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SALISBURY BANCORP, INC. - Quarter Report: 2015 September (Form 10-Q)

 

 

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, 2015

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM ________ TO ________

 

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Connecticut   06-1514263
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)
     
5 Bissell Street, Lakeville, CT   06039
(Address of principal executive offices)   (Zip code)

(860) 435-9801

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

 

The number of shares of Common Stock outstanding as of November 13, 2015 is 2,733,576.

 

 
 

 

TABLE OF CONTENTS

 

 

  PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (unaudited) 3
  CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2015 (unaudited) AND DECEMBER 31, 2014 3
  CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (unaudited) 4
  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (unaudited) 5
  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (unaudited) 5
  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2015 AND 2014 (unaudited) 6
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 33
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 52
Item 4. CONTROLS AND PROCEDURES 54
  PART II. OTHER INFORMATION  
Item 1. LEGAL PROCEEDINGS 54
Item 1A. RISK FACTORS 56
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 56
Item 3.  DEFAULTS UPON SENIOR SECURITIES 56
Item 4.  MINE SAFETY DISCLOSURES 56
Item 5.  OTHER INFORMATION 56
Item 6.  EXHIBITS 57

 
 

 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

  (in thousands, except share data)  September 30, 2015
(unaudited)
  December 31, 2014
ASSETS          
Cash and due from banks  $11,436   $13,280 
Interest bearing demand deposits with other banks   70,259    22,825 
Total cash and cash equivalents   81,695    36,105 
Securities          
Available-for-sale at fair value   80,371    91,312 
Federal Home Loan Bank of Boston stock at cost   3,515    3,515 
Loans held-for-sale   573    568 
Loans receivable, net (allowance for loan losses: $5,659 and $5,358)   687,719    673,330 
Other real estate owned   167    1,002 
Bank premises and equipment, net   14,588    14,431 
Goodwill   12,552    12,552 
Intangible assets (net of accumulated amortization: $2,752 and $2,258)   2,496    2,990 
Accrued interest receivable   2,296    2,334 
Cash surrender value of life insurance policies   13,591    13,314 
Deferred taxes   2,788    2,428 
Other assets   1,882    1,546 
Total Assets  $904,233   $855,427 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
Demand (non-interest bearing)  $194,618   $161,386 
Demand (interest-bearing)   129,779    117,169 
Money market   184,409    174,274 
Savings and other   123,017    121,387 
Certificates of deposit   129,656    141,210 
Total deposits   761,479    715,426 
Repurchase agreements   4,210    4,163 
Federal Home Loan Bank of Boston advances   26,928    28,813 
Note payable   380     
Capital lease liability   422    424 
Accrued interest and other liabilities   5,364    4,780 
Total Liabilities   798,783    753,606 
Shareholders' Equity          
Preferred stock - $.01 per share par value          
Authorized: 25,000; Issued: 16,000 (Series B);          
Liquidation preference: $1,000 per share   16,000    16,000 
Common stock - $.10 per share par value          
Authorized: 5,000,000;          
Issued: 2,733,576 and 2,720,766   273    272 
Paid-in capital   41,362    41,077 
Retained earnings   46,558    42,677 
Unearned compensation - restricted stock awards   (186)   (313)
Accumulated other comprehensive income   1,443    2,108 
Total Shareholders' Equity   105,450    101,821 
Total Liabilities and Shareholders' Equity  $904,233   $855,427 

3
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

  Periods ended September 30,    Three months ended      Nine months ended  
  (in thousands, except per share amounts)    2015      2014      2015      2014  
Interest and dividend income                    
Interest and fees on loans  $7,955   $4,656   $23,727   $13,983 
Interest on debt securities                    
Taxable   286    330    910    1,075 
Tax exempt   351    416    1,098    1,294 
Other interest and dividends   58    42    132    87 
Total interest and dividend income   8,650    5,444    25,867    16,439 
Interest expense                    
Deposits   463    379    1,359    1,079 
Repurchase agreements   2    3    5    5 
Capital lease   18    12    53    29 
Note payable   1        1     
Federal Home Loan Bank of Boston advances   269    296    832    892 
Total interest expense   753    690    2,250    2,005 
Net interest and dividend income   7,897    4,754    23,617    14,434 
Provision for loan losses   655    318    651    969 
Net interest and dividend income after provision for loan losses   7,242    4,436    22,966    13,465 
Non-interest income                    
Trust and wealth advisory   798    791    2,510    2,509 
Service charges and fees   798    639    2,307    1,807 
Gains on sales and calls of available-for-sale securities, net   6        192     
Gains on sales of mortgage loans, net   47        227    43 
Mortgage servicing, net   5    41    (15)   80 
Other   115    82    343    234 
Total non-interest income   1,769    1,553    5,564    4,673 
Non-interest expense                    
Salaries   2,531    1,980    7,520    5,776 
Employee benefits   916    697    2,881    2,176 
Premises and equipment   863    667    2,683    2,080 
Data processing   404    420    1,276    1,166 
Professional fees   398    315    1,642    1,025 
Collections, OREO and loan related   125    85    594    319 
FDIC insurance   163    119    494    340 
Marketing and community support   174    115    465    355 
Amortization of core deposit intangibles   161    75    494    194 
Merger and acquisition related expenses       196        586 
Other   467    439    1,528    1,269 
Total non-interest expense   6,202    5,108    19,577    15,286 
Income before income taxes   2,809    881    8,953    2,852 
Income tax provision   824    113    2,663    567 
Net income  $1,985   $768   $6,290   $2,285 
Net income available to common shareholders  $1,945   $728   $6,170   $2,159 
                     
Basic earnings per common share  $0.71   $0.43   $2.26   $1.26 
Diluted earnings per common share   0.71    0.43    2.25    1.26 
Common dividends per share   0.28    0.28    0.84    0.84 

4
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

     Three months ended      Nine months ended  
  Periods ended September 30, (in thousands)    2015      2014      2015      2014  
Net income  $1,985   $768   $6,290   $2,285 
Other comprehensive income (loss)                    
Net unrealized gains (losses) on securities available-for-sale   116    342    (816)   2,771 
Reclassification of net realized gains in net income (1)   (6)       (192)    
Unrealized gains (losses) on securities available-for-sale   110    342    (1,008)   2,771 
Income tax (expense) benefit   (37)   (116)   343    (942)
Other comprehensive income (loss), net of tax   73    226    (665)   1,829 
Comprehensive income  $2,058   $994   $5,625   $4,114 

(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 of available-for-sale securities, net, the tax effect is included in the income tax provision and the after tax amount is included in net income.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

  (dollars in thousands) (unaudited) Common Stock  Preferred stock  Paid-in capital  Retained earnings  Unearned compensation – restricted stock awards 

Accumulated other comp-

rehensive income

 

Total share-

holders' equity

   Shares  Amount                  
Balances at December 31, 2013   1,710,121   $171   $16,000   $13,668   $42,240   $(335)  $1,046   $72,790 
Net income for period                   2,285            2,285 
Other comprehensive income, net of tax                           1,829    1,829 
Common stock dividends declared                   (1,439)           (1,439)
Preferred stock dividends declared                   (126)           (126)
Issuance of restricted common stock   3,000            81        (81)        
Forfeiture of restricted common stock   (2,000)           (50)       50         
Stock based compensation-restricted stock awards                       112        112 
Issuance of common stock for directors   2,160            65                65 
Balances at September 30, 2014   1,713,281   $171   $16,000   $13,764   $42,960   $(254)  $2,875   $75,516 
Balances at December 31, 2014   2,720,766   $272   $16,000   $41,077   $42,677   $(313)  $2,108   $101,821 
Net income for period                   6,290            6,290 
Other comprehensive loss, net of tax                           (665)   (665)
Common stock dividends declared                   (2,289)           (2,289)
Preferred stock dividends declared                   (120)           (120)
Stock options exercised   9,450    1        182                183 
Issuance of common stock for executives   1,000            29                29 
Forfeiture of restricted common stock   (300)           (7)       7         
Issuance of common stock for directors   2,660            81                81 
Stock based compensation-restricted stock awards                       120        120 
Balances at September 30, 2015   2,733,576   $273   $16,000   $41,362  $46,558   $(186)  $1,443   $105,450 

5
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

  Nine months ended September 30, (in thousands)  2015  2014
Operating Activities          
Net income  $6,290   $2,285 
Adjustments to reconcile net income to net cash provided by operating activities:          
(Accretion), amortization and depreciation:          
Securities   178    163 
Bank premises and equipment   917    737 
Core deposit intangible   494    193 
Mortgage servicing rights   282    220 
(Increase) decrease fair value adjustment on loans   (2,031)   24 
(Increase) decrease fair value adjustment on deposits   (355)   53 
(Gains) and losses, including write-downs          
Gain on calls of securities available-for-sale, net   (40)   (39)
Gain on sales of securities available-for-sale, net   (152)    
Gain on sales of loans, excluding capitalized servicing rights   (102)    
Write-downs of other real estate owned   238    4 
      Loss on sale/disposals of premises and equipment   45    5 
Provision for loan losses   651    969 
Proceeds from loans sold   4,897    3,536 
Loans originated for sale   (4,800)   (3,324)
Decrease (increase) in deferred loan origination fees and costs, net   25    (21)
Mortgage servicing rights originated   (125)   (6)
Increase (decrease) in mortgage servicing rights impairment reserve   3    (14)
Decrease (increase) in interest receivable   38    (74)
Deferred tax benefit   (17)   (39)
Increase in prepaid expenses   (409)   (81)
Increase in cash surrender value of life insurance policies   (277)   (173)
Increase in income tax receivable       (329)
Increase in income tax payable   271     
Increase in other assets   (87)   (76)
Decrease in accrued expenses   (11)   (144)
Decrease in interest payable   (45)   (5)
Increase in other liabilities   369    82 
Stock based compensation-restricted stock awards   120    112 
Net cash provided by operating activities   6,367    4,058 
Investing Activities          
Maturity of interest-bearing time deposits with other banks       738 
Redemption of Federal Home Loan Bank of Boston stock       1,825 
Purchases of securities available-for-sale   (9,322)    
Proceeds from sales of securities available-for-sale   3,861     
Proceeds from calls of securities available-for-sale   7,995    4,115 
Proceeds from maturities of securities available-for-sale   7,413    7,539 
Loan originations and principal collections, net   (13,748)   (24,694)
Recoveries of loans previously charged off   613    50 
Proceeds from sales of other real estate owned   698    40 
Premiums paid on bank-owned life insurance       (1,100)
Cash and cash equivalents acquired from Sharon, CT branch office of another institution       17,462 
Capital expenditures   (739)   (1,872)
Net cash (utilized) provided by investing activities   (3,229)   4,103 

6
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Financing Activities          
Increase in deposit transaction accounts, net   57,607    24,527 
(Decrease) increase in time deposits, net   (11,199)   2,174 
Increase in securities sold under agreements to repurchase, net   47    3,946 
Principal payments on Federal Home Loan Bank of Boston advances   (786)   (1,193)
Modification payment on Federal Home Loan Bank of Boston advances   (1,099)     
Decrease in capital lease obligation   (2)   (1)
Stock options exercised   183     
Issuance of shares for director fees   81    65 
Issuance of shares for executives   29     
Common stock dividends paid   (2,289)   (1,439)
Series B preferred stock dividends paid   (120)   (126)
Net cash provided by financing activities   42,452    27,953 
Net increase  in cash and cash equivalents   45,590    36,114 
Cash and cash equivalents, beginning of period   36,105    12,711 
Cash and cash equivalents, end of period  $81,695   $48,825 
Cash paid during period          
Interest  $2,650   $2,010 
Income taxes   2,409    935 
Non-cash investing and financing activities          
Transfer from loans to other real estate owned   101     
Note payable to finance building purchase   380     
Sharon branch acquisition          
Cash and cash equivalents acquired       17,462 
Net loans acquired       63 
Fixed assets acquired       158 
Core deposit intangible       489 
Deposits assumed       18,171 
Accrued interest payable assumed       1 

 

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 financial position of Salisbury and the statements of income, comprehensive income, shareholders’ equity and cash flows for the interim periods presented.

The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (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, impairment of goodwill and intangibles and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.

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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2014 Annual Report on Form 10-K for the year ended December 31, 2014.

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, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of this ASU is to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. However, in July 2015, the FASB voted to approve deferring the effective date by one year (i.e. interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e. interim and annual reporting periods beginning after December 15, 2016). Salisbury is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

8
 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. Salisbury anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The standard is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The guidance should be applied on a retrospective basis. Salisbury anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. Salisbury anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07:  “Fair Value Measurement (Topic 820) - Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).”  The objective of this update is to address the diversity in practice related to how certain investments measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient.  Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient.  The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.  Salisbury anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16: “Simplifying the Accounting for Measurement-Period Adjustments.” Under the ASU, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation or amortization, or other income effects (if any) as a result of the change to the provisional amounts, calculated as if the accounting had been completed as of the acquisition date, must be recorded in the reporting period in which the adjustment amounts are determined rather than retrospectively. The ASU also requires that the acquirer present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early application is permitted for financial statements that have not been issued. Salisbury anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

9
 

NOTE 2 - SECURITIES

The composition of securities is as follows:

  (in thousands)  Amortized
cost (1)
  Gross un-
realized gains
  Gross un-
realized losses
  Fair value
September 30, 2015                    
Available-for-sale                    
U.S. Treasury notes  $7,498   $67   $   $7,565 
U.S. Government agency notes   498    2        500 
Municipal bonds   32,691    690    (64)   33,317 
Mortgage-backed securities                    
U.S. Government agencies and U.S. Government-sponsored enterprises   26,449    575    (18)   27,006 
Collateralized mortgage obligations                    
U.S. Government agencies   2,136    21        2,157 
  Non-agency   4,834    505    (7)   5,332 
SBA bonds   3,297    53        3,350 
CRA mutual funds   762    7        769 
Preferred stock   20    355        375 
Total securities available-for-sale  $78,185   $2,275   $(89)  $80,371 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,515   $   $   $3,515 

 

  (in thousands)  Amortized
cost (1)
  Gross un-
realized gains
  Gross un-
realized losses
  Fair value
December 31, 2014                    
Available-for-sale                    
U.S. Treasury notes  $2,699   $107   $   $2,806 
U.S. Government agency notes   5,850    24        5,874 
Municipal bonds   38,962    1,455    (65)   40,352 
Mortgage-backed securities                    
U.S. Government agencies and U.S. Government-sponsored enterprises   27,036    688    (15)   27,709 
Collateralized mortgage obligations                    
U.S. Government agencies   2,657    22        2,679 
Non-agency   6,056    552    (12)   6,596 
SBA bonds   4,336    129        4,465 
CRA mutual funds   502    2        504 
Preferred stock   20    307        327 
Total securities available-for-sale  $88,118   $3,286   $(92)  $91,312 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,515   $   $   $3,515 
(1)Net of other-than-temporary impairment write-downs recognized in earnings.

