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SALISBURY BANCORP, INC. - Quarter Report: 2016 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, 2016

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 14, 2016 is 2,758,086.

 

 
 

 

TABLE OF CONTENTS

      Page 
PART I. FINANCIAL INFORMATION    
Item 1.  Financial Statements (unaudited)    
   CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2016 (unaudited) and DECEMBER 31, 2015  3 
   CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015 (unaudited)  4 
   CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015 (unaudited)  5 
   CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015 ( (unaudited)  5 
  

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015 (unaudited)

 6, 7 
   NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  8 
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  31 
Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  47 
Item 4.  CONTROLS AND PROCEDURES  49 
PART II. OTHER INFORMATION  49 
Item 1.  LEGAL PROCEEDINGS  49 
Item 1A.  RISK FACTORS  49 
Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  49 
Item 3.  DEFAULTS UPON SENIOR SECURITIES  49 
Item 4.  MINE SAFETY DISCLOSURES  49 
Item 5.  OTHER INFORMATION  49 
Item 6.  EXHIBITS  50 
SIGNATURES  51 

2
 

 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)  September 30, 2016    December 31, 2015  
ASSETS    (unaudited)     
Cash and due from banks  $13,004   $14,891 
Interest bearing demand deposits with other banks   29,634    47,227 
Total cash and cash equivalents   42,638    62,118 
Securities:          
Available-for-sale at fair value   76,801    76,694 
Federal Home Loan Bank of Boston stock at cost   2,937    3,176 
Loans held-for-sale   837    763 
Loans receivable, net (allowance for loan losses: $5,892 and $5,716)   753,623    699,018 
Other real estate owned   2,823     
Bank premises and equipment, net   14,573    14,307 
Goodwill   12,552    12,552 
Intangible assets (net of accumulated amortization: $3,364 and $2,909)   1,883    2,338 
Accrued interest receivable   2,260    2,307 
Cash surrender value of life insurance policies   13,952    13,685 
Deferred taxes   2,114    1,989 
Other assets   1,452    2,245 
Total Assets  $928,445   $891,192 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits:          
Demand (non-interest bearing)  $210,396   $201,340 
Demand (interest bearing)   126,064    125,465 
Money market   201,504    183,783 
Savings and other   127,595    119,651 
Certificates of deposit   121,171    124,294 
Total deposits   786,730    754,533 
Repurchase agreements   3,581    3,914 
Federal Home Loan Bank of Boston advances   27,134    26,979 
Subordinated debt(1)   9,782    9,764 
Note payable   351    376 
Capital lease liability   419    422 
Accrued interest and other liabilities   6,894    4,630 
Total Liabilities   834,891    800,618 
Shareholders' Equity          
Common stock - $0.10 per share par value          
Authorized: 5,000,000          
Outstanding: 2,758,086 and 2,733,576   276    273 
Paid-in capital   42,053    41,364 
Retained earnings   50,773    47,922 
Unearned compensation - restricted stock awards   (431)   (110)
Accumulated other comprehensive income   883    1,125 
Total Shareholders' Equity   93,554    90,574 
Total Liabilities and Shareholders' Equity  $928,445   $891,192 

 

(1) Net of issuance costs, which are capitalized and amortized as a component of interest expense over a period of 10 years.

