299
Residential 5+ multifamily		33,619		99		1,737		-		-		35,455
Construction of residential 1-4 family		11,889		-		-		-		-		11,889
Home equity lines of credit		33,381		312		105		-		-		33,798
Residential real estate		416,191		4,689		6,561		-		-		427,441
Commercial		271,708		10,964		7,052		71		-		289,795
Construction of commercial		8,225		-		241		-		-		8,466
Commercial real estate		279,933		10,964		7,293		71		-		298,261
Farm land		1,934		-		1,707		-		-		3,641
Vacant land		7,834		59		-		-		-		7,893
Real estate secured		705,892		15,712		15,561		71		-		737,236
Commercial and industrial		167,458		443		1,510		-		-		169,411
Municipal		21,914		-		-		-		-		21,914
Consumer		6,344		3		38		-		-		6,385
Loans receivable, gross	$	901,608	$	16,158	$	17,109	$	71	$	-	$	934,946

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, 2020
Residential 1-4 family	$	349,382	$	1,419	$	308	$	673	$	219	$	2,619	$	-	$	1,508
Residential 5+ multifamily		36,197		-		-		-		861		861		-		861
Construction of residential 1-4 family		8,814		-		-		-		-		-		-		-
Home equity lines of credit		27,522		157		9		-		116		282		-		154
Residential real estate		421,915		1,576		317		673		1,196		3,762		-		2,523
Commercial		307,927		1,855		530		95		434		2,914		-		2,544
Construction of commercial		31,722		-		-		-		-		-		-		-
Commercial real estate		339,649		1,855		530		95		434		2,914		-		2,544
Farm land		2,594		154		450		-		-		604		-		158
Vacant land		14,079		-		-		-		-		-		-		37
Real estate secured		778,237		3,585		1,297		768		1,630		7,280		-		5,262
Commercial and industrial		224,496		2,148		457		1		46		2,652		12		374
Municipal		21,512		-		-		-		-		-		-		-
Consumer		7,677		10		-		-		-		10		-		-
Loans receivable, gross	$	1,031,922	$	5,743	$	1,754	$	769	$	1,676	$	9,942	$	12	$	5,636


			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, 2019
Residential 1-4 family	$	344,085	$	971	$	351	$	200	$	692	$	2,214	$	-	$	1,551
Residential 5+ multifamily		34,594		-		-		-		861		861		-		861
Construction of residential 1-4 family		11,889		-		-		-		-		-		-		-
Home equity lines of credit		33,522		152		46		-		78		276		-		105
Residential real estate		424,090		1,123		397		200		1,631		3,351		-		2,517
Commercial		289,103		336		141		71		144		692		-		914
Construction of commercial		8,466		-		-		-		-		-		-		-
Commercial real estate		297,569		336		141		71		144		692		-		914
Farm land		3,461		180		-		-		-		180		-		186
Vacant land		7,852		-		41		-		-		41		-		-
Real estate secured		732,972		1,639		579		271		1,775		4,264		-		3,617
Commercial and industrial		169,262		2		146		1		-		149		1		-
Municipal		21,914		-		-		-		-		-		-		-
Consumer		6,382		-		1		2		-		3		2		-
Loans receivable, gross	$	930,530	$	1,641	$	726	$	274	$	1,775	$	4,416	$	3	$	3,617

Troubled Debt Restructurings (TDRs)

Troubled debt restructurings occurring during the years ended December 31, 2020 and 2019:

	December 31, 2020						December 31, 2019
(in thousands)	Quantity		Pre-modification balance		Post-modification balance		Quantity		Pre-modification balance		Post-modification balance
Residential real estate		1	$	180	$	180		3	$	1,416	$	1,416
Commercial real estate		1		133		133		4		977		1,191
Consumer		-		-		-		1		-		36
Troubled debt restructurings		2	$	313	$	313		8	$	2,393	$	2,643
Interest only payments to sell property		-	$	-	$	-		1	$	791	$	791
Rate reduction		-		-		-		-		-		-
Modification and Rate reduction		-		-		-		2		625		625
Extension of new funds to pay outstanding taxes		-		-		-		3		259		442
Modification and term extension		2		313		313		2		718		785
Troubled debt restructurings		2	$	313	$	313		8	$	2,393	$	2,643