Salisbury sold $3.7 million in securities available-for-sale during the nine month period ended September 30, 2015, and did not sell any securities available-for-sale during the nine month period ended September 30, 2014. Realized gains on sales of securities sold in 2015 are $153,000.

10
 

The following table summarizes, for all securities in an unrealized loss position, the aggregate fair value and gross unrealized loss of securities that have been in a continuous unrealized loss position as of the date presented:

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

Unrealized

losses

  Fair
value
 

Unrealized

losses

  Fair
value
  Unrealized losses
  September 30, 2015                  
Available-for-sale                              
Municipal bonds  $1,267   $(64)  $   $   $1,267   $(64)
Mortgage-backed securities   1,828    (18)           1,828    (18)
Collateralized mortgage obligations:                           
Non-agency   244    (7)           244    (7)
Total temporarily impaired securities   3,339    (89)           3,339    (89)

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

Unrealized

losses

  Fair
value
 

Unrealized

losses

  Fair
value
  Unrealized losses
  December 31, 2014                  
Available-for-sale                              
Municipal bonds  $177   $1  $1,589   $64   $1,766   $65
Mortgage-backed securities   56    1   1,885    14    1,941    15
Collateralized mortgage obligations:                            
Non-agency   441    7   164    5    605    12
Total temporarily impaired securities   674    9   3,638    83    4,312    92

Salisbury evaluates securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers whether it has the intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI.

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at September 30, 2015.

U.S. Government agency mortgage-backed securities: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be at maturity, and Salisbury does not intend to sell these securities. Therefore, management does not consider these securities to be OTTI at September 30, 2015.

Municipal bonds: Contractual cash flows are performing as expected. Salisbury’s portfolio is mostly comprised of tax-exempt general obligation bonds or public-purpose revenue bonds for schools, municipal offices, sewer infrastructure and fire houses, for small towns and municipalities across the United States. In the wake of the financial crisis, most monoline bond insurers had their ratings downgraded or withdrawn because of excessive exposure to insurance for collateralized debt obligations. Where appropriate, Salisbury performs credit underwriting reviews of unrated issuers, including some that have had their ratings withdrawn and are insured by insurers that have had their ratings withdrawn, to assess default risk. For all completed reviews, pass credit risk ratings have been assigned. Management expects to recover the entire amortized cost basis of these securities. 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 at maturity, and Salisbury does not intend to sell these securities. Therefore, management does not consider these securities to be OTTI at September 30, 2015.

11
 

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at September 30, 2015, to assess whether any of the securities were OTTI. Salisbury uses cash flow forecasts for each security based on a variety of market driven assumptions and securitization terms, including prepayment speed, default or delinquency rate, and default severity for losses including interest, legal fees, property repairs, expenses and realtor fees, that, together with the loan amount are subtracted from collateral sales proceeds to determine severity. In 2009, Salisbury determined that five non-agency CMO securities reflected OTTI and recognized losses for deterioration in credit quality of $1,128,000. Salisbury judged the four remaining securities not to have additional OTTI and all other CMO securities not to be OTTI as of September 30, 2015. 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.

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)    2015      2014  
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, 2015. 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.

12
 

NOTE 3 – LOANS

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

   September 30, 2015  December 31, 2014
  (In thousands)  Business Activities  Loans 

Acquired

Loans

  Total  Business Activities  Loans 

Acquired

Loans

  Total
Residential 1-4 family  $260,912   $8,026   $268,938   $252,258   $9,223   $261,481 
Residential 5+ multifamily   6,192    6,228    12,420    5,556    8,735    14,291 
Construction of residential 1-4 family   6,193        6,193    2,004        2,004 
Home equity credit   33,880        33,880    34,627        34,627 
Residential real estate   307,177    14,254    321,431    294,445    17,958    312,403 
Commercial   110,955    91,467    202,422    98,498    97,899    196,397 
Construction of commercial   12,987    4,862    17,849    18,602    9,045    27,647 
Commercial real estate   123,942    96,329    220,271    117,100    106,944    224,044 
Farm land   3,485        3,485    3,239        3,239 
Vacant land   9,446        9,446    9,342        9,342 
Real estate secured   444,050    110,583    554,633    424,126    124,902    549,028 
Commercial and industrial   70,858    53,928    124,786    49,204    68,714    117,918 
Municipal   6,947        6,947    6,083        6,083 
Consumer   5,760    74    5,834    4,334    122    4,456 
Loans receivable, gross   527,615    164,585    692,200    483,747    193,738    677,485 
Deferred loan origination fees and costs, net   1,178        1,178    1,203        1,203 
Allowance for loan losses   (5,386)   (273)   (5,659)   (5,337)   (21)   (5,358)
Loans receivable, net  $523,407   $164,312   $687,719   $479,613   $193,717   $673,330 
Loans held-for-sale                              
Residential 1-4 family  $573   $   $573   $568   $   $568 

 

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 Columbia 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, and installment and collateral loans. 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.

13
 

Loan Credit Quality

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

Business Activities Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
September 30, 2015                              
Residential 1-4 family  $246,872   $7,053   $6,895   $92   $   $260,912 
Residential 5+ multifamily   4,180    1,048    964            6,192 
Construction of residential 1-4 family   6,193                    6,193 
Home equity credit   32,331    469    1,080            33,880 
Residential real estate   289,576    8,570    8,939    92        307,177 
Commercial   99,165    4,984    6,806            110,955 
Construction of commercial   12,416        571            12,987 
Commercial real estate   111,581    4,984    7,377            123,942 
Farm land   2,449        1,036            3,485 
Vacant land   6,446    71    2,929            9,446 
Real estate secured   410,052    13,625    20,281    92        444,050 
Commercial and industrial   69,007    1,230    621            70,858 
Municipal   6,947                    6,947 
Consumer   5,742    11    7            5,760 
Loans receivable, gross  $491,748   $14,866   $20,909   $92   $   $527,615 

Acquired Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
September 30, 2015                              
Residential 1-4 family  $7,168   $91   $767   $   $   $8,026 
Residential 5+ multifamily   6,228                    6,228 
Construction of residential 1-4 family                        
Home equity credit                        
Residential real estate   13,396    91    767            14,254 
Commercial   83,657    3,052    4,758            91,467 
Construction of commercial   4,590        272            4,862 
Commercial real estate   88,247    3,052    5,030            96,329 
Farm land                        
Vacant land                        
Real estate secured   101,643    3,143    5,797            110,583 
Commercial and industrial   52,051    1,192    603    82        53,928 
Municipal                        
Consumer   50    7        17        74 
Loans receivable, gross  $153,744   $4,342   $6,400   $99   $   $164,585 

 

14
 

Business Activities Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2014                              
Residential 1-4 family  $232,628   $12,350   $7,187   $93   $   $252,258 
Residential 5+ multifamily   3,420    1,072    1,064            5,556 
Construction of residential 1-4 family   2,004                    2,004 
Home equity credit   32,639    807    1,181            34,627 
Residential real estate   270,691    14,229    9,432    93        294,445 
Commercial   79,975    10,728    7,795            98,498 
Construction of commercial   18,024        578            18,602 
Commercial real estate   97,999    10,728    8,373            117,100 
Farm land   772    1,361    1,106            3,239 
Vacant land   6,039    140    3,163            9,342 
Real estate secured   375,501    26,458    22,074    93        424,126 
Commercial and industrial   44,903    3,527    774            49,204 
Municipal   6,083                    6,083 
Consumer   4,271    53    10            4,334 
Loans receivable, gross  $430,758   $30,038   $22,858   $93   $   $483,747 

Acquired Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2014                              
Residential 1-4 family  $8,661   $   $562   $   $   $9,223 
Residential 5+ multifamily   8,735                    8,735 
Construction of residential 1-4 family                        
Home equity credit                        
Residential real estate   17,396        562            17,958 
Commercial   89,820    3,830    3,723    526        97,899 
Construction of commercial   9,045                    9,045 
Commercial real estate   98,865    3,830    3,723    526        106,944 
Farm land                        
Vacant land                        
Real estate secured   116,261    3,830    4,285    526        124,902 
Commercial and industrial   66,098    1,675    941            68,714 
Municipal                        
Consumer   96    7    19            122 
Loans receivable, gross  $182,455   $5,512   $5,245   $526   $   $193,738 

 

 

15
 

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

 

Business Activities Loans

    Past due   
                  180  30      
  (in thousands)  Current  1-29  30-59  60-89  90-179  days  days  Accruing  Non-
      days  days  days  days  and  and90 days accrual
                  over  overand over  
  September 30, 2015                           
Residential 1-4 family  $252,773   $3,454   $332   $426   $93   $3,834   $4,685   $   $5,770 
Residential 5+ multifamily   6,032    71                89    89        89 
Construction of residential 1-4 family   6,193                                 
Home equity credit   32,733    424    291        422    10    723        494 
Residential real estate   297,731    3,949    623    426    515    3,933    5,497        6,353 
Commercial   106,638    1,708    1,569    240    119    681    2,609        2,423 
Construction of commercial   12,539            448            448         
Commercial real estate   119,177    1,708    1,569    688    119    681    3,057        2,423 
Farm land   2,762                    723    723        1,036 
Vacant land   5,504    1,119                2,823    2,823        2,857 
Real estate secured   425,174    6,776    2,192    1,114    634    8,160    12,100        12,669 
Commercial and industrial   69,459    840    139    397    5    18    559    5    419 
Municipal   6,947                                 
Consumer   5,653    92    14    1            15         
Loans receivable, gross  $507,233   $7,708   $2,345   $1,512   $639   $8,178   $12,674   $5   $13,088 

Acquired Loans

  September 30, 2015                           
Residential 1-4 family  $6,977   $190   $   $   $269   $590   $859   $91   $767 
Residential 5+ multifamily   6,228                                 
Construction of residential 1-4 family                                    
Home equity credit                                    
Residential real estate   13,205    190            269    590    859    91    767 
Commercial   86,852    1,982        461    102    2,070    2,633        2,172 
Construction of commercial   4,590                    272    272        272 
Commercial real estate   91,442    1,982        461    102    2,342    2,905        2,444 
Farm land                                    
Vacant land                                    
Real estate secured   104,647    2,172        461    371    2,932    3,764    91    3,211 
Commercial and industrial   53,116    561    191    20    40        251        40 
Municipal                                    
Consumer   70        4                4         
Loans receivable, gross  $157,833   $2,733   $195   $481   $411   $2,932   $4,019   $91   $3,251 

  

16
 

Business Activities Loans

    Past due   
                  180  30      
  (in thousands)  Current  1-29  30-59  60-89  90-179  days  days  Accruing  Non-
      days  days  days  days  and  and90 days accrual
                  over  overand over  
  December 31, 2014                           
Residential 1-4 family  $241,567   $7,299   $1,250   $555   $976   $611   $3,392   $   $2,445 
Residential 5+ multifamily   5,467                89        89        89 
Construction of residential 1-4 family   2,004                                 
Home equity credit   33,488    387    122    528    39    63    752        348 
Residential real estate   282,526    7,686    1,372    1,083    1,104    674    4,233        2,882 
Commercial   94,598    2,079    602            1,219    1,821        1,219 
Construction of commercial   18,602                                 
Commercial real estate   113,200    2,079    602            1,219    1,821        1,219 
Farm land   2,119        13    723        384    1,120        384 
Vacant land   6,422    51    7        39    2,823    2,869        2,862 
Real estate secured   404,267    9,816    1,994    1,806    1,143    5,100    10,043        7,347 
Commercial and industrial   48,478    582    91    17    36        144    17    33 
Municipal   6,083                                 
Consumer   4,274    47    8    5            13         
Loans receivable, gross  $463,102   $10,445   $2,093   $1,828   $1,179   $5,100   $10,200   $17   $7,380 
                                              

Acquired Loans

  December 31, 2014                        
Residential 1-4 family  $8,661   $   $   $   $   $562   $562   $   $562 
Residential 5+ multifamily   8,735                                 
Construction of residential 1-4 family                                    
Home equity credit                                    
Residential real estate   17,396                    562    562        562 
Commercial   95,695    1,109    167        285    643    1,095        1,931 
Construction of commercial   9,045                                 
Commercial real estate   104,740    1,109    167        285    643    1,095        1,931 
Farm land                                    
Vacant land                                    
Real estate secured   122,136    1,109    167        285    1,205    1,657        2,493 
Commercial and industrial   67,665    740    89    220            309         
Municipal                                    
Consumer   117    5                             
Loans receivable, gross  $189,918   $1,854   $256   $220   $285   $1,205   $1,966   $   $2,493 
                                              

Interest on impaired loans that would have been recorded as additional interest income for the nine months ended September 30, 2015 and 2014 had the loans been current in accordance with their original terms totaled $609,000 and $410,000, respectively, disregarding the impact of purchased accounting on these loans.

 

17
 

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

Business Activities Loans  Nine months ended
   September 30, 2015  September 30, 2014
  (in thousands)  Quantity 

Pre-

modification balance

 

Post-

modification balance

  Quantity 

Pre-

modification balance

 

Post-

modification balance

Residential real estate   2   $923   $923    2   $237   $237 
Commercial real estate   2    478    478    3    846    846 
Construction of commercial               1    131    131 
Home equity credit   1    35    35    2    72    72 
Troubled debt restructurings   5   $1,436   $1,436    8   $1,286   $1,286 
Rate reduction and term extension   2   $478   $478             
Interest only and term extension               1    48    48 
Term extension and amortization               2    338    338 
Interest only               2    54    54 
Debt consolidation, rate reduction, term extension               1    399    399 
Debt consolidation and term extension               2    447    447 
Note bifurcation   1    48    48             
Term extension   2    910    910             
Troubled debt restructurings   5   $1,436   $1,436    8   $1,286   $1,286 

Five loans were modified in troubled debt restructurings during 2015, one of which was past due at September 30, 2015.

There was one acquired loan modified in a troubled debt restructuring during the nine months ended September 30, 2015.

As of September 30, 2015, the Bank had $4.3 million in loans collateralized by residential real estate property in the process of foreclosure.