3
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

   Three months ended  Nine months ended
Periods ended September 30, (in thousands except per share amounts)    2016      2015      2016      2015  
Interest and dividend income                    
Interest and fees on loans  $8,061   $7,955   $23,915   $23,727 
Interest on debt securities:                    
Taxable   341    286    976    910 
Tax exempt   202    351    725    1,098 
Other interest and dividends   60    58    138    132 
Total interest and dividend income   8,664    8,650    25,754    25,867 
Interest expense                    
Deposits   565    463    1,603    1,359 
Repurchase agreements   2    2    4    5 
Capital lease   17    18    52    53 
Note payable   5    1    16    1 
Subordinated debt   156        468     
Federal Home Loan Bank of Boston advances   237    269    714    832 
Total interest expense   982    753    2,857    2,250 
Net interest and dividend income   7,682    7,897    22,897    23,617 
Provision for loan losses   344    655    1,332    651 
Net interest and dividend income after provision for loan losses   7,338    7,242    21,565    22,966 
Non-interest income                    
Trust and wealth advisory   849    798    2,517    2,510 
Service charges and fees   840    798    2,355    2,307 
Gains on sales of mortgage loans, net   55    47    152    227 
Mortgage servicing, net   28    5    61    (15)
Gains on sales and calls of available-for-sale securities, net   10    6    157    192 
Other   113    115    342    343 
Total non-interest income   1,895    1,769    5,584    5,564 
Non-interest expense                    
Salaries   2,757    2,531    8,017    7,520 
Employee benefits   924    916    2,923    2,881 
Premises and equipment   809    863    2,546    2,683 
Data processing   472    404    1,369    1,276 
Professional fees   459    398    1,403    1,642 
Collections, OREO and loan related   109    125    420    594 
FDIC insurance   164    163    474    494 
Marketing and community support   144    174    524    465 
Amortization of core deposit intangibles   148    161    455    494 
Other   513    467    1,844    1,528 
Total non-interest expense   6,499    6,202    19,975    19,577 
Income before income taxes   2,734    2,809    7,174    8,953 
Income tax provision   812    824    2,009    2,663 
Net income  $1,922   $1,985   $5,165   $6,290 
Net income applicable to common shareholders   $1,907   $1,928   $5,124   $6,116 
Basic earnings per common share  $0.70   $0.71   $1.88   $2.26 
Weighted average common shares outstanding, to calculate basic earnings per share   2,737    2,707    2,732    2,704 
Diluted earnings per common share   0.69    0.71    1.87    2.25 
Weighted average common shares outstanding, to calculate diluted earnings per share   2,751    2,724    2,747    2,721 
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)    2016      2015      2016      2015  
Net income  $1,922   $1,985   $5,165   $6,290 
Other comprehensive (loss) income                    
Net unrealized (losses) gains on securities available-for-sale   (331)   116    (211)   (816)
Reclassification of net realized gains in net income (1)   (10)   (6)   (157)   (192)
Unrealized (losses) gains on securities available-for-sale   (341)   110    (368)   (1,008)
Income tax benefit (expense)   116    (37)   126    343 
Unrealized (losses) gains on securities available-for-sale, net of tax   (225)   73    (242)   (665)
Comprehensive income  $1,697   $2,058   $4,923   $5,625 

 

(1)Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of other comprehensive income (loss) and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains on sales and calls of available-for-sale securities, net, the tax effect is included in the income tax provision and the after tax amount is included in net income.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) Nine months ended September 30, 2016 and 2015

(dollars in thousands)  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, 2014   2,720,766   $272   $16,000   $41,077   $42,677   $(313)  $2,108   $101,821 
Net income                   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 
Balances at December 31, 2015   2,733,576   $273   $   $41,364   $47,922   $(110)  $1,125   $90,574 
Net income                   5,165            5,165 
Other comprehensive loss, net of tax                           (242)   (242)
Common stock dividends declared                   (2,314)           (2,314)
Stock options exercised   4,050            87                87 
Issuance of restricted stock awards   15,800    2        464        (466)        
Forfeiture of restricted common stock   (100)           (3)       3         
Issuance of common stock for directors   4,760    1        141                 142 
Stock based compensation – restricted stock awards                       142        142 
Balances at September 30, 2016   2,758,086   $276   $   $42,053   $50,773   $(431)  $883   $93,554 

 

5
 

  

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Nine months ended September 30, (in thousands)    2016      2015  
Operating Activities          
Net income  $5,165   $6,290 
Adjustments to reconcile net income to net cash provided by operating activities:          
(Accretion), amortization and depreciation:          
Securities   204    178 
Bank premises and equipment   889    917 
Core deposit intangible   455    494 
Mortgage servicing rights   182    282 
Fair value adjustment on loans    (1,429)   (2,031)
Fair value adjustment on deposits   (97)   (355)
(Gains) and losses, including write-downs          
Gain on calls of securities available-for-sale, net   (1)   (40)
Gain on sales of securities available-for-sale, net   (156)   (152)
Gain on sales of loans, excluding capitalized servicing rights   (152)   (102)
Write-downs of other real estate owned       238 
Loss on sale/disposals of premises and equipment   13    45 
Provision for loan losses   1,332    651 
Proceeds from loans sold   6,814    4,897 
Loans originated for sale   (6,736)   (4,800)
(Increase) decrease in deferred loan origination costs, net   (91)   25 
Mortgage servicing rights originated   (71)   (125)
Increase in mortgage servicing rights impairment reserve   13    3 
Decrease in interest receivable   47    38 
Deferred tax benefit       (17)
Decrease (increase) in prepaid expenses   18    (409)
Increase in cash surrender value of life insurance policies   (267)   (277)
Decrease in income tax receivable   433     
Increase in income tax payable       271 
Increase (decrease) in other assets   218    (87)
Increase (decrease) in accrued expenses   1,079    (11)
Modification fees on Federal Home Loan Bank advances   173     
Amortization of debt issuance costs   18     
Decrease in interest payable   (125)   (45)
Increase in other liabilities   1,310    369 
Stock based compensation-restricted stock awards   142    120 
Net cash provided by operating activities   9,380    6,367 
Investing Activities          
Purchase of Federal Home Loan Bank of Boston stock   (319)    
Redemption of Federal Home Loan Bank of Boston stock   558     
Purchases of securities available-for-sale   (45,317)   (9,322)
Proceeds from sales of securities available-for-sale   3,860    3,861 
Proceeds from calls of securities available-for-sale   11,811    7,995 
Proceeds from maturities of securities available-for-sale   29,125    7,413 
Loan originations and principal collections, net   (57,351)   (13,748)
Recoveries of loans previously charged off   111    613 
Proceeds from sales of other real estate owned       698 
Capital expenditures   (1,168)   (739)
Net cash used in investing activities   (58,690)   (3,229)
6
 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine months ended September 30, (in thousands)    2016      2015  
Financing Activities          
Increase in deposit transaction accounts, net  35,320   57,607 
Decrease in time deposits, net   (3,026    (11,199
(Decrease) increase in securities sold under agreements to repurchase, net   (333)   47
Principal payments on Federal Home Loan Bank of Boston advances   (18)   (786)
Modification payment on Federal Home Loan Bank of Boston advances       (1,099)
Principal payments on note payable   (25)    
Decrease in capital lease obligation   (3)   (2)
Stock options exercised   87    183 
Issuance of shares for director fees   142    81 
Issuance of shares for executives       29 
Common stock dividends paid   (2,314)   (2,289)
Series B preferred stock dividends paid       (120)
Net cash provided by financing activities   29,830    42,452 
Net (decrease) increase in cash and cash equivalents   (19,480)   45,590 
Cash and cash equivalents, beginning of period   62,118    36,105 
Cash and cash equivalents, end of period  $42,638   $81,695 
Cash paid during period          
Interest  $2,714   $2,650 
Income taxes   842    2,409 
Non-cash investing and financing activities          
Transfer from loans to other real estate owned   2,823    101 
Note payable to fund building purchase       380 
7
 