For the twelve months ended December 2020, there were two troubled debt restructurings. 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, 2020				For the twelve months ending December 31, 2019
	Quantity		Balance		Quantity		Balance
Troubled Debt Restructurings
Residential 1-4 family		1		178		-		-
Commercial real estate		-		-		1		274
Total		1		178		1		274

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)		2020		2019
Non-accrual loans, excluding troubled debt restructured loans	$	4,091	$	2,604
Non-accrual troubled debt restructured loans		1,546		1,013
Accruing troubled debt restructured loans		6,272		7,778
Total impaired loans	$	11,909	$	11,395
Commitments to lend additional amounts to impaired borrowers	$	-	$	-

Allowance for Loan Losses

In first quarter 2019 Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan losses. As a result of this transfer, which is reflected in the table below as the “acquisition discount transfer”, gross loans receivable and the allowance for loan losses increased by $663 thousand. The balance of net loans receivable did not change as a result of this transfer. The table below shows the activity within the allowance for loan losses by loan segment.


	December 31, 2020												December 31, 2019
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Acquisition Discount Transfer		Provision			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	2,393	$	255		$	(11	)	$	9	$	2,646	$	2,149	$	10	$	367		$	(136	)	$	3	$	2,393
Residential 5+ multifamily		446		282			(42	)		-		686		413		-		33			-			-		446
Construction of residential 1-4 family		75		(10	)		-			-		65		83		-		(8	)		-			-		75
Home equity lines of credit		197		(197	)		-			252		252		219		1		258			(281	)		-		197
Residential real estate		3,111		330			(53	)		261		3,649		2,864		11		650			(417	)		3		3,111
Commercial		3,742		2,776			(17	)		45		6,546		3,048		488		248			(44	)		2		3,742
Construction of commercial		104		492			-			-		596		122		-		(18	)		-			-		104
Commercial real estate		3,846		3,268			(17	)		45		7,142		3,170		488		230			(44	)		2		3,846
Farm land		47		12			-			-		59		33		-		14			-			-		47
Vacant land		71		109			-			-		180		100		-		(29	)		-			-		71
Real estate secured		7,075		3,719			(70	)		306		11,030		6,167		499		865			(461	)		5		7,075
Commercial and industrial		1,145		612			(362	)		2		1,397		1,158		164		(78	)		(145	)		46		1,145
Municipal		46		(3	)		-			-		43		12		-		34			-			-		46
Consumer		60		72			(70	)		15		77		56		-		3			(36	)		37		60
Unallocated		569		638			-			-		1,207		438		-		131			-			-		569
Totals	$	8,895	$	5,038		$	(502	)	$	323	$	13,754	$	7,831	$	663	$	955		$	(642	)	$	88	$	8,895


	December 31, 2018
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	1,862	$	580		$	(299	)	$	6	$	2,149
Residential 5+ multifamily		155		258			-			-		413
Construction of residential 1-4 family		75		8			-			-		83
Home equity lines of credit		236		(18	)		-			1		219
Residential real estate		2,328		828			(299	)		7		2,864
Commercial		2,547		756			(259	)		4		3,048
Construction of commercial		80		42			-			-		122
Commercial real estate		2,627		798			(259	)		4		3,170
Farm land		32		(6	)		-			7		33
Vacant land		132		(32	)		-			-		100
Real estate secured		5,119		1,588			(558	)		18		6,167
Commercial and industrial		984		255			(108	)		27		1,158
Municipal		30		(18	)		-			-		12
Consumer		80		28			(81	)		29		56
Unallocated		563		(125	)		-			-		438
Totals	$	6,776	$	1,728		$	(747	)	$	74	$	7,831

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


(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2020
Residential 1-4 family	$	347,695	$	2,445	$	4,306	$	201	$	352,001	$	2,646
Residential 5+ multifamily		36,094		686		964		-		37,058		686
Construction of residential 1-4 family		8,814		65		-		-		8,814		65
Home equity lines of credit		27,650		232		154		20		27,804		252
Residential real estate		420,253		3,428		5,424		221		425,677		3,649
Commercial		305,193		6,298		5,648		248		310,841		6,546
Construction of commercial		31,722		596		-		-		31,722		596
Commercial real estate		336,915		6,894		5,648		248		342,563		7,142
Farm land		3,040		59		158		-		3,198		59
Vacant land		13,912		178		167		2		14,079		180
Real estate secured		774,120		10,559		11,397		471		785,517		11,030
Commercial and industrial		226,662		1,223		486		174		227,148		1,397
Municipal		21,512		43		-		-		21,512		43
Consumer		7,661		59		26		18		7,687		77
Unallocated allowance		-		1,207		-		-		-		1,207
Totals	$	1,029,955	$	13,091	$	11,909	$	663	$	1,041,864	$	13,754