 

18
 

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

   Business Activities Loans  Acquired Loans
  (in thousands)  Three months ended September 30, 2015  Three months ended September 30, 2015
   Beginning balance 

Provision

(benefit)

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

(benefit)

 

Charge-

offs

 

Reco-

veries

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

Provision

(benefit)

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

(benefit)

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,306   $952   $(573)  $113   $2,798   $   $70   $   $   $70 
Commercial   1,697    (256)   (214)       1,227    7    151        5    163 
Land   164    186    (72)       278                     
Real estate   4,167    882    (859)   113    4,303    7    221        5    233 
Commercial and industrial   583    (484)   (56)   455    498    14            26    40 
Municipal   61    (13)           48                     
Consumer   117    30    (47)   13    113                     
Unallocated   409    15            424                     
Totals  $5,337   $430   $(962)  $581   $5,386   $21   $221   $   $31   $273 
  (in thousands)  Three months ended September 30, 2014  Nine months ended September 30, 2014
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $1,974   $357   $(46)  $16   $2,301   $1,938   $494   $(149)  $18   $2,301 
Commercial   1,622    89           1,711    1,385    378    (52)       1,711 
Land   184    (17)   (6)       161    226    33    (98)       161 
Real estate   3,780    429    (52)   16    4,173    3,549    905    (299)   18    4,173 
Commercial and industrial   584    (68)      1    517    561    (57)   (1)   14    517 
Municipal   44    18            62    43    19            62 
Consumer   49    11    (3)   2    59    105    (46)   (18)   18    59 
Unallocated   645    (72)           573    425    148            573 
Totals  $5,102   $318   $(55)  $19   $5,384   $4,683   $969   $(318)  $50   $5,384 

 

19
 

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

Business Activities Loans

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
September 30, 2015                              
Residential 1-4 family  $252,454   $1,603   $8,458   $724   $260,912   $2,327 
Residential 5+ multifamily   4,315    37    1,877        6,192    37 
Construction of residential 1-4 family   6,193    52            6,193    52 
Home equity credit   33,230    345    650    37    33,880    382 
Residential real estate   296,192    2,037    10,985    761    307,177    2,798 
Commercial   106,573    937    4,382    170    110,955    1,107 
Construction of commercial   12,864    120    123        12,987    120 
Commercial real estate   119,437    1,057    4,505    170    123,942    1,227 
Farm land   2,449    19    1,036    1    3,485    20 
Vacant land   6,364    234    3,082    24    9,446    258 
Real estate secured   424,442    3,347    19,608    956    444,050    4,303 
Commercial and industrial   70,372    494    486    4    70,858    498 
Municipal   6,947    48            6,947    48 
Consumer   5,760    113            5,760    113 
Unallocated allowance       424                424 
Totals  $507,521   $4,426   $20,094   $960   $527,615   $5,386 

Acquired Loans

(in thousands)  Collectively evaluated  Individually evaluated  ASC 310-30 loans   Total portfolio 
    Loans    Allowance    Loans    Allowance    Loans    Allowance    Loans    Allowance 
September 30, 2015                                        
Residential 1-4 family  $7,259   $   $767   $70   $   $   $8,026   $70 
Residential 5+ multifamily   6,228                        6,228     
Construction of residential 1-4 family                                
Home equity credit                                
Residential real estate   13,487        767    70            14,254    70 
Commercial   83,257    13    2,920    145    5,290    2    91,467    160 
Construction of commercial   4,590    3    272                4,862    3 
Commercial real estate   87,847    16    3,192    145    5,290    2    96,329    163 
Farm land                                
Vacant land                                
Real estate secured   101,334    16    3,959    215    5,290    2    110,583    233 
Commercial and industrial   52,587    40    40        1,301        53,928    40 
Municipal                                
Consumer   57                17        74     
Unallocated allowance                                
Totals  $153,978   $56   $3,999   $215   $6,608   $2   $164,585   $273 
20
 

Business Activities Loans

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2014                              
Residential 1-4 family  $245,997   $1,316   $6,261   $549   $252,258   $1,865 
Residential 5+ multifamily   4,536    66    1,020    3    5,556    69 
Construction of residential 1-4 family   2,004    13            2,004    13 
Home equity credit   34,231    350    396    9    34,627    359 
Residential real estate   286,768    1,745    7,677    561    294,445    2,306 
Commercial   93,784    1,018    4,714    486    98,498    1,504 
Construction of commercial   18,474    193    128        18,602    193 
Commercial real estate   112,258    1,211    4,842    486    117,100    1,697 
Farm land   2,855    59    384        3,239    59 
Vacant land   6,245    67    3,097    38    9,342    105 
Real estate secured   408,126    3,082    16,000    1,085    424,126    4,167 
Commercial and industrial   48,635    532    569    51    49,204    583 
Municipal   6,083    61            6,083    61 
Consumer   4,334    117            4,334    117 
Unallocated allowance       409                409 
Totals  $467,178   $4,201   $16,569   $1,136   $483,747   $5,337 

Acquired Loans

  (in thousands)  Collectively evaluated  Individually evaluated  ASC 310-30 loans  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2014                                        
Residential 1-4 family  $8,661   $   $562   $   $   $   $9,223   $ 
Residential 5+ multifamily   8,735                        8,735     
Construction of residential 1-4 family                                
Home equity credit                                
Residential real estate   17,396        562                17,958     
Commercial   89,820        2,502        5,577        97,899     
Construction of commercial   9,045    7                    9,045    7 
Commercial real estate   98,865    7    2,502        5,577        106,944    7 
Farm land                                
Vacant land                                
Real estate secured   116,261    7    3,064        5,577        124,902    7 
Commercial and industrial   66,874    14            1,840        68,714    14 
Municipal                                
Consumer   103                19        122     
Unallocated allowance                                
Totals  $183,238   $21   $3,064   $   $7,436   $   $193,738   $21 
21
 

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

Business Activities Loans

  September 30, 2015 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
Performing loans  $503,052   $3,935   $   $   $503,052   $3,935 
Potential problem loans   4,469    67            4,469    67 
Impaired loans           20,094    960    20,094    960 
Unallocated allowance       424                424 
Totals  $507,521   $4,426   $20,094   $960   $527,615   $5,386 

Acquired Loans

  September 30, 2015 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
Performing loans  $158,144   $56   $   $   $158,144   $56 
Potential problem loans   2,442    2            2,442    2 
Impaired loans           3,999    215    3,999    215 
Unallocated allowance                        
Totals  $160,586   $58   $3,999   $215   $164,585   $273 

Business Activities Loans

  December 31, 2014 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
  Performing loans  $457,744   $3,283   $   $   $457,744   $3,283 
  Potential problem loans   9,423    509    11        9,434    509 
  Impaired loans           16,569    1,136    16,569    1,136 
  Unallocated allowance       409                409 
  Totals  $467,167   $4,201   $16,580   $1,136   $483,747   $5,337 

Acquired Loans

  December 31, 2014 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
  Performing loans  $187,966   $21   $   $   $187,966   $21 
  Potential problem loans   2,708                2,708     
  Impaired loans           3,064        3,064     
  Unallocated allowance                        
  Totals  $190,674   $21   $3,064   $   $193,738   $21 

  

22
 

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:

Business Activities Loans

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
September 30, 2015                                         
Residential 1-4 family  $7,170   $7,703   $6,213   $724   $109   $3,165   $3,314   $3,043   $82 
Home equity credit   543    557    176    37    6    107    122    611    2 
Residential real estate   7,713    8,260    6,389    761    115    3,272    3,436    3,654    84 
Commercial   3,864    4,309    2,629    170    113    518    548    2,130    12 
Construction of commercial                       123    129    127    6 
Farm land   11    13    445    1        1,025    1,100    270    15 
Vacant land   2,870    3,789    3,058    24    2    212    244    5    7 
Real estate secured   14,458    16,371    12,521    956    230    5,150    5,457    6,186    124 
Commercial and industrial   247    255    120    4    8    239    272    464    7 
Consumer                                    
Totals  $14,705   $16,626   $12,641   $960   $238   $5,389   $5,729   $6,650   $131 

 

Acquired Loans

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
September 30, 2015                                         
Residential 1-4 family  $590   $716   $176   $70   $   $177   $177   $436   $4 
Home equity credit                                    
Residential real estate   590    716    176    70        177    177    436    4 
Commercial   2,146    2,897    557    145    61    774    1,091    2,097    10 
Construction of commercial                       272    278    138    16 
Farm land                                    
Vacant land                                    
Real estate secured   2,736    3,613    733    215    61    1,223    1,546    2,671    30 
Commercial and industrial   40    70    4        1                 
Consumer                                    
Totals  $2,776   $3,683   $737   $215   $62   $1,223   $1,546   $2,671   $30 

 

23
 

Business Activities Loans

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
  December 31, 2014           
Residential 1-4 family  $5,008   $5,157   $4,547   $552   $128   $2,273   $2,395   $2,703   $57 
Home equity credit   9    24    91    9        387    405    441    4 
Residential real estate   5,017    5,181    4,638    561    128    2,660    2,800    3,144    61 
Commercial   3,383    3,563    3,262    486    108    1,331    1,520    1,468    54 
Construction of commercial                       128    134    123     
Farm land                       384    384    384     
Vacant land   3,097    3,996    3,090    38    12                 
Real estate secured   11,497    12,740    10,990    1,085    248    4,503    4,838    5,119    115 
Commercial and industrial   102    161    106    51    2    467    469    516    30 
Consumer                               19     
Totals  $11,599   $12,901   $11,096   $1,136   $250   $4,970   $5,307   $5,654   $145 

Acquired Loans

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
  December 31, 2014                       
Residential 1-4 family  $   $   $   $   $   $562   $716   $562   $3 
Home equity credit                                    
Residential real estate                       562    716    562    3 
Commercial                       2,502    4,014    2,502    12 
Construction of commercial                                    
Farm land                                    
Vacant land                                    
Real estate secured                       3,064    4,730    3,064    15 
Commercial and industrial                           4         
Consumer                                    
Totals  $   $   $   $   $   $3,064   $4,734   $3,064   $15 

Acquired Loans

Loans that Salisbury acquired through business combinations are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest.

24
 

For loans that meet the criteria stipulated in ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” Salisbury recognizes the accretable yield, which is defined as the excess of all cash flows expected to be collected at acquisition over the initial fair value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. The excess of the loan’s contractually required payments over the cash flows expected to be collected is the nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss accrual, or a valuation allowance. Going forward, Salisbury continues to evaluate whether the timing and the amount of cash to be collected are reasonably expected. Subsequent significant increases in cash flows Salisbury expects to collect will first reduce any previously recognized valuation allowance and then be reflected prospectively as an increase to the level yield. Subsequent decreases in expected cash flows may result in the loan being considered impaired. Interest income is not recognized to the extent that the net investment in the loan would increase to an amount greater than the estimated payoff amount.

For ASC 310-30 loans, the expected cash flows reflect anticipated prepayments, determined on a loan by loan basis according to the anticipated collection plan of these loans. The expected prepayments used to determine the accretable yield are consistent between the cash flows expected to be collected and projections of contractual cash flows so as to not affect the nonaccretable difference. For ASC 310-30 loans, prepayments result in the recognition of the nonaccretable balance as current period yield. Changes in prepayment assumptions may change the amount of interest income and principal expected to be collected.

The carrying amount of the acquired loans at September 30, 2015 totaled $165 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $9.8 million (and a note balance of $12.2 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows.

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under ASC-310-30:

   Three months  Nine months
  Periods ended September 30, (in thousands)    2015      2014      2015      2014  
Balance at beginning of period  $1,604   $   $1,242   $ 
Acquisitions                
Sales                
Reclassification from nonaccretable difference for loans with improved cash flows   379        1,157     
Change in cash flows that do not affect nonaccretable difference                
Accretion   (297)       (713)    
Balance at end of period  $1,686   $   $1,686   $ 

For loans that do not meet the ASC 310-30 criteria, Salisbury accretes interest income on a level yield basis using the contractually required cash flows. Salisbury subjects loans that do not meet the ASC 310-30 criteria to ASC Topic 450, “Contingencies” by collectively evaluating these loans for an allowance for loan losses.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if Salisbury can reasonably estimate the timing and amount of the expected cash flows on such loans and if Salisbury expects to fully collect the new carrying value of the loans. As such, Salisbury may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield.

NOTE 4 - MORTGAGE SERVICING RIGHTS

  (in thousands)    September 30, 2015      December 31, 2014  
Residential mortgage loans serviced for others  $132,201   $138,106 
Fair value of mortgage servicing rights   1,429    1,568 

Changes in mortgage servicing rights are as follows:

   Three months  Nine months
  Periods ended September 30, (in thousands)   2015      2014      2015      2014  
Mortgage Servicing Rights                    
Balance, beginning of period  $599   $838   $694   $980 
Originated   22    (17)   124    5 
Amortization (1)   (85)   (56)   (282)   (220)
Balance, end of period   536    765    536    765 
Valuation Allowance                    
Balance, beginning of period   (2)   (1)   1    (15)
Decrease (increase) in impairment reserve (1)   1    1    (2)   15 
Balance, end of period   (1)       (1)    
Loan servicing rights, net  $535   $765   $535   $765 
(1)Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

NOTE 5 - PLEDGED ASSETS

  (in thousands)    September 30, 2015      December 31, 2014  
Securities available-for-sale (at fair value)  $68,569   $69,055 
Loans receivable   159,436    157,581 
Total pledged assets  $228,005   $226,636 

At September 30, 2015, securities were pledged as follows: $60.4 million to secure public deposits, $8.1 million to secure repurchase agreements and $0.1 million to secure FHLBB advances. In addition to securities, loans receivable were pledged to secure FHLBB advances and credit facilities.

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NOTE 6 – EARNINGS PER SHARE

Salisbury defines unvested share-based payment awards that contain non-forfeitable rights to dividends as participating securities that are included in computing earnings per share (EPS) using the two-class method.