 

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position of Salisbury and the consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the interim periods presented.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, expected cash flows from loans acquired in a business combination, other-than-temporary impairment of securities and impairment of goodwill and intangibles.

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2015 Annual Report on Form 10-K for the year ended December 31, 2015.

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 January 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – overall (subtopic 825-10): "Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. Salisbury does not expect ASU No. 2016-01 to have a material impact on its Consolidated Financial Statements; however, Salisbury will continue to closely monitor developments and additional guidance.

8
 

In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. Salisbury is currently evaluating this ASU to determine the impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation–Stock Compensation (Topic 718): "Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. Salisbury is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on Salisbury’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods with those fiscal years beginning after December 15, 2019. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Salisbury is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on Salisbury’s Consolidated Financial Statements.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments." This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on Salisbury’s 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, 2016                    
Available-for-sale                    
Municipal bonds  $18,252   $352   $   $18,604 
Mortgage-backed securities                    
U.S. Government agencies and U.S. Government-sponsored enterprises   47,881    372    (77)   48,176 
Collateralized mortgage obligations                    
U.S. Government agencies   1,596    8        1,604 
Non-agency   3,619    418    (5)   4,032 
SBA bonds   2,268    18        2,286 
CRA mutual funds   828    10        838 
Corporate bonds   1,000    20        1,020 
Preferred stock   20    221        241 
Total securities available-for-sale  $75,464   $1,419   $(82)  $76,801 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $2,937   $   $   $2,937 

 

 

(in thousands)

Amortized

cost (1)

 

Gross un-

realized gains

 

Gross un-

realized losses

 Fair Value 
December 31, 2015                    
Available-for-sale                    
U.S. Treasury notes  $2,499   $42   $   $2,541 
U.S. Government agency notes   498            498 
Municipal bonds   29,752    633        30,385 
Mortgage-backed securities                    
U.S. Government agencies and U.S. Government-sponsored enterprises   31,900    385    (83)   32,202 
Collateralized mortgage obligations                    
U.S. Government agencies   2,002    12        2,014 
Non-agency   4,487    468    (7)   4,948 
SBA bonds   3,065    31        3,096 
CRA mutual funds   766        (2)   764 
Preferred stock   20    226        246 
Total securities available-for-sale  $74,989   $1,797   $(92)  $76,694 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,176   $   $   $3,176 
(1)Net of other-than-temporary impairment write-downs recognized in earnings.

Salisbury sold $3.6 million in securities available-for-sale during the nine month period ended September 30, 2016, and sold $3.7 million in securities available-for-sale during the nine month period ended September 30, 2015.

10
 

The following table summarizes, for all securities in an unrealized loss position, including debt securities for which a portion of other-than-temporary impairment (OTTI) has been recognized, 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, 2016                              
Available-for-sale                              
Mortgage-backed securities  $27,770   $(71)  $310   $(6)  $28,080   $(77)
Collateralized mortgage obligations:                              
Non-agency   203    (1)   175    (4)   378    (5)
Total temporarily impaired  securities  $27,973   $(72)  $485   $(10)  $28,458   $(82)

 

  (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, 2015                              
Available-for-sale                              
Mortgage-backed securities  $14,750   $(83)  $53   $  $14,803   $(83)
Collateralized mortgage obligations:                              
Non-agency   237        226    (7)   463    (7)
   CRA mutual funds   764    (2)           764    (2)
Total temporarily impaired  securities  $15,751   $(85) $279   $(7)  $16,030   $(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, 2016.

