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NOTE 3 - LOANS
 9 Months Ended
Sep. 30, 2021
Receivables [Abstract]  
NOTE 3 - LOANS

NOTE 3 - LOANS

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

(In thousands)    September 30, 2021     December 31, 2020  
Residential 1-4 family  $368,801   $352,001 
Residential 5+ multifamily   46,237    37,058 
Construction of residential 1-4 family   15,429    8,814 
Home equity lines of credit   24,001    27,804 
Residential real estate   454,468    425,677 
Commercial   314,820    310,841 
Construction of commercial   47,145    31,722 
Commercial real estate   361,965    342,563 
Farm land   3,409    3,198 
Vacant land   13,698    14,079 
Real estate secured   833,540    785,517 
Commercial and industrial ex PPP Loans   167,528    140,516 
PPP Loans   40,652    86,632 
Total Commercial and industrial   208,180    227,148 
Municipal   18,061    21,512 
Consumer   11,152    7,687 
Loans receivable, gross   1,070,933    1,041,864 
Deferred loan origination fees, net   (314)   (372)
Allowance for loan losses   (13,168)   (13,754)
Loans receivable, net  $1,057,451   $1,027,738 
Loans held-for-sale          
Residential 1-4 family  $639   $2,735 

 

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 September 30, 2021 and December 31, 2020, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $79.6 million and $65.3 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 due to the COVID-19 virus pandemic ("virus"). Approximately 41% 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 13% of the Bank's commercial loans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 9% 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 camps 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 173% as of September 30, 2021 and 182% at December 31, 2020 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. Due to the COVID-19 pandemic, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

In 2021 Salisbury processed 472 applications for loans of approximately $48.2 million under the SBA's Paycheck Protection Program (PPP). Interest income is accrued on the unpaid principal balance of these loans. Deferred loan origination fees and costs on PPP loans are amortized as an adjustment to yield over the lives of the related loans, which is predominately five years. For the three and nine months ended September 30, 2021, Salisbury recorded interest income of $0.1 million and $0.6 million, respectively, and net fee income of approximately $0.7 million and $2.3 million, respectively, on PPP loans. Total net fees on PPP loans originated in 2020 and 2021, that will be recognized over the life of the loans, were estimated at $3.1 million and $2.0 million, respectively. In 2020 and the nine-month period ended September 30, 2021, Salisbury recognized essentially all of the net fees on PPP loans originated in 2020. In the nine-month period ended September 30, 2021, Salisbury recognized approximately $0.6 million of the net fees on PPP loans originated in 2021. Salisbury had gross PPP loan balances of $40.7 million on its consolidated balance sheet at September 30, 2021 compared with $86.6 million at December 31, 2020. Approximately $2.9 million of the September 30, 2021 balance related to PPP loans originated in 2020 and $37.8 million related to PPP loans originated in 2021.

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" (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 Federal Deposit Insurance Corporation ("FDIC") and the Connecticut Department of Banking ("CTDOB").

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

(in thousands) Pass Special mention Substandard Doubtful Loss Total
September 30, 2021                              
Residential 1-4 family  $361,116   $4,139   $3,546   $-   $-   $368,801 
Residential 5+ multifamily   44,484    83    1,670    -    -    46,237 
Construction of residential 1-4 family   15,301    128    -    -    -    15,429 
Home equity lines of credit   23,706    209    86    -    -    24,001 
Residential real estate   444,607    4,559    5,302    -    -    454,468 
Commercial   274,004    5,654    35,162    -    -    314,820 
Construction of commercial   47,145    -    -    -    -    47,145 
Commercial real estate   321,149    5,654    35,162    -    -    361,965 
Farm land   1,610    1,223    576    -    -    3,409 
Vacant land   13,621    42    35    -    -    13,698 
Real estate secured   780,987    11,478    41,075    -    -    833,540 
Commercial and industrial   205,140    500    2,540    -    -    208,180 
Municipal   18,061    -    -    -    -    18,061 
Consumer   11,132    1    19    -    -    11,152 
Loans receivable, gross  $1,015,320   $11,979   $43,634   $-   $-   $1,070,933 
(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 

 