The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Basic EPS excludes dilution and is computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

The following table sets forth the computation of earnings per share (basic and diluted) for the periods indicated:

     Three months    Nine months
  Periods ended September 30, (in thousands)   2015      2014      2015      2014  
Net income  $1,985   $768   $6,290   $2,285 
Less: Preferred stock dividends declared   (40)   (40)   (120)   (126)
Net income available to common shareholders   1,945    728    6,170    2,159 
Less: Undistributed earnings allocated to participating securities   (17)   (8)   (54)   (26)
Net income allocated to common stock  $1,928   $720   $6,116   $2,133 
Common shares issued   2,731    1,713    2,728    1,713 
Less: Unvested restricted stock awards   (24)   (20)   (24)   (21)
Common shares outstanding used to calculate basic earnings per common share   2,707    1,693    2,704    1,692 
Add: Dilutive effect of stock options   17        17     
Common shares outstanding used to calculate diluted earnings per common share   2,724    1,693    2,721    1,692 
Earnings per common share (basic)  $0.71   $0.43   $2.26   $1.26 
Earnings per common share (diluted)  $0.71   $0.43   $2.25   $1.26 

NOTE 7 – SHAREHOLDERS’ EQUITY

Capital Requirements

Salisbury and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional and discretionary actions by the regulators that, if undertaken, could have a direct material effect on Salisbury’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Salisbury and the Bank must meet specific guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Salisbury’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require Salisbury and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined) to average assets (as defined) and total, Common Equity Tier 1 and Tier 1 capital (as defined) to risk-weighted assets (as defined). Management believes, as of September 30, 2015, that Salisbury and the Bank meet all of the capital adequacy requirements to which they are subject.

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In July 2013, the Federal Reserve Bank (FRB) approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for bank holding companies and their bank subsidiaries. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. On April 8, 2014, the FDIC adopted as final its interim final rule, which is identical in substance to the final rules issued by the FRB in July 2013. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Bank and Company. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

The phase-in period for the final rules began for Salisbury and the Bank on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule and should be fully phased-in by January 1, 2019.

The Bank was classified, as of its most recent notification, as "well capitalized." The Bank's actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" are as follows:

                      To be Well Capitalized
   Actual  For Capital Adequacy Purposes  Under Prompt Corrective Action Provisions
  (dollars in thousands)  Amount  Ratio  Amount  Ratio  Amount  Ratio
  September 30, 2015                  
Total Capital (to risk-weighted assets)                              
Salisbury  $96,366    13.90%  $55,481    8.0%   n/a     
Bank   87,507    12.62    55,481    8.0   $69,352    10.0%
Tier 1 Capital (to risk-weighted assets)                              
Salisbury   90,458    13.04    41,611    6.0    n/a     
Bank   81,599    11.77    41,611    6.0    55,481    8.0 
Common Equity Tier 1 Capital (to risk-weighted assets)                              
Salisbury   74,458    10.74    39,473    4.5    n/a     
Bank   81,599    11.77    39,473    4.5    57,017    6.5 
Tier 1 Capital (to average assets)                              
Salisbury   90,458    10.31    35,088    4.0    n/a     
Bank   81,599    9.30    35,088    4.0    43,859    5.0 
December 31, 2014                              
Total Capital (to risk-weighted assets)                              
Salisbury  $89,783    14.27%  $50,334    8.0%   n/a     
Bank   80,492    12.75    50,492    8.0   $63,116    10.0%
Tier 1 Capital (to risk-weighted assets)                              
Salisbury   84,171    13.38    25,167    4.0    n/a     
Bank   74,881    11.86    25,246    4.0    37,869    6.0 
Tier 1 Capital (to average assets)                              
Salisbury   84,171    12.31    27,344    4.0    n/a     
Bank   74,881    10.95    27,345    4.0    34,181    5.0 

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DIVIDENDS

Cash Dividends to Common Shareholders

Salisbury's ability to pay cash dividends is substantially dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.

FRB Supervisory Letter SR 09-4, February 24, 2009, revised March 30, 2009, notes that, as a general matter, the Board of Directors of a Bank Holding Company (“BHC”) should inform the Federal Reserve and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital structure.

Preferred Stock

In August 2011, Salisbury issued to the U.S. Secretary of the Treasury (the “Treasury”) $16 million of its Series B Preferred Stock under the Small Business Lending Fund (the “SBLF”) program. The SBLF program is a $30 billion fund established under the Small Business Jobs Act of 2010 to encourage lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. The Preferred Stock qualifies as Tier 1 capital for regulatory purposes and ranks senior to the Common Stock.

The Series B Preferred Stock pays noncumulative dividends. The dividend rate on the Series B Preferred Stock for the initial ten quarterly dividend periods, commencing with the period ended September 30, 2011 and ending with the period ended December 31, 2013, was determined each quarter based on the increase in the Bank’s Qualified Small Business Lending over a baseline amount. The dividend rate for the quarterly period ended September 30, 2015 was 1.0%. For the eleventh quarterly dividend payment through four and one-half years after its issuance, the dividend rate on the Series B Preferred Stock will be 1.0%. Commencing with the second quarter of 2016, after four and one-half years from its issuance, the dividend rate will be fixed at 9.0% per annum. The Series B Preferred Stock is non-voting, other than voting rights on matters that could adversely affect the Series B Preferred Stock. The Series B Preferred Stock is redeemable at any time at one hundred percent of the issue price plus any accrued and unpaid dividends.

NOTE 8 – PENSION AND OTHER BENEFITS

Salisbury had an insured noncontributory defined benefit retirement plan which was available to employees prior to December 31, 2012 based upon age and length of service. During 2012, Salisbury decided to complete its transition from providing retirement benefits under a defined benefit pension plan to a defined contribution 401(k) plan. Effective December 31, 2012, the pension plan was frozen, by amending the defined benefit pension plan to freeze retirement benefits at current levels and discontinue future benefit accruals. The plan was terminated effective October 15, 2014. 

The components of net periodic cost for Salisbury’s insured noncontributory defined benefit retirement plan were as follows:

     Three months ended      Nine months ended  
  Periods ended September 30, (in thousands)    2014      2014  
Interest cost on benefit obligation  $69   $207 
Expected return on plan assets   (74)   (222)
Net periodic benefit cost  $(5)  $(15)

Salisbury’s 401(k) Plan expense was $166,000 and $159,000, respectively, for the three month periods ended September 30, 2015 and 2014, and $516,000 and $495,000, respectively, for the nine month periods ended September 30, 2015 and 2014. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $14,000 and $13,000 respectively, for the three month periods ended September 30, 2015 and 2014, and $53,000 and $40,000, respectively, for the nine month periods ended September 30, 2015 and 2014.

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Employee Stock Ownership Plan (ESOP)

Salisbury offers an Employee Stock Ownership Plan (ESOP) to eligible employees.  Under the Plan, Salisbury may make discretionary contributions to the Plan, which vests in full upon six years of qualified service.

Salisbury’s ESOP expense was $96,000 and $47,000, respectively, for the three month periods ended September 30, 2015 and 2014, and $287,000 and $141,000, respectively, for the nine month periods ended September 30, 2015 and 2014.

Other Retirement Plans

A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and who have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section.

In 2014 and 2013, the Bank awarded seven (7) and six (6) Executives, respectively, with discretionary contributions to the Plan. Expenses related to this plan amounted to $34,000 and $15,000, respectively, for the three month periods ended September 30, 2015 and 2014, and $95,000 and $44,000 for the nine months ended September 30, 2015 and 2014, respectively. Based on the Executive’s date of retirement, the vesting schedule ranges from 7.7% per year to 50% per year. There have been no awards granted in 2015.

Restricted Stock and Options

On September 28, 2015, 2,700 shares of stock options were exercised at $21.48 per share by one former Riverside Bank executive.

On February 17, 2015 and February 25, 2015, 1,350 and 5,400 shares of stock options were exercised, respectively, at $18.52 per share by two former Riverside Bank executives.

On December 5, 2014, Salisbury granted a total of 6,000 shares of restricted stock pursuant to its 2011 Long Term Incentive Plan to three (3) employees, including 1,000 shares to Richard J. Cantele, Jr., President and Chief Executive Officer, 3,000 shares to John Davies, New York Regional President and Chief Lending Officer, and 2,000 shares to Todd Rubino, Senior Vice President and Senior Commercial Loan Officer. Of these 6,000 shares, 2,250 immediately vested and the remaining 3,750 shares vest over a period of 36 months.

On January 3, 2014, Salisbury granted a total of 3,000 shares of restricted stock, pursuant to its 2011 Long Term Incentive Plan, to two (2) employees, including 2,000 shares to Donald E. White, Chief Financial Officer, and 1,000 shares to Richard P. Kelly, Executive Vice President and Chief Credit Officer. The stock will be vested three years from the grant date.

Expense was $52,000 and $43,000, respectively, for the three month periods ended September 30, 2015 and 2014, and $167,000 and $112,000, respectively, for the nine month periods ended September 30, 2015 and 2014.

Unrecognized compensation cost relating to the awards as of September 30, 2015 and 2014 totaled $186,000 and $254,000, respectively. A total of 300 shares were forfeited in the nine months ended September 30, 2015, and 2,000 shares were forfeited in the nine months ended September 30, 2014.

NOTE 9 –ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income are as follows:

  (in thousands)    September 30, 2015      December 31, 2014  
Unrealized gains on securities available-for-sale, net of tax  $1,443   $2,108 
Accumulated other comprehensive income, net  $1,443   $2,108 

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NOTE 10 – FAIR VALUE OF ASSETS AND LIABILITIES

Salisbury uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, other assets are recorded at fair value on a nonrecurring basis, such as loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

ASC 820-10, “Fair Value Measurement-Overall,” provides a framework for measuring fair value under generally accepted accounting principles. This guidance permitted Salisbury the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Salisbury did not elect fair value treatment for any financial assets or liabilities upon adoption.

In accordance with ASC 820-10, Salisbury groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury’s market assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2. Significant other observable inputs. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.
Level 3. Significant unobservable inputs. Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Salisbury did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the nine months ended September 30, 2015.

The following is a description of valuation methodologies for assets recorded at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Securities available-for-sale. Securities available-for-sale are recorded at fair value on a recurring basis. Level 1 securities include preferred stock. Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of the U.S. Treasury and U.S. government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, municipal bonds, SBA bonds, corporate bonds and certain preferred equities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.
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Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell, as appropriate. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3.
Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

 Assets measured at fair value are as follows:

   Fair Value Measurements Using       Assets at  
  (in thousands)    Level 1       Level 2      Level 3      fair  
                     value  
September 30, 2015                    
Assets at fair value on a recurring basis                    
U.S. Treasury notes  $   $7,565   $   $7,565 
U.S. Government agency notes       500        500 
Municipal bonds       33,317        33,317 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government-sponsored enterprises       27,006        27,006 
Collateralized mortgage obligations:                    
U.S. Government agencies       2,157        2,157 
Non-agency       5,332        5,332 
SBA bonds       3,350        3,350 
CRA mutual funds       769        769 
Preferred stock   375            375 
Securities available-for-sale  $375   $79,996   $   $80,371 
Assets at fair value on a non-recurring basis                    
Collateral dependent impaired loans           16,305    16,305 
Other real estate owned           167    167 
December 31, 2014                    
Assets at fair value on a recurring basis                    
U.S. Treasury notes  $   $2,806   $   $2,806 
U.S. Government agency notes       5,874        5,874 
Municipal bonds       40,352        40,352 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government-sponsored enterprises       27,709        27,709 
Collateralized mortgage obligations:                    
U.S. Government agencies       2,679        2,679 
Non-agency       6,596        6,596 
SBA bonds       4,465        4,465 
CRA mutual funds       504        504 
Preferred stock   327            327 
Securities available-for-sale  $327   $90,985   $   $91,312 
Assets at fair value on a non-recurring basis                    
Collateral dependent impaired loans  $   $   $10,463   $10,463 
Other real estate owned           1,002    1,002 
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Carrying values and estimated fair values of financial instruments are as follows:

  (in thousands)  Carrying  Estimated  Fair value measurements using
   value  fair value  Level 1  Level 2  Level 3
  September 30, 2015               
Financial Assets                         
Cash and cash equivalents  $81,695   $81,695   $81,695   $   $ 
Securities available-for-sale   80,371    80,371    375    79,996     
Federal Home Loan Bank stock   3,515    3,515        3,515     
Loans held-for-sale   573    584            584 
Loans receivable, net   687,719    695,147            695,147 
Accrued interest receivable   2,296    2,296            2,296 
  Cash surrender value of life insurance   13,591    13,591    13,591         
Financial Liabilities                         
Demand (non-interest-bearing)  $194,618   $194,618   $   $   $194,618 
Demand (interest-bearing)   129,779    129,779            129,779 
Money market   184,409    184,409            184,409 
Savings and other   123,017    123,017            123,017 
Certificates of deposit   129,656    130,765            130,765 
Deposits   761,479    762,588            762,588 
Repurchase agreements   4,210    4,210            4,210 
FHLBB advances   26,928    28,988            28,988 
Note payable   380    409            409 
Capital lease liability   422    898            898 
Accrued interest payable   121    121            121 
December 31, 2014                         
Financial Assets                         
Cash and cash equivalents  $36,105   $36,105   $36,105   $   $ 
Securities available-for-sale   91,312    91,312    327    90,985     
Federal Home Loan Bank stock   3,515    3,515        3,515     
Loans held-for-sale   568    572            572 
Loans receivable, net   673,330    683,845            683,845 
Accrued interest receivable   2,334    2,334            2,334 
  Cash surrender value of life insurance   13,314    13,314    13,314         
Financial Liabilities                         
Demand (non-interest-bearing)  $161,386   $161,386   $   $   $161,386 
Demand (interest-bearing)   117,169    117,169            117,169 
Money market   174,274    174,274            174,274 
Savings and other   121,387    121,387            121,387 
Certificates of deposit   141,210    142,261            142,261 
Deposits   715,426    716,477            716,477 
Repurchase agreements   4,163    4,163            4,163 
FHLBB advances   28,813    30,626            30,626 
Capital lease liability   424    929            929 
Accrued interest payable   166    166            166 
                          

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions.

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Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, 2014. Readers should also review other disclosures Salisbury files from time to time with the Securities and Exchange Commission (the “SEC”).

BUSINESS

Salisbury, a Connecticut corporation, formed in 1998, is the bank holding company for the Bank, a Connecticut-chartered and FDIC insured commercial bank headquartered in Lakeville, Connecticut. Salisbury's principal business consists of the business of the Bank. The Bank, formed in 1848, is engaged in customary banking activities, including general deposit taking and lending activities to both retail and commercial markets, and trust and wealth advisory services. The Bank conducts its banking business from thirteen full-service offices in the towns of: Canaan, Lakeville, Salisbury and Sharon, Connecticut; Great Barrington, South Egremont and Sheffield, Massachusetts; and, Fishkill, Newburgh, Poughkeepsie, Red Oaks Mill, Dover Plains and Millerton, New York, and its trust and wealth advisory services from offices in Lakeville, Connecticut. In May 2014, the Bank established a new branch in Great Barrington, Massachusetts. In June 2014, the Bank acquired a branch office and related deposits from another institution in Sharon, Connecticut and consolidated its existing Sharon office with the new branch. In December 2014, the Bank completed its acquisition of Riverside Bank of Poughkeepsie, New York, adding four new offices and a strong commercial lending focus to Salisbury’s New York market presence.