(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2019
Residential 1-4 family	$	340,847	$	2,117	$	5,452	$	276	$	346,299	$	2,393
Residential 5+ multifamily		34,478		446		977		-		35,455		446
Construction of residential 1-4 family		11,889		75		-		-		11,889		75
Home equity lines of credit		33,693		197		105		-		33,798		197
Residential real estate		420,907		2,835		6,534		276		427,441		3,111
Commercial		285,462		3,333		4,333		409		289,795		3,742
Construction of commercial		8,466		104		-		-		8,466		104
Commercial real estate		293,928		3,437		4,333		409		298,261		3,846
Farm land		3,455		47		186		-		3,641		47
Vacant land		7,713		66		180		5		7,893		71
Real estate secured		726,003		6,385		11,233		690		737,236		7,075
Commercial and industrial		169,285		1,143		126		2		169,411		1,145
Municipal		21,914		46		-		-		21,914		46
Consumer		6,349		59		36		1		6,385		60
Unallocated allowance		-		569		-		-		-		569
Totals	$	923,551	$	8,202	$	11,395	$	693	$	934,946	$	8,895

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


December 31, 2020 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
Performing loans	$	1,011,757	$	10,424	$	-	$	-	$	1,011,757	$	10,424
Potential problem loans ¹		18,198		1,460		-		-		18,198		1,460
Impaired loans		-		-		11,909		663		11,909		663
Unallocated allowance		-		1,207		-		-		-		1,207
Totals	$	1,029,955	$	13,091	$	11,909	$	663	$	1,041,864	$	13,754


December 31, 2019 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
Performing loans	$	913,648	$	7,251	$	-	$	-	$	913,648	$	7,251
Potential problem loans ¹		9,903		382		-		-		9,903		382
Impaired loans		-		-		11,395		693		11,395		693
Unallocated allowance		-		569		-		-		-		569
Totals	$	923,551	$	8,202	$	11,395	$	693	$	934,946	$	8,895

¹Potential 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, 2020
Residential	$	2,971	$	3,040	$	3,862	$	201	$	72	$	2,299	$	2,676	$	1,993	$	27
Home equity lines of credit		75		75		76		20		-		79		117		103		-
Residential real estate		3,046		3,115		3,938		221		72		2,378		2,793		2,096		27
Commercial		3,058		3,117		3,325		248		132		2,590		3,203		1,139		91
Construction of commercial		-		-		-		-		-		-		-		-		-
Farm land		-		-		-		-		-		158		319		173		-
Vacant land		37		40		39		2		-		130		145		134		9
Real estate secured		6,141		6,272		7,302		471		204		5,256		6,460		3,542		127
Commercial and industrial		416		424		482		174		4		70		283		58		2
Consumer		26		26		31		18		2		-		-		-		-
Totals	$	6,583	$	6,722	$	7,815	$	663	$	210	$	5,326	$	6,743	$	3,600	$	129

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, 2019

Residential $ 4,111 $ 4,190 $ 3,725 $ 276 $ 162 $ 2,318 $ 3,081 $ 2,940 $ 52

Home equity lines of credit - - 52 - - 105 450 391 -

Residential real estate 4,111 4,190 3,777 276 162 2,423 3,531 3,331 52

Commercial 3,309 3,335 2,574 409 90 1,024 1,733 1,747 54

Construction of commercial - - 77 - - - - 39 -

Farm land - - - - - 186 329 203 -

Vacant land 41 41 42 5 3 139 157 143 10

Real estate secured 7,461 7,566 6,470 690 255 3,772 5,750 5,463 116

Commercial and industrial 93 97 16 2 4 33 188 265 4

Consumer 36 36 21 1 - - - 3 -

Totals $ 7,590 $ 7,699 $ 6,507 $ 693 $ 259 $ 3,805 $ 5,938 $ 5,731 $ 120