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, 2021                        
Residential 1-4 family  $368,034   $167   $84   $442   $74   $767   $-   $1,235 
Residential 5+ multifamily   45,376    -    -    -    861    861    -    861 
Construction of residential 1-4 family   15,429    -    -    -    -    -    -    - 
Home equity lines of credit   23,831    105    14    -    51    170    -    86 
Residential real estate   452,670    272    98    442    986    1,798    -    2,182 
Commercial   314,342    200    24    -    254    478    -    1,954 
Construction of commercial   47,145    -    -    -    -    -    -    - 
Commercial real estate   361,487    200    24    -    254    478    -    1,954 
Farm land   3,279    130    -    -    -    130    -    576 
Vacant land   13,663    35    -    -    -    35    -    35 
Real estate secured   831,099    637    122    442    1,240    2,441    -    4,747 
Commercial and industrial   207,792    289    53    -    46    388    11    243 
Municipal   18,061    -    -    -    -    -    -    - 
Consumer   11,108    4    40    -    -    44    -    - 
Loans receivable, gross  $1,068,060   $930   $215   $442   $1,286   $2,873   $11   $4,990 

 

      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, 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 

 

Troubled Debt Restructurings (TDRs)

For the three and nine month periods ended September 30, 2021, one residential loan with a loan balance of $74 thousand was modified in a troubled debt restructuring for term extension. For third quarter 2020 one residential loan with a loan balance of $180 thousand was modified in a troubled debt restructuring for term extension. For the nine month period ended September 2020, there were two troubled debt restructurings: one residential loan with a loan balance of $180 thousand was modified for term extension and one CRE loan of $133 thousand was modified for workout refinance, which required an extension of new funds to pay outstanding taxes.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

 

                     
    Three months ended September 30, 2021   Three months ended September 30, 2020
(in thousands)   Beginning balance   Provision (Benefit)   Charge- offs   Reco- veries   Ending balance   Beginning balance     Provision (Benefit)   Charge- offs   Reco- veries   Ending balance
Residential 1-4 family   $ 2,377     $ 393     $ (35 )   $ 5     $ 2,740     $ 3,048       $ 69     $ (11 )   $ 1     $ 3,107  
Residential 5+ multifamily     545       156       -     -       701       589         14       -       -       603  
Construction of residential 1-4 family     95       41       -       -       136       87         10       -       -       97  
Home equity lines of credit     190       26       (20 )      -       196       283         (8 )     -       -       275  
Residential real estate     3,207       616       (55 )     5     3,773       4,007         85       (11 )     1     4,082  
Commercial     6,212       (165 )      -     119       6,166       5,160         317       (14 )     1       5,464  
Construction of commercial     668       118       -       -       786       205         195       -       -       400  
Commercial real estate     6,880       (47 )      -     119       6,952       5,365         512       (14 )     1       5,864  
Farm land     32       (1 )      -       -       31       60         5       -       -       65  
Vacant land     87       (1 )      -       1       87       182         (11 )     -       -       171  
Real estate secured     10,206       567       (55 )     125       10,843       9,614         591       (25 )     2       10,182  
Commercial and industrial     1,256       73     -       3       1,332       1,515         (44 )     -     1       1,472  
Municipal     32       (1 )     -       -       31       36         5       -       -       41  
Consumer     66       62       (19 )     6       115       74         40       (41 )     7       80  
Unallocated     1,148       (301 )      -       -       847       1,132         94       -       -       1,226  
Totals   $ 12,708     $ 400     $ (74 )   $ 134     $ 13,168     $ 12,371       $ 686     $ (66 )   $ 10     $ 13,001  

 

                     
    Nine months ended September 30, 2021   Nine months ended September 30, 2020
(in thousands)   Beginning balance   Provision (Benefit)   Charge- offs   Reco- veries   Ending balance   Beginning balance     Provision (Benefit)   Charge- offs   Reco- veries   Ending balance
Residential 1-4 family   $ 2,646     $ 129     $ (44 )   $ 9     $ 2,740     $ 2,393       $ 716     $ (11 )   $ 9     $ 3,107  
Residential 5+ multifamily     686       15       -     -       701       446         199       (42 )      -       603  
Construction of residential 1-4 family     65       71       -       -       136       75         22       -       -       97  
Home equity lines of credit     252       (36 )      (20 )      -       196       197         78     -       -       275  
Residential real estate     3,649       179       (64 )     9     3,773       3,111         1,015       (53 )     9     4,082  
Commercial     6,546       (509 )      (7 )     136       6,166       3,742         1,719       (17 )     20       5,464  
Construction of commercial     596       208       (18 )      -       786       104         296       -       -       400  
Commercial real estate     7,142       (301 )      (25 )     136       6,952       3,846         2,015       (17 )     20       5,864  
Farm land     59       (28 )      -       -       31       47         18       -       -       65  
Vacant land     180       (94 )      -       1       87       71         100     -       -       171  
Real estate secured     11,030       (244 )      (89 )     146       10,843       7,075         3,148       (70 )     29       10,182  
Commercial and industrial     1,397       17     (131 )      49       1,332       1,145         326     -     1       1,472  
Municipal     43       (12 )     -       -       31       46         (5 )      -       -       41  
Consumer     77       82       (34 )     (10 )      115       60         72       (66 )     14       80  
Unallocated     1,207       (360 )      -       -       847       569         657       -       -       1,226  
Totals   $ 13,754     $ (517 )    $ (254 )   $ 185     $ 13,168     $ 8,895       $ 4,198     $ (136 )   $ 44     $ 13,001  