Critical Accounting Policies and Estimates

Salisbury’s consolidated financial statements follow GAAP as applied to the banking industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.

Salisbury’s significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements which, along with this Management’s Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating Salisbury’s reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

Loans acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of cash flows initially expected to be collected and discounting those cash flows at an appropriate market rate of interest. The Bank continues to evaluate the reasonableness of the timing and the amount of cash expected to be collected. Subsequent changes in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired.  For collateral dependent loans with deteriorated credit quality, the Bank estimates the fair value of the underlying collateral of the loans.  These values are discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.

The allowance for loan losses represents management’s estimate of credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. Note 1 describes the methodology used to determine the allowance for loan losses. A discussion of the factors driving changes in the amount of the allowance for loan losses are included in the “Provision and Allowance for Loan Losses” section of Management’s Discussion and Analysis.

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Management evaluates goodwill and identifiable intangible assets for impairment annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates, which are used to determine the carrying value of goodwill and identifiable intangible assets or which otherwise adversely affects their value or estimated lives could have a material adverse impact on the results of operations.

Management evaluates securities for other-than-temporary impairment giving consideration to the extent to which the fair value has been less than cost, estimates of future cash flows, delinquencies and default severity, and the intent and ability of Salisbury to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The consideration of the above factors is subjective and involves estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

FINANCIAL CONDITION

Overview

Total assets were $904.2 million at September 30, 2015, up $48.8 million from December 31, 2014. Loans receivable, net, were $687.7 million at September 30, 2015, up $14.4 million, or 2.1%, from December 31, 2014. Non-performing assets were $16.6 million at September 30, 2015, up $5.7 million from $10.9 million at December 31, 2014. Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, was 0.82%, 0.79% and 1.15%, at September 30, 2015, December 31, 2014 and September 30, 2014, respectively. Deposits were $761.5 million, up $46.1 million from $715.4 million at December 31, 2014.

At September 30, 2015, book value and tangible book value per common share were $32.72 and $27.21, respectively. Salisbury’s Tier 1 leverage, total risk-based and common equity Tier 1 capital ratios were 10.31%, 13.90%, and 10.74%, respectively.

Securities and Short Term Funds

During the third quarter of 2015, securities increased $1.0 million to $80.4 million due to a $5 million purchase, mostly offset by calls and principal pay downs during the quarter. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) increased $31.3 million to $81.7 million, mainly due to the increase in deposits.

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 its 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.

Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider any of its securities, other than four non-agency CMO securities reflecting OTTI, to be OTTI at September 30, 2015.

Salisbury has, and continues to monitor, CMO securities where historical recognition of losses has occurred as a result of OTTI. Salisbury determined, as of September 30, 2015, that additional recognition of OTTI was not required. Salisbury deemed the four remaining securities not to have additional OTTI and all other CMO securities not to be OTTI as of September 30, 2015. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI.

Loans

Net loans receivable increased $14.4 million to $687.7 million at September 30, 2015, compared with $673.3 million at December 31, 2014 and increased $225.8 million from $461.9 million at September 30, 2014. Such year-over-year increase includes loans acquired with a fair value of $196.3 million from Riverside Bank.

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Loan Credit Quality

During the first nine months of 2015, total impaired and potential problem loans decreased to $31.0 million, or 4.5% of gross loans receivable at September 30, 2015, from $31.7 million, or 4.7% of gross loans receivable at December 31, 2014 and increased from $26.6 million at September 30, 2014. While the aggregate of such loans increased from $26.6 million at September 30, 2014, the percentage of such loans improved from 5.70% of gross loans receivable at September 30, 2014. On a combined basis, the five largest impaired loan relationships account for 35% of the balance while the five largest potential problem loan relationships account for 64% of the balance.

On a combined basis, the five largest non-performing loan relationships account for 55% of the non-performing balances while the combined ten largest loan relationships account for 73% of total non-performing assets. Accordingly asset quality issues are confined to a small number of relationships and management does not consider them to be systemic. All of the ten largest non-performing relationships are secured by real estate and eight of these are actively moving through the legal process. Salisbury endeavors to work constructively to resolve its non-performing loan issues with customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral.

Changes in impaired and potential problem loans are as follows:

                                         
   September 30, 2015   September 30, 2014 
                                         
Three months ended Impaired loans    Potential        Impaired loans    Potential      
(in thousands)  Non-        problem         Non-         problem      
    accural    Accruing    loans    Total    accrual    Accruing    loans    Total 
Loans placed on non-accrual status  $2,385   $(973)  $   $1,412   $409   $   $(311)  $98 
Loans restored to accrual status   (325)   86    236    (3)   (518)   401        (117)
Loan risk rating downgrades to substandard                           2,261    2,261 
Loan risk rating upgrades from substandard                                
Loan repayments   (428)   (202)   (74)   (704)   (66)   (422)   (557)   (1,045)
Loan charge-offs   (175)           (175)   (52)           (52)
Increase (decrease) in TDR loans       35        35        400        400 
Inter-month tax advances                   7            7 
Increase (decrease) in loans  $1,457   $(1,054)  $162   $565   $(220)  $379   $1,393   $1,552 

During the third quarter of 2015, Salisbury placed $2.4 million of loans on non-accrual status as a result of deteriorated payment and financial performance and charged-off $175,000 of non-accrual loans primarily as a result of credit or collateral deficiencies.

Salisbury has cooperative relationships with the vast majority of its non-performing loan customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral. Salisbury pursues the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, Salisbury will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.

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Credit Quality Segments

Salisbury categorizes loans receivable into the following credit quality segments.

·Impaired loans consist of all non-accrual loans and troubled debt restructured loans, and represent loans for which it is expected that Salisbury will not be able to collect all principal and interest amounts due according to the contractual terms of the original loan agreements.
·Non-accrual loans are loans for which the accrual of interest has been discontinued because, in the opinion of management, full collection of principal and interest is not expected because the financial condition of the borrower has deteriorated, or principal or interest has been in default for a period of 90 days or more.
·Non-performing loans consist of non-accrual loans and accruing loans past due for 90 days or more. These loans are secured with adequate collateral and in the process of collection.  Non-performing assets consist of non-performing loans plus real estate acquired in settlement of loans.
·Troubled debt restructured loans are loans for which concessions such as reduction of interest rates, other than normal market rate adjustments, or extended deferral of principal or interest payments, extension of maturity dates, or reduction of principal balance or accrued interest, have been granted due to a borrower’s financial condition.  Loan restructuring is employed when management believes the granting of a concession will increase the probability of the full or partial collection of principal and interest.
·Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating.

Credit Risk Ratings

Salisbury assigns credit risk ratings to loans receivable in order to manage credit risk and to determine the allowance for loan losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. Salisbury’s 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 ratings (special mention, substandard, doubtful, and loss) defined by the bank’s regulatory agencies, the FDIC and CTDOB. 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 risk 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 risk 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 risk rated as "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 risk rated 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 and risk ratings are examined annually on a rotating basis by its two primary regulatory agencies, the FDIC and CTDOB.

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Impaired Loans

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

  (in thousands)    September 30, 2015      December 31, 2014  
Accruing troubled debt restructured loans  $7,755   $9,760 
Non-accrual troubled debt restructured loans   3,014    628 
Non-accrual loans, excluding troubled debt restructured loans   13,325    9,245 
Total impaired loans  $24,094   $19,633 
Commitments to lend additional amounts to impaired borrowers  $   $ 

Non-Performing Assets

Non-performing assets increased $5.7 million to $16.6 million, or 1.8% of assets at September 30, 2015, from $10.9 million, or 1.3% of assets at December 31, 2014, and increased $7.7 million from $8.9 million, or 1.4% of assets at September 30, 2014.

The 52% year-over-year increase in non-performing assets in 2015 resulted primarily from $9.2 million of loans placed on non-accrual status. This increase was offset in part by $1.2 million reinstated to accrual, $0.7 million in payoffs and repayments and $1.1 million charged off and $0.7 million placed in OREO.

The components of non-performing assets are as follows:

  (in thousands)    September 30, 2015      December 31, 2014  
Residential 1-4 family and 5+ multi-family  $6,626   $3,096 
Home equity credit   494    348 
Commercial   4,595    3,150 
Construction of commercial   272     
Farm land   1,036    384 
Vacant land   2,857    2,862 
Real estate secured   15,880    9,840 
Commercial and industrial   459    33 
Consumer        
Non-accruing loans   16,339    9,873 
Accruing loans past due 90 days and over   96    17 
Non-performing loans   16,435    9,890 
Real estate acquired in settlement of loans   167    1,002 
Non-performing assets  $16,602   $10,892 
 The past due status of non-performing loans is as follows:
  (in thousands)    September 30, 2015      December 31, 2014  
Current  $1,256   $1,268 
Past due 001-029 days   973    586 
Past due 030-059 days   1,410    54 
Past due 060-089 days   637    214 
Past due 090-179 days   1,048    1,464 
Past due 180 days and over   11,111    6,304 
Total non-performing loans  $16,435   $9,890 

At September 30, 2015, 7.64% of non-performing loans were current with respect to loan payments, compared with 12.82% at December 31, 2014. Loans past due 180 days include a $2.8 million loan secured by vacant land (residential building lots) where Salisbury has initiated a foreclosure action that is referred to in Item 1 of Part II, Legal Proceedings.

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Troubled Debt Restructured Loans

Troubled debt restructured loans increased $0.4 million during the nine (9) month period ended September 30, 2015 to $10.8 million, or 1.55% of gross loans receivable at September 30, 2015, from $10.4 million, or 1.54% of gross loans receivable at December 31, 2014.

The components of troubled debt restructured loans are as follows:

  (in thousands)    September 30, 2015      December 31, 2014  
Residential 1-4 family  $4,477   $4,748 
Home equity credit   156    48 
Personal   225     
Vacant land   123    235 
Commercial   2,707    4,065 
Real estate secured   7,688    9,096 
Commercial and industrial   67    664 
Accruing troubled debt restructured loans   7,755    9,760 
Residential 1-4 family   1,001    294 
Home equity credit       88 
Commercial   1,622    235 
Vacant land        
Real estate secured   2,623    617 
Commercial and industrial   391    10 
Non-accrual troubled debt restructured loans   3,014    627 
Troubled debt restructured loans  $10,769   $10,387 
The past due status of troubled debt restructured loans is as follows:
  (in thousands)    September 30, 2015      December 31, 2014  
Current  $6,913   $6,514 
Past due 1-29 days   842    2,704 
Past due 30-59 days       542 
Past due 60-89 days        
Accruing troubled debt restructured loans   7,755    9,760 
Current       49 
Past due 1-29 days   973     
Past due 30-59 days   1,410     
Past due 60-89 days   631    10 
Past due 90-179 days       333 
Past due 180 days and over       235 
Non-accrual troubled debt restructured loans   3,014    627 
Total troubled debt restructured loans  $10,769   $10,387 

At September 30, 2015, 64.19% of troubled debt restructured loans were current with respect to loan payments, as compared with 62.71% at December 31, 2014.

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Past Due Loans

Loans past due 30 days or more increased $4.5 million during 2015 to $16.7 million, or 2.41% of gross loans receivable at September 30, 2015, compared with $12.2 million, or 1.79% of gross loans receivable at December 31, 2014.

The components of loans past due 30 days or greater are as follows:

  (in thousands)    September 30, 2015      December 31, 2014  
Past due 030-059 days  $1,130   $2,295 
Past due 060-089 days   1,356    1,834 
Past due 090-179 days   96    17 
Accruing loans   2,582    4,146 
Past due 030-059 days   1,410    54 
Past due 060-089 days   637    214 
Past due 090-179 days   954    1,447 
Past due 180 days and over   11,110    6,305 
Non-accrual loans   14,111    8,020 
Total loans past due 30 days or greater  $16,693   $12,166 

Potential Problem Loans

Potential problem loans decreased $5.2 million during the first nine months of 2015 to $6.9 million, or 1.00% of gross loans receivable at September 30, 2015, compared with $12.1 million, or 1.79% of gross loans receivable at December 31, 2014.

The components of potential problem loans are as follows:

  (in thousands)    September 30, 2015      December 31, 2014  
Residential 1-4 family  $663   $2,829 
Residential 5+ multifamily       975 
Construction of residential 1-4 family        
Home equity credit   466    786 
Residential real estate   1,129    4,590 
Commercial   4,558    5,139 
Construction of commercial   448    450 
Commercial real estate   5,006    5,589 
Farm land       723 
Vacant land   24    66 
Real estate secured   6,159    10,968 
Commercial and industrial   744    1,146 
Consumer   7    28 
Total potential problem loans  $6,910   $12,142 

The past due status of potential problem loans is as follows:

  (in thousands)    September 30, 2015      December 31, 2014  
Current  $5,311   $8,302 
Past due 001-029 days   611    2,416 
Past due 030-059 days   332    100 
Past due 060-089 days   656    1,324 
Past due 090-179 days        
Total potential problem loans  $6,910   $12,142 

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At September 30, 2015, 76.9% of potential problem loans were current with respect to loan payments, as compared with 68.1% at December 31, 2014.

Management cannot predict the extent to which economic or other factors may impact such borrowers’ future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Deposits and Borrowings

Deposits increased $46.1 million during the nine months ended September 30, 2015 to $761.5 million, from $715.4 million at December 31, 2014, and increased $239.2 million year-over-year from $522.3 million at September 30, 2014. The year-over-year increase is mainly attributable to the $211.2 million of deposits assumed in the Riverside Bank merger. Retail repurchase agreements remained stable during the nine months ended September 30, 2015 at $4.2 million compared with $4.2 million at December 31, 2014, and decreased $2.3 million for year-over-year compared with $6.5 million at September 30, 2014.

Federal Home Loan Bank of Boston (FHLBB) advances decreased $1.9 million during the nine months ended September 30, 2015 to $26.9 million at September 30, 2015, from $28.8 million at December 31, 2014, and decreased $2.3 million for year-over-year from $29.2 million at September 30, 2014. The decreases were due to amortizing payments of advances, maturities of advances that were not renewed, and in accordance with ASC 470-50 for two advances which were modified during the quarter ending September September 30, 2015. The modification extended $21 million in advances a weighted average 39 months.

Liquidity

Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities.

Salisbury manages its liquidity in accordance with a liquidity funding policy, and also maintains a contingency funding plan that provides for the prompt and comprehensive response to unexpected demands for liquidity. At September 30, 2015, Salisbury's liquidity ratio, as represented by cash, short term available-for-sale securities and marketable assets to net deposits and short term unsecured liabilities, was 24.53%, up from 17.95% at December 31, 2014. Management believes Salisbury’s funding sources will meet anticipated funding needs.

Operating activities for the nine-month period ended September 30, 2015 provided net cash of $6.4 million. Investing activities utilized net cash of $3.2 million, principally from securities purchases of $9.3 million and $13.7 million of net loan originations and principal collections and offset by proceeds of $19.3 million from sales, calls, and maturities of securities available-for-sale. Financing activities provided net cash of $42.5 million, principally due to a net increase of $46.4 million in deposits and repurchase agreements, contractual pay downs, as well as payments related to the modification of two FHLBB advances which total $1.9 million and common and preferred stock dividends paid totaling $2.4 million.

At September 30, 2015, Salisbury had outstanding commitments to fund new loan originations of $17.1 million and unused lines of credit of $107.5 million. Salisbury believes that these commitments can be met in the normal course of business. Salisbury believes that its liquidity sources will continue to provide funding sufficient to support operating activities, loan originations and commitments, and deposit withdrawals.

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RESULTS OF OPERATIONS

For the three month periods ended September 30, 2015 and 2014

OVERVIEW

Net income available to common shareholders was $1,945,000, or $0.71 per common share, for the third quarter ended September 30, 2015 (third quarter 2015), compared with $2,032,000, or $0.74 per common share, for the second quarter ended June 30, 2015 (second quarter 2015), and $728,000, or $0.43 per common share, for the third quarter ended September 30, 2014 (third quarter 2014).

Salisbury’s earnings per common share for the three (3) month period ended September 30, 2015 increased to $0.71 per common share as compared with $0.43 per common share for the same periods in 2014.
During the three (3) month period ended September 30, 2015, total shareholders’ equity increased to $105.5 million from $104.1 million at June 30, 2015.
Salisbury’s efficiency ratio improved to 60.40% for the quarter ended September 30, 2015 as compared with 62.61% from the prior quarter and 75.92% for the third quarter 2014.
Annualized return on average assets for the quarter ended September 30, 2015 amounted to 0.87% as compared with 0.94% for the prior quarter and 0.45% for the third quarter 2014.
Annualized return on average common shareholders’ equity amounted to 8.64% for the quarter ended September 30, 2015 as compared with 9.26% for the prior quarter and 4.85% for the third quarter 2014.

Net Interest Income

Tax equivalent net interest income increased $110,000, or 1.4%, versus second quarter 2015, and increased $3.1 million, or 61.5%, versus third quarter 2014. Interest income for the third quarter reflects net accretion related to the fair value adjustments of loans acquired in the Riverside Bank acquisition in the amount of $726,000. The second quarter of 2015 included similar adjustments totaling $654,000. Average earning assets increased $26.7 million versus second quarter 2015, and increased $234.6 million versus third quarter 2014. Average total interest-bearing deposits increased $5.4 million versus second quarter 2015 and increased $136.4 million versus third quarter 2014 primarily as a result of the Riverside Bank acquisition. The net interest margin (tax equivalent) of 3.91% decreased 10 basis points versus 4.01% for the second quarter 2015 and increased 52 basis points versus 3.39% for the third quarter 2014.

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The following table sets forth the components of Salisbury's fully tax-equivalent (“FTE”) net interest income and yields on average interest-earning assets and interest-bearing liabilities.

  Three months ended September 30,  Average Balance  Income / Expense  Average Yield / Rate
  (dollars in thousands)    2015      2014      2015      2014      2015      2014  
Loans (a)(d)  $690,075   $465,073   $8,070   $4,768    4.64%   4.08%
Securities (c)(d)   78,214    83,793    819    956    4.19    4.56 
FHLBB stock   3,515    3,813    29    17    3.24    1.82 
Short term funds (b)   59,984    44,483    30    24    0.20    0.22 
Total interest-earning assets   831,788    597,162    8,948    5,765    4.27    3.85 
Other assets   58,603    42,489                     
Total assets  $890,391   $639,651                     
Interest-bearing demand deposits  $125,220   $84,711    80    66    0.25    0.31 
Money market accounts   181,668    134,803    120    79    0.26    0.23 
Savings and other   124,405    121,226    57    56    0.18    0.18 
Certificates of deposit   131,289    85,464    206    178    0.62    0.83 
Total interest-bearing deposits   562,582    426,204    463    379    0.33    0.35 
Repurchase agreements   5,279    6,291    2    3    0.18    0.19 
Capital lease   423    424    18    12    16.57    11.04 
Note payable   169        1        1.61    0.00 
FHLBB advances   27,689    29,355    269    296    3.81    3.94 
Total interest-bearing liabilities   596,142    462,274    753    690    0.50    0.59 
Demand deposits   180,276    95,580                     
Other liabilities   8,705    6,239                     
Shareholders’ equity   105,268    75,558                     
Total liabilities & shareholders’ equity  $890,391   $639,651                     
Net interest income            $8,195   $5,075           
Spread on interest-bearing funds                       3.77    3.26 
Net interest margin (e)                       3.91    3.39 
 (a)Includes non-accrual loans.
(b)Includes interest-bearing deposits in other banks and federal funds sold.
 (c)Average balances of securities are based on historical cost.
 (d)Includes tax exempt income of $298,000 and $321,000, respectively, for 2015 and 2014 on tax-exempt loans and securities whose income and yields are calculated on a tax-equivalent basis.
 (e)Net interest income divided by average interest-earning assets.

The following table sets forth the changes in FTE interest due to volume and rate.

  Three months ended September 30, (in thousands) 2015 versus 2014
Change in interest due to   Volume    Rate    Net 
Interest-earning assets               
Loans  $2,468   $834   $3,302 
Securities   (61)   (76)   (137)
FHLBB stock   (2)   14    12 
Short term funds   8    (2)   6 
Total   2,413    770    3,183 
Interest-bearing liabilities               
Deposits   144    (60)   84 
Repurchase agreements       (1)   (1)
Capital lease       6    6 
Note payable   1        1 
FHLBB advances   (16)   (11)   (27)
Total   129    (66)   63 
Net change in net interest and dividend income  $2,284   $836   $3,120 

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Interest Income

Tax equivalent interest income increased $3.1 million to $8.9 million for third quarter 2015 as compared with third quarter 2014.

Tax equivalent loan income increased $3.3 million, or 69.3%, primarily due to a $225.0 million, or 48.4%, increase in average loans, and by a 56 basis point increase in the average loan yield, mainly due to the increase in higher yielding loans resulting from the Riverside Bank merger.

Tax equivalent securities income decreased $137,000, or 14.3%, primarily due to a $5.6 million, or 6.7%, decrease in average volume due to calls and prepayments of mortgage backed securities, sales of bonds, and a 37 basis point decrease in average yield.

Interest Expense

Interest expense increased $63,000, or 9.1%, to $753,000 for third quarter 2015 as compared with third quarter 2014.

Interest on deposit accounts increased $84,000, or 22.2%, as a result of a $136.4 million, or 32.01% increase, in the average balance of deposits, slightly offset by lower average rates, down 2 basis points on deposits. The lower average rate resulted from the effect of currently lower market interest rates paid on interest bearing deposits and changes in product mix.

Interest expense on FHLBB borrowings decreased $27,000 as a result of lower average borrowings, down $1.7 million, and by an average borrowing rate decrease of 13 basis points.

Provision and Allowance for Loan Losses

The provision for loan losses was $655,000 for third quarter 2015, compared with $318,000 for third quarter 2014. Net loan charge-offs were $54,000 and $46,000 for the respective quarters.

The following table details the principal categories of credit quality ratios:

  September 30, (dollars in thousands)    2015      2014  
Net charge-offs to average loans receivable, gross   0.03%   0.03%
Non-performing loans to loans receivable, gross   2.37    1.84 
Accruing loans past due 30-89 days to loans receivable, gross   0.36    0.28 
Allowance for loan losses to loans receivable, gross   0.82    1.15 
Allowance for loan losses to non-performing loans   34.43    62.52 
Non-performing assets to total assets   1.84    1.40 

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, decreased to 0.82% at September 30, 2015 compared to 1.15% at September 30, 2014. When expressed as a percentage of gross loans, the allowance for loan losses declined significantly from September 30, 2014 to September 30, 2015 due to the increase in the balance of gross loans that resulted from the addition of the loans purchased from Riverside Bank.

During the third quarter of 2015, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) amounted to $16.4 million, which represents an increase at 2.37% of gross loans receivable at September 30, 2015 compared to 1.84% at September 30, 2014. Accruing loans past due 30-89 days increased $1.2 million to $2.5 million, or 0.36% of gross loans receivable from 0.28% at September 30, 2014. See “Financial Condition – Loan Credit Quality” above for further discussion and analysis.

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The allowance for loan losses represents management’s estimate of the probable credit losses inherent in the loan portfolio as of the reporting date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by loan charge-offs. Loan charge-offs are recognized when management determines a loan, or portion of a loan, to be uncollectible. The allowance for loan losses is computed by segregating the portfolio into three components: (1) loans collectively evaluated for impairment: general loss allocation factors for non-impaired loans are segmented into pools of loans based on similar risk characteristics such as loan product, collateral type and loan-to-value, loan risk rating, historical loss experience, delinquency factors and other similar economic indicators, (2) loans individually evaluated for impairment: individual loss allocations for loans deemed to be impaired based on discounted cash flows or collateral value, and (3) unallocated: general loss allocations for other environmental factors.

Impaired loans are individually evaluated for impairment.  Impairment is measured for each individual loan using either the present value of the future cash flows discounted at an appropriate rate or the net fair market value of the collateral, if the loan is collateral dependent.  An allowance is established when the present value or collateral value, whichever is appropriate, is lower than the carrying value of the loan.  Impairments are calculated at least quarterly.

The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and then applying management’s general loss allocation factors. The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. It reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

Determining the adequacy of the allowance at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of the loan portfolio is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise requiring increased provisions. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at September 30, 2015.

Management’s loan risk rating assignments, loss percentages and specific reserves are subjected annually to an independent credit review by an external firm. In addition, the Bank is examined annually on a rotational process by one of its two primary regulatory agencies, the FDIC and CTDOB. As an integral part of their examination process, the FDIC and CTDOB review the adequacy and methodology of the Bank's credit risk ratings and allowance for loan losses.

Non-Interest Income

The following table details the principal categories of non-interest income.

  Three months ended September 30, (dollars in thousands) 2015      2014      2015 vs. 2014  
Trust and wealth advisory  $798   $791   $7    0.88%
Service charges and fees   798    639    159    24.88%
Gains on sales and calls of available-for-sale securities, net   6        6    
Gains on sales of mortgage loans, net   47        47    
Mortgage servicing, net   5    41    (36)   (87.80)%
Other   115    82    33    40.24%
Total non-interest income  $1,769   $1,553   $216    13.91%

 

44
 

Non-interest income for third quarter 2015 decreased $131,000 versus second quarter 2015 and increased $216,000 versus third quarter 2014. Trust and wealth advisory revenues decreased $92,000 versus second quarter 2015 and increased $7,000 versus third quarter 2014. The quarter over quarter decrease is due to tax letter fees collected in the second quarter, and decreased estate fees collected in the third quarter. Service charges and fees increased $20,000 versus second quarter 2015 and increased $159,000 versus third quarter 2014. The increases were a result of higher fees as a result of increased transactional volume, mainly attributable to the contribution from deposit accounts and balances assumed in the Riverside Bank acquisition. Income from sales and servicing of mortgage loans decreased $54,000 versus second quarter 2015 and increased $11,000 versus third quarter 2014. Third quarter 2015 mortgage loans sales totaled $1.4 million versus $3.0 million for second quarter 2015 and $1.4 million for third quarter 2014. Third quarter 2015, second quarter 2015, and third quarter 2014 included amortization of $85,000, $78,000, and $55,000, respectively. Gain on sale of securities for third quarter 2015 totaled $6,000, compared to $11,000 in the second quarter 2015 and no gains were recognized in the third quarter 2014.

Non-Interest Expense

The following table details the principal categories of non-interest expense.

 

  Three months ended September 30, (dollars in thousands) 2015      2014      2015 vs. 2014  
Salaries  $2,531   $1,980   $551    27.83%
Employee benefits   916    697    219    31.45%
Premises and equipment   863    667    196    29.38%
Data processing   404    420    (16)   (3.81)%
Professional fees   398    315    83    26.35%
Collections, OREO and loan related   125    85    40    47.06%
FDIC insurance   163    119    44    36.97%
Marketing and community support   174    115    59    51.30%
Amortization of intangible assets   161    75    86    114.67%
Merger and acquisition related expenses       196    (196)   (100.00)%
Other   467    439    28    6.38%
Non-interest expense  $6,202   $5,108   $1,094    21.42%

 

Non-interest expense for third quarter 2015 decreased $338,000 versus second quarter 2015 and increased $1.1 million versus third quarter 2014. Total compensation expense increased $39,000 versus second quarter 2015 as a result of seasonal employees. Total compensation expense year-over-year increased by $770,000 (third quarter 2015 versus third quarter 2014) and reflects increased staffing levels primarily as a result of the Riverside Bank acquisition.

Premises and equipment decreased $50,000 versus second quarter 2015 and increased $196,000 versus third quarter 2014. The quarterly decrease was related to lower utilities (seasonal), building maintenance and software maintenance (reclassification of IT help desk support to consulting). The year-over-year increase is mainly due to the addition of branch facilities acquired as a result of the Riverside Bank acquisition in December 2014, and the Sharon, Connecticut branch acquisition, as well as the opening of a new branch in Great Barrington, Massachusetts in June 2014.

Data processing increased $6,000 versus second quarter 2015 and decreased $16,000 versus third quarter 2014 mainly attributable to the Sharon branch data conversion expense in 2014.

Professional fees decreased $195,000 versus second quarter 2015, and increased $83,000 versus third quarter 2014. Second quarter 2015 included core vendor consulting, purchase accounting review and trust tax filing fees being reclassified from data processing to consulting fees.

Collections, OREO and loan related expenses decreased $94,000 versus second quarter 2015 and increased $40,000 versus third quarter 2014. The quarter-over-quarter decrease is mainly due to second quarter 2015 OREO write-downs.

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Income Taxes

The effective income tax rates for third quarter 2015, second quarter 2015 and third quarter 2014 were 29.31%, 29.93% and 12.83%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury’s effective tax rate is generally less than the 34% federal statutory rate due to holdings of tax-exempt municipal bonds, some tax-exempt loans and bank owned life insurance.