 

 

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 
September 30, 2021                              
Residential 1-4 family  $365,721   $2,737   $3,080   $3   $368,801   $2,740 
Residential 5+ multifamily   45,283    701    954    -    46,237    701 
Construction of residential 1-4 family   15,429    136    -    -    15,429    136 
Home equity lines of credit   23,915    196    86    -    24,001    196 
Residential real estate   450,348    3,770    4,120    3    454,468    3,773 
Commercial   310,947    6,123    3,873    43    314,820    6,166 
Construction of commercial   47,145    786    -    -    47,145    786 
Commercial real estate   358,092    6,909    3,873    43    361,965    6,952 
Farm land   2,833    31    576    -    3,409    31 
Vacant land   13,663    87    35    -    13,698    87 
Real estate secured   824,936    10,797    8,604    46    833,540    10,843 
Commercial and industrial   207,859    1,288    321    44    208,180    1,332 
Municipal   18,061    31    -    -    18,061    31 
Consumer   11,134    115    18    -    11,152    115 
Unallocated allowance   -    847    -    -    -    847 
Totals  $1,061,990   $13,078   $8,943   $90   $1,070,933   $13,168 

 

  (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 

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

September 30, 2021 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $1,025,195   $9,490   $-   $-   $1,025,195   $9,490 
Potential problem loans 1   36,795    2,741    -    -    36,795    2,741 
Impaired loans   -    -    8,943    90    8,943    90 
Unallocated allowance   -    847    -    -    -    847 
Totals  $1,061,990   $13,078   $8,943   $90   $1,070,933   $13,168 

 

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 

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, 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 
September 30, 2021                           
Residential  $45   $47   $1,120   $3   $2   $3,989   $4,404   $3,642   $52 
Home equity lines of credit   -    -    22    -    -    86    127    156    - 
Residential real estate   45    47    1,142    3    2    4,075    4,531    3,798    52 
Commercial   1,007    1,033    1,921    43    33    2,866    3,377    3,002    47 
Construction of commercial   -    -    -    -    -    -    -    -    - 
Farm land   -    -    -    -    -    576    756    415    - 
Vacant land   -    -    73    -    -    35    39    52    - 
Real estate secured   1,052    1,080    3,136    46    35    7,552    8,703    7,267    99 
Commercial and industrial   221    228    336    44    3    100    270    91    - 
Consumer   -    -    8    -    -    18    18    15    1 
Totals  $1,273   $1,308   $3,480   $90   $38   $7,670   $8,991   $7,373   $100 

Note: The income recognized is for the nine month period ended September 30, 2021.

   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, 2020                           
Residential  $3,854   $3,972   $4,034   $383   $67   $1,959   $2,335   $1,912   $20 
Home equity lines of credit   75    75    77    14    -    158    507    111    1 
Residential real estate   3,929    4,047    4,111    397    67    2,117    2,842    2,023    21 
Commercial   3,099    3,148    3,401    270    104    1,298    1,940    978    31 
Construction of commercial   -    -    -    -    -    -    -    -    - 
Farm land   -    -    -    -    -    166    322    177    - 
Vacant land   38    40    40    3    -    132    148    136    7 
Real estate secured   7,066    7,235    7,552    670    171    3,713    5,252    3,314    59 
Commercial and industrial   824    827    422    380    3    52    205    59    2 
Consumer   30    30    33    18    1    -    -    -    - 
Totals  $7,920   $8,092   $8,007   $1,068   $175   $3,765   $5,457   $3,373   $61 

Note: The income recognized is for the nine month period ended September 30, 2020.

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance           Loan balance     
    Recorded Investment    Note    Average    Specific allowance    Income recognized    Recorded Investment    Note    Average    Income 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