Salisbury did not incur Connecticut income tax in 2015 (to date) or 2014, other than minimum state income tax, as a result of its utilization of Connecticut tax legislation that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company (“PIC”). In accordance with this legislation, in 2004 the Bank formed a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change in the State of Connecticut corporate tax law.

For the nine month periods ended September 30, 2015 and 2014

Overview

Net income available to common shareholders was $6,170,000, or $2.26 per common share, for the nine month period ended September 30, 2015 (nine month period 2015), compared with $2,159,000, or $1.26 per common share, for the nine month period ended September 30, 2014 (nine month period 2014).

·Earnings per common share of $2.26 increased $1.00, or 79.4%, as compared to $1.26 for the nine month period 2014.
·Earnings per common share for the nine months ended September 30, 2014, excluding non-recurring expenses related to strategic initiatives of $533,000, (after tax) or $0.31 per share would have been $1.57 per share for the nine month period.
·During the nine (9) month period ended September 30, 2015, total shareholders’ equity increased to $105.5 million from $101.8 million at December 31, 2014.
·The net interest margin increased 40 basis points versus nine months 2014.
·Net loans receivable increased $225.8 million, or 49%, from September 30, 2014.
·Provision for loan losses was $651,000 for the nine month period ended September 30, 2015 and $969,000 for the nine month period ended September 30, 2014. Net charge-offs of $350,000 were realized in the nine month period 2015, versus net charge-offs of $269,000 for nine month period 2014.
·Tax equivalent net interest and dividend income increased $9.1 million, or 58%, versus September 30, 2014.

Net Interest Income

Tax equivalent net interest income for the nine month period ended September 30, 2015 increased $9.1 million, or 58%, versus the nine month period ended September 30, 2014, mainly attributable to the increase in loan income resulting from the Riverside Bank merger. The net interest margin increased 40 basis points to 4.01% from 3.61%.

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The following table sets forth the components of Salisbury's fully tax-equivalent (“FTE”) net interest and dividend income and yields on average interest-earning assets and interest-bearing liabilities.

  Nine months ended September 30,    Average Balance    Income / Expense    Average Yield / Rate
  (dollars in thousands)    2015      2014      2015      2014      2015      2014  
  Loans (a)(d)  $684,870   $456,120   $24,052   $14,297    4.67%   4.17%
  Securities (c)(d)   79,765    88,146    2,584    3,028    4.32    4.58 
  FHLBB stock   3,515    4,621    59    57    2.29    1.65 
  Short term funds (b)   44,881    19,352    72    30    0.22    0.21 
  Total interest earning assets   813,031    568,239    26,767    17,412    4.38    4.08 
  Other assets   60,304    39,956                     
  Total assets  $873,335   $608,195                     
  Interest-bearing demand deposits  $120,266   $81,504    231    199    0.26    0.33 
  Money market accounts   175,993    126,275    349    211    0.26    0.22 
  Savings and other   126,210    114,983    166    153    0.18    0.18 
  Certificates of deposit   137,179    82,886    613    517    0.60    0.83 
  Total interest-bearing deposits   559,648    405,648    1,359    1,080    0.32    0.36 
  Repurchase agreements   4,170    4,070    5    5    0.17    0.17 
  Capital lease   423    425    53    29    16.57    9.18 
  Note payable   57        1        1.61     
  FHLBB advances   28,122    30,640    832    891    3.90    3.84 
  Total interest-bearing liabilities   592,420    440,783    2,250    2,005    0.51    0.61 
  Demand deposits   168,397    86,100                     
  Other liabilities   8,387    6,521                     
  Shareholders’ equity   104,131    74,791                     
  Total liabilities & shareholders’ equity  $873,335   $608,195                     
  Net interest and dividend income            $24,517   $15,407           
  Spread on interest-bearing funds                       3.87    3.47 
  Net interest margin (e)                       4.01    3.61 
(a)Includes non-accrual loans.
(b)Includes interest-bearing deposits in other banks and federal funds sold.
(c)Average balances of securities are based on historical cost.
(d)Includes tax exempt income of $900,000 and $973,000, respectively, for 2015 and 2014 on tax-exempt loans and securities whose income and yields are calculated on a tax-equivalent basis.
(e)Net interest income divided by average interest-earning assets.

The following table sets forth the changes in FTE interest due to volume and rate.

  Nine months ended September 30, (in thousands)  2015 versus 2014
  Change in interest due to   Volume    Rate    Net 
  Interest-earning assets               
Loans  $7,603   $2,152   $9,755 
Securities   (280)   (164)   (444)
FHLBB stock   (16)   18    2 
Short term funds   40    2    42 
  Total   7,347    2,008    9,355 
  Interest-bearing liabilities               
Deposits   481    (202)   279 
Repurchase agreements            
Capital lease       24    24 
Note payable   1        1 
FHLBB advances   (74)   15    (59)
  Total   408    (163)   245 
  Net change in net interest and dividend income  $6,939   $2,171   $9,110 

47
 

Interest Income

Tax equivalent interest income increased $9.4 million, or 54%, to $26.8 million for the nine month period 2015 versus nine month period 2014.

Tax equivalent loan income increased $9.8 million, or 68%, primarily due to a $228.8 million, or 50%, increase in average loans and a 50 basis points increase in the average loan yield.

Tax equivalent securities income decreased $444,000, or 15%, primarily due to an $8.4 million, or 10%, decrease in average volume and a 26 basis points decrease in the average yield. Changes in securities yields resulted from the effect of changes in market interest rates on securities purchases, calls of agency bonds and prepayments of mortgage backed-securities.

Interest Expense

Interest expense increased $245,000, or 12%, to $2.3 million for nine month period 2015 versus nine month period 2014.

Interest on deposit accounts and retail repurchase agreements increased $279,000, or 26%, as a result of higher average deposit balances, up by $154.0 million as a result of the merger with Riverside Bank. This increase is partially offset by an average deposit rate decrease of 4 basis points.

Interest expense on FHLBB borrowings decreased $59,000 as a result of lower average borrowings, down $2.5 million as a result of both scheduled maturities and the impact of the modification of two advances, and offset in part by a higher average borrowing rate, up 6 basis points.

Provision and Allowance for Loan Losses

Provision for loan losses was $651,000 for the nine month period ended September 30, 2015 and $969,000 for the nine month period ended September 30, 2014. Net charge-offs were $350,000 and $269,000 for the respective periods.

Reserve coverage at September 30, 2015, as measured by the ratio of allowance for loan losses to gross loans, at 0.82%, compares with 1.15% a year ago at September 30, 2014. During the first nine months of 2015, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) increased $7.8 million to $16.4 million. Such amount represents 2.37% of gross loans receivable, an increase from 1.46% at December 31, 2014. At September 30, 2015, accruing loans past due 30-89 days decreased $1.6 million to $2.5 million or 0.36% of gross loans receivable from 0.61% at December 31, 2014. See “Financial Condition – Loan Credit Quality” for further discussion and analysis.

Non-interest income

The following table details the principal categories of non-interest income.

  Nine months ended September 30, (dollars in thousands)   2015      2014      2015 vs. 2014  
Trust and wealth advisory fees  $2,510   $2,509   $1    0.04%
Service charges and fees   2,307    1,807    500    27.67%
Gains on sales and calls of available-for-sale securities, net   192        192    
Gains on sales of mortgage loans, net   227    43    184    427.91%
Mortgage servicing, net   (15)   80    (95)   (118.75)%
Other   343    234    109    46.58%
Total non-interest income  $5,564   $4,673   $891    19.07%

Non-interest income for the nine month period ended September 30, 2015 increased $891,000 versus the same period in 2014. Trust and wealth advisory revenues increased $1,000. Service charges and fees increased $500,000 resulting from increased transactional volume due to the Riverside Bank merger. Income from sales and servicing of mortgage loans increased $89,000 due to interest rate driven fluctuations in the volume of fixed rate residential mortgage loan sales and mortgage servicing valuations. Mortgage loan sales totaled $6.4 million for the nine month period ended September 30, 2015 and $3.5 million for the nine month period ended September 30, 2014. The nine month periods ended September 30, 2015 and 2014 included mortgage servicing amortization of $282,000 and $220,000, respectively. Other income includes bank owned life insurance income and rental income.

48
 

Non-interest expense

The following table details the principal categories of non-interest expense.

  Nine months ended September 30, (dollars in thousands)   2015      2014      2015 vs. 2014  
Salaries  $7,520   $5,776   $1,744    30.19%
Employee benefits   2,881    2,176    705    32.40%
Premises and equipment   2,683    2,080    603    28.99%
Data processing   1,276    1,166    110    9.43%
Professional fees   1,642    1,025    617    60.20%
Collections, OREO and loan related   594    319    275    86.21%
FDIC insurance   494    340    154    45.29%
Marketing and community support   465    355    110    30.99%
Amortization of intangible assets   494    194    300    154.64%
Merger and acquisition related expenses       586    (586)   (100.00)%
Other   1,528    1,269    259    20.41%
Non-interest expense  $19,577   $15,286   $4,291    28.07%

Non-interest expense for the nine month period ended September 30, 2015 increased $4.3 million versus the same period in 2014. Salaries and benefits increased $1.7 million primarily due to increase in staff due to the merger with Riverside Bank. Premises and equipment increased $603,000 due primarily to the increase in the number of facilities. Data processing increased $110,000 due primarily to increased volume. Professional fees increased $617,000 due primarily to higher auditing and other fees associated with the Riverside Bank merger, due diligence on core data processing providers, IT support and the reclassification of trust tax filings from data processing to consulting. These increases were partially offset by lower legal fees in 2015. Collections, OREO and loan related expense increased $275,000 due primarily to write-down of OREO. Salisbury had one foreclosed property at September 30, 2015. FDIC insurance increased $154,000 due to the increase in assets. Marketing and community support increased $110,000 due primarily to an increase in contributions and general marketing campaigns. Amortization of intangible assets increased $300,000 due to the Sharon branch acquisition from Union Savings Bank and the acquisition of Riverside Bank. Other expenses increased $259,000 due to higher administrative and operational expenses.

Income taxes

The effective income tax rates for the nine month periods ended September 30, 2015 and September 30, 2014 were 29.7% and 19.9%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury’s effective tax rate is generally less than the 34% federal statutory rate due to holdings of tax-exempt municipal bonds, tax-exempt loans and bank owned life insurance.

CAPITAL RESOURCES

Shareholders’ equity was $105.5 million at September 30, 2015, up $3.7 million from December 31, 2014. Book value and tangible book value per common share were $32.72 and $27.21, respectively, compared with $31.54 and $25.84, respectively, at December 31, 2014. Contributing to the increase in shareholders’ equity for year-to-date 2015 was net income of $6.3 million and issued stock of $0.4 million, partially offset by other comprehensive loss of $0.7 million, and common and preferred stock dividends of $2.4 million. Accumulated other comprehensive income consists of unrealized gains on securities available-for-sale, net of tax, of $1.4 million as of September 30, 2015.

In August 2011, Salisbury issued to the U.S. Secretary of the Treasury (the “Treasury”) $16.0 million of its Series B Preferred Stock under the Small Business Lending Fund (the “SBLF”) program. The SBLF program is a $30 billion fund established under the Small Business Jobs Act of 2010 to encourage lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. The Preferred Stock qualifies as Tier 1 capital for regulatory purposes and ranks senior to the Common Stock.

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The Series B Preferred Stock pays noncumulative dividends. The dividend rate on the Series B Preferred Stock for the initial ten quarterly dividend periods, commencing with the period ended September 30, 2011 and ending with the period ended December 31, 2013, was determined each quarter based on the increase in the Bank’s Qualified Small Business Lending over a baseline amount. For the eleventh quarterly dividend payment through four and one-half years after its issuance, the dividend rate on the Series B Preferred Stock will be 1.0%. The dividend rate for the quarterly period ended September 30, 2015 was 1.0%. Commencing with the second quarter of 2016, after four and one-half years from its issuance, the dividend rate will be fixed at 9.0% per annum. The Series B Preferred Stock is non-voting, other than voting rights on matters that could adversely affect the Series B Preferred Stock. The Series B Preferred Stock is redeemable at any time at one hundred percent of the issue price plus any accrued and unpaid dividends.

On January 3, 2014, Salisbury granted a total of 3,000 shares of restricted stock, pursuant to its 2011 Long Term Incentive Plan, to two (2) employees, including 2,000 shares to Donald E. White, Chief Financial Officer, and 1,000 shares to Richard P. Kelly, Executive Vice President and Chief Credit Officer. The stock will be vested three years from the grant date.

On December 5, 2014, Salisbury granted a total of 6,000 shares of restricted stock pursuant to its 2011 Long Term Incentive Plan, to three (3) employees, including 1,000 shares to Richard J. Cantele, Jr., President and Chief Executive Officer, 3,000 shares to John Davies, New York Regional President and Chief Lending Officer, and 2,000 shares to Todd Rubino, Senior Vice President and Senior Commercial Loan Officer. Of these 6,000 shares, 2,250 immediately vested and the remaining 3,750 shares vest over a period of 36 months.

On February 17, 2015 and February 25, 2015, 1,350 and 5,400 shares of stock options were exercised, respectively, at $18.52 per share by two former Riverside Bank executives.

On September 28, 2015, 2,700 shares of stock options were exercised at $21.48 per share by one former Riverside Bank executive.

Capital Requirements

Salisbury and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Under current regulatory definitions, the Bank is considered to be “well capitalized” for capital adequacy purposes. As a result, the Bank pays lower federal deposit insurance premiums than banks that are not “well capitalized.” Salisbury’s and the Bank's regulatory capital ratios are as follows:

    September 30, 2015  December 31, 2014
     Salisbury   Bank   Salisbury   Bank
Total Capital (to risk-weighted assets)   13.90%   12.62%   14.27%   12.75%
Tier 1 Capital (to risk-weighted assets)   13.04    11.77    13.38    11.86 
Common Equity Tier 1 Capital (to risk-weighted assets)   10.74    11.77    n/a    n/a 
Tier 1 Capital (to average assets)   10.31    9.30    12.31    10.95 

To be considered a well-capitalized institution, which is the highest capital category for an institution as defined by the Prompt Corrective Action Regulations issued by the FDIC and the FRB, an institution must maintain a Total Risk-Based ratio of 10% or above, a Tier 1 Risk-Based ratio of 8% or above, common equity Tier I capital of 6.5% or above, and a Leverage ratio of 5% or above, and must not be subject to any written order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level. Maintaining strong capital is essential to Salisbury’s and the Bank’s safety and soundness.

In December 2010, the Basel Committee, a group of bank regulatory supervisors from around the world, released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III.” Basel III, when fully implemented by the U.S. bank regulatory agencies and fully phased-in (2019), will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.

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Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Bank. The rules, effective January 1, 2015 include a new common equity Tier 1 capital risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

Dividends

During the nine month period ended September 30, 2015, Salisbury paid $120,000 in Series B preferred stock dividends to the U.S. Treasury’s SBLF program, and $2,289,000 in common stock dividends.

On October 30, 2015, the Board of Directors of Salisbury declared a common stock dividend of $0.28 per common share payable on November 27, 2015 to shareholders of record on November 11, 2015. Common stock dividends, when declared, will generally be paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

Salisbury's ability to pay cash dividends is substantially dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Commissioner of Banking, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.

FRB Supervisory Letter SR 09-4, February 24, 2009, revised September 27, 2009, notes that, as a general matter, the Board of Directors of a BHC should inform the FRB and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the FRB reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital structure.

Salisbury believes that the payment of common stock cash dividends is appropriate, provided that such payment considers Salisbury's capital needs, asset quality, and overall financial condition and does not adversely affect the financial stability of Salisbury or the Bank. The continued payment of common stock cash dividends by Salisbury will be dependent on Salisbury's and the Bank’s future core earnings, financial condition and capital needs, regulatory restrictions, and other factors deemed relevant by the Board of Directors of Salisbury.

IMPACT OF INFLATION AND CHANGING PRICES

Salisbury’s consolidated financial statements are prepared in conformity with generally accepted accounting principles that require the measurement of financial condition and operating results in terms of historical dollars without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of Salisbury are monetary and as a result, interest rates have a greater impact on Salisbury’s performance than do the effects of general levels of inflation, although interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. Although not a material factor in recent years, inflation could impact earnings in future periods.

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FORWARD-LOOKING STATEMENTS

This Form 10-Q and future filings made by Salisbury with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by Salisbury and the Bank, and oral statements made by executive officers of Salisbury and the Bank, may include forward-looking statements relating to such matters as:

(a)assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which Salisbury and the Bank do business; and
(b)expectations for revenues and earnings for Salisbury and the Bank.

Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. For those statements, Salisbury claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Salisbury notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of Salisbury’s and the Bank’s business include the following:

(a)the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates;
(b)changes in the legislative and regulatory environment that negatively impacts Salisbury and the Bank through increased operating expenses;
(c)increased competition from other financial and non-financial institutions;
(d)the impact of technological advances; and
(e)other risks detailed from time to time in Salisbury’s filings with the Securities and Exchange Commission.

Such developments could have an adverse impact on Salisbury’s and the Bank’s financial position and results of operations.

Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUR MARKET RISK

Salisbury manages its exposure to interest rate risk through its Asset/Liability Management Committee (“ALCO”) using risk limits and policy guidelines to manage assets and funding liabilities to produce financial results that are consistent with Salisbury’s liquidity, capital adequacy, growth, risk and profitability targets. Interest rate risk is the risk of loss to future earnings due to changes in interest rates.

The ALCO manages interest rate risk using income simulation to measure interest rate risk inherent in Salisbury’s financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 24-month horizon. In management’s September 30, 2015 analysis, all of the simulations incorporate a static growth assumption over the simulation horizons. Additionally, the simulations take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

The ALCO reviews the simulation results to determine whether Salisbury’s exposure to change in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. Salisbury’s tolerance levels for changes in net interest income in its income simulations vary depending on the magnitude of interest rate changes and level of risk-based capital. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where interest rates remain stable over the forecast horizon. The ALCO also evaluates the directional trends of net interest income, net interest margin and other financial measures over the forecast horizon for consistency with its liquidity, capital adequacy, growth, risk and profitability targets.

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The ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At September 30, 2015, the ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates – immediate instantaneous shock upward shift of 300 basis points for short term rates to 300 basis points for the 10-year Treasury; (3) immediately falling interest rates – immediate non-parallel downward shift in market interest rates ranging from 25 basis points for short term rates to 104 basis points for the 10-year Treasury; and (4) Static growth with assumption sensitivity stress testing with immediately rising interest rates – immediate instantaneous shock upward shift of 200 basis points for short term rates to 200 basis points for the 10-year Treasury. Deposit rates are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. Income simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of September 30, 2015, net interest income simulations indicated that the Bank’s exposure to changing interest rates over the simulation horizons remained within its tolerance levels. The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for changes in market interest rates using the Bank’s financial instruments as of September 30, 2015:

  As of September 30, 2015    Months 1-12      Months 13-24  
Immediately rising interest rates (static growth assumptions)   0.11%   6.85%
Immediately falling interest rates (static growth assumptions)   (1.46)   (3.80)
Immediately rising interest rates (static growth with assumption sensitivity stress testing)   0.65    5.70 

The negative exposure of net interest income to immediately and gradually rising rates as compared to the unchanged rate scenario results from a faster projected rise in the cost of funds versus income from earning assets, as relatively rate-sensitive money market and time deposits re-price faster than longer duration earning assets. The negative exposure of net interest income to immediately falling rates as compared to an unchanged rate scenario results from a greater decline in earning asset yields compared to rates paid on funding liabilities, as a result of faster prepayments on existing assets and lower reinvestment rates on future loans originated and securities purchased.

While the ALCO reviews simulation assumptions and back-tests simulation results to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the re-pricing, maturity and prepayment characteristics of financial instruments and the composition of Salisbury’s balance sheet may change to a different degree than estimated. Simulation modeling assumes Salisbury’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The assumed relationship between short-term interest rate changes and core deposit rate and balance changes used in income simulation may differ from the ALCO’s estimates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.

Salisbury also monitors the potential change in market value of its available-for-sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to Salisbury’s capital and liquidity position. Results are calculated using industry-standard analytical techniques and securities data. Available-for-sale equity securities are excluded from this analysis because the market value of such securities cannot be directly correlated with changes in interest rates.

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The following table summarizes the potential change in market value of available-for-sale debt securities resulting from immediate parallel rate shifts:

  As of September 30, 2015 (in thousands)    Rates up 100bp      Rates up 200bp  
U.S. Treasury notes  $(32)  $(64)
U.S. Government agency notes   (9)   (20)
Municipal bonds   (1,742)   (3,311)
Mortgage backed securities   (643)   (1,435)
Collateralized mortgage obligations   (150)   (321)
SBA pools   (8)   (15)
Other   (26)   (48)
Total available-for-sale debt securities  $(2,610)  $(5,214)

Item 4.CONTROL AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Salisbury’s management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Salisbury’s disclosure controls and procedures as of September 30, 2015. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of September 30, 2015.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 

Changes in Internal Controls

In addition, based on an evaluation of its internal controls over financial reporting, no change in Salisbury’s internal control over financial reporting occurred during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, Salisbury’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

The Bank is involved in various claims and legal proceedings, which are not material, arising in the ordinary course of business.

As previously disclosed, the Bank, individually and in its capacity as a former Co-Trustee of the Erling C. Christophersen Revocable Trust (the “Trust”), was named as a defendant in litigation filed in the Connecticut Complex Litigation Docket in Stamford, captioned John Christophersen v. Erling Christophersen, et al., X08-CV-08-5009597S (the “First Action”). The Bank also was a counterclaim-defendant in related mortgage foreclosure litigation in the Connecticut Complex Litigation Docket in Stamford, captioned Salisbury Bank and Trust Company v. Erling C. Christophersen, et al., X08-CV-10-6005847-S (the “Foreclosure Action,” together with the First Action, the “Actions”). The other parties to the Actions were John R. Christophersen; Erling C. Christophersen, individually and as Co-Trustee of the Trust; Bonnie Christophersen and Elena Dreiske, individually and as Co-Trustees of the Mildred B. Blount Testamentary Trust; People’s United Bank; Law Offices of Gary Oberst, P.C.; Rhoda Rudnick; and Hinckley Allen & Snyder LLP.

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The Actions involved a dispute over title to certain real property located in Westport, Connecticut that was conveyed by Erling Christophersen, as grantor, to the Trust on or about August 8, 2007. Subsequent to this conveyance, the Bank loaned $3,387,000 to the Trust, which was secured by a commercial mortgage in favor of the Bank on the Westport property. This mortgage is the subject of the Foreclosure Action brought by the Bank.

As previously disclosed, John R. Christophersen claimed an interest in the Westport real property transferred to the Trust and sought to quiet title to the property and to recover money damages from the defendants for the alleged wrongful divestiture of his claimed interest in the property.

On June 25, 2012, the Bank and John R. Christophersen entered into a Settlement Agreement, which resolved all differences between John R. Christophersen and the Bank and resulted in the withdrawal (with prejudice) of the claims made by John R. Christophersen. All claims against the Bank have been withdrawn and the Bank is no longer a defendant or counterclaim defendant in any litigation involving the Actions. As an additional consequence of the Settlement Agreement, Bonnie Christophersen, Elena Dreiske and People’s United Bank are no longer parties to any of the litigation referenced above.

On July 27, 2012, Erling Christophersen filed a Motion to Restore the First Action, and on October 15, 2012 filed a Motion to Stay the Foreclosure Action pending resolution of the Motion to Restore. The Bank opposed both motions. On February 1, 2013, the Court issued orders denying both motions. On February 14, 2013, Erling Christophersen appealed the orders denying his Motion to Restore the First Action, and Motion to Stay the Foreclosure Action.

The Appellate Court dismissed the appeal of the Foreclosure Action in May 2013, and later denied Erling Christophersen’s motion for reconsideration of its decision.

The Bank proceeded in its Foreclosure Action against Erling Christophersen. Erling Christophersen asserted two special defenses and set-off claims alleging (1) that the Bank failed to defend the title claims against the properties, and (2) that the Bank took certain trustee fees without approval. The Bank moved to strike the special defenses and set off claims. In a decision issued on November 6, 2013, the Court granted the motion to strike as to the second special defense and set off, but denied the motion as to the first special defense and set off. Trial began on February 4, 2014, and concluded on February 14, 2014.

In a decision issued on June 2, 2014, the Court dismissed Erling Christophersen’s special defense, and made findings as to the amount of the debt owed by Erling Christophersen and the value of the property, reserving judgment on whether to order a strict foreclosure or foreclosure by sale pending a hearing on the amount of attorneys’ fees accrued, and the debt accrued since the commencement of the trial. That hearing was held on July 29, 2014. On July 25, 2014, Erling Christophersen moved to disqualify the Bank’s counsel, seeking, in part, the remedy of a new trial. The Court denied that motion in a decision dated July 30, 2014. On August 5, 2014, the Court issued a Judgment of Strict Foreclosure (the “Judgment”) in favor of the Bank and set September 16, 2014 as the Law Day, which is the final date fixed by the Court on which the debtor can pay off the debt or redeem the real property, with subsequent dates for subsequent encumbrances in inverse order of priority.

On September 15, 2014, Christophersen moved to open the Judgment, which motion was denied by order of the Court dated September 30, 2014. On October 3, 2014, Christophersen filed an Appeal of the Judgment and of the denial of his motion to reopen. Salisbury Bank moved to dismiss the Appeal on October 24, 2014, on grounds that Christophersen cannot represent the Trust as he is not an attorney, and that Christophersen in his individual capacity does not have any interest in this appeal. On December 17, 2014, the motion was granted in part and dismissed in part, but the decision is moot because counsel submitted an appearance on behalf of the Trust on December 29, 2014.

The appeal is fully briefed and ready for oral argument, which has not been scheduled by the Court as of September 30, 2015.

There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the registrant’s business, to which Salisbury is a party or to which any of its property is subject.

 

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Item 1A.RISK FACTORS
Not applicable

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

Item 3.DEFAULTS UPON SENIOR SECURITIES
None

Item 4.MINE SAFETY DISCLOSURES
Not Applicable

Item 5.OTHER INFORMATION
None

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Item 6.EXHIBITS

2.1Agreement and Plan of Merger by and among Salisbury Bancorp, Inc., Salisbury Bank and Trust Company and Riverside Bank dated March 18, 2014 (incorporated by reference to Exhibit 2.1 of Form 8-K filed on March 19, 2014.
3.1Certificate of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Registrant’s 1998 Registration Statement on Form S-4 filed April 23, 1998, File No.: 33-50857).
3.1.1Amendment to Article Third of Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed March 11, 2009).
3.1.2Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed March 19, 2009).
3.1.3Certificate of Amendment to Certificate of Incorporation for the Series B Preferred Stock (incorporated by reference to Registrant’s Form 8-K filed on August 25, 2011).
3.1.4Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed October 30, 2014).
3.2Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014).
10.1Securities Purchase Agreement dated August 25, 2011 with the U.S. Treasury Department relating to the Small Business Lending Fund (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed on August 25, 2011).
10.22011 Long Term Incentive Plan adopted by the Board on March 25, 2011 and approved by the shareholders at Salisbury’s 2011 Annual Meeting (incorporated by reference to Exhibit 10.9 of Registrant’s Annual Report on Form 10-K filed March 19, 2012).
10.3Amendment Number One to 2011 Long Term Incentive Plan dated as of January 18, 2013 (incorporated by reference to Exhibit 10.10 of Registrant’s Annual Report on Form 10-K filed March 7, 2013).
10.4Severance Agreement between Salisbury Bank and Trust and Mr. Richard J. Cantele, Jr. effective as of January 1, 2013 (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed February 15, 2013).
10.5Non-qualified Deferred Compensation Plan effective as of January 1, 2013 (incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed February 15, 2013).
10.6Change in Control Agreement with Donald E. White dated April 1, 2013 (incorporated by reference to Exhibit 10.3 of Form 10-Q filed May 14, 2013).
10.7Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.14 of Form 10-K filed March 28, 2014).
10.8Salisbury Bancorp, Inc. 2015 Phantom Stock Appreciation Unit and Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Form 8-K filed January 2, 2015).
10.9Amendment Number One to Salisbury Bancorp, Inc. 2015 Phantom Stock Appreciation Unit and Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Form 8-K filed January 30, 2015).
31.1Chief Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Chief Financial Officer Certification Pursuant to 17 CF 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SALISBURY BANCORP, INC.
     
November 13, 2015 by:   /s/ Richard J. Cantele, Jr.  
    Richard J. Cantele, Jr.,
    President and Chief Executive Officer
     
November 13, 2015 by:   /s/ Donald E. White  
    Donald E. White
    Executive Vice President and Chief Financial Officer

 

 

 

 

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