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 maturity, and does not intend to sell these securities. Therefore, management does not consider these securities to be OTTI at September 30, 2016.

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at September 30, 2016, 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, 2016. 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.

11
 

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)    2016      2015  
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, 2016. Deterioration of the FHLBB’s capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

NOTE 3 – LOANS

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

   September 30, 2016  December 31, 2015
  (In thousands)  Business Activities  Loans 

Acquired

Loans

  Total  Business Activities  Loans 

Acquired

Loans

  Total
Residential 1-4 family  $286,663   $7,022   $293,685   $261,495   $7,799   $269,294 
Residential 5+ multifamily   7,690    5,864    13,554    6,411    6,136    12,547 
Construction of residential 1-4 family   9,824        9,824    7,998        7,998 
Home equity lines of credit   35,470        35,470    35,017        35,017 
Residential real estate   339,647    12,886    352,533    310,921    13,935    324,856 
Commercial   162,602    81,741    244,343    129,446    88,829    218,275 
Construction of commercial   4,066    2,139    6,205    6,525    4,874    11,399 
Commercial real estate   166,668    83,880    250,548    135,971    93,703    229,674 
Farm land   4,033        4,033    3,193        3,193 
Vacant land   5,830        5,830    8,563        8,563 
Real estate secured   516,178    96,766    612,944    458,648    107,638    566,286 
Commercial and industrial   101,146    30,009    131,155    74,657    46,764    121,421 
Municipal   8,475        8,475    9,566        9,566 
Consumer   5,593    68    5,661    6,195    77    6,272 
Loans receivable, gross   631,392    126,843    758,235    549,066    154,479    703,545 
Deferred loan origination costs, net   1,280        1,280    1,189        1,189 
Allowance for loan losses   (5,613)   (279)   (5,892)   (5,481)   (235)   (5,716)
Loans receivable, net  $627,059   $126,564   $753,623   $544,774   $154,244   $699,018 
Loans held-for-sale                              
Residential 1-4 family  $837   $   $837   $763   $   $763 

Concentrations of Credit Risk

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

12
 

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, 2016                              
Residential 1-4 family  $276,508   $6,111   $3,955   $89   $   $286,663 
Residential 5+ multifamily   5,611    1,912    167            7,690 
Construction of residential 1-4 family   9,824                    9,824 
Home equity lines of credit   34,102    528    840            35,470 
Residential real estate   326,045    8,551    4,962    89        339,647 
Commercial   152,026    3,541    7,035            162,602 
Construction of commercial   3,949        117            4,066 
Commercial real estate   155,975    3,541    7,152            166,668 
Farm land   3,025        1,008            4,033 
Vacant land   5,739    63    28            5,830 
Real estate secured   490,784    12,155    13,150    89        516,178 
Commercial and industrial   98,795    1,716    635            101,146 
Municipal   8,475                    8,475 
Consumer   5,566    27                5,593 
Loans receivable, gross  $603,620   $13,898   $13,785   $89   $   $631,392 

 

Acquired Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
September 30, 2016                              
Residential 1-4 family  $6,133   $110   $779   $   $   $7,022 
Residential 5+ multifamily   5,741        123            5,864 
Construction of residential 1-4 family                        
Home equity lines of credit                        
Residential real estate   11,874    110    902            12,886 
Commercial   72,288    4,082    5,371            81,741 
Construction of commercial   1,881        258            2,139 
Commercial real estate   74,169    4,082    5,629            83,880 
Farm land                        
Vacant land                        
Real estate secured   86,043    4,192    6,531            96,766 
Commercial and industrial   28,566    1,238    205            30,009 
Municipal                        
Consumer   65    3                68 
Loans receivable, gross  $114,674   $5,433   $6,736   $   $   $126,843 

13
 

Business Activities Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2015                              
Residential 1-4 family  $248,027   $6,933   $6,444   $91   $   $261,495 
Residential 5+ multifamily   4,507    1,815    89            6,411 
Construction of residential 1-4 family   7,111    887                7,998 
Home equity lines of credit   33,687    545    785            35,017 
Residential real estate   293,332    10,180    7,318    91        310,921 
Commercial   120,903    4,801    3,742            129,446 
Construction of commercial   6,525                    6,525 
Commercial real estate   127,428    4,801    3,742            135,971 
Farm land   2,162        1,031            3,193 
Vacant land   5,567    69    2,927            8,563 
Real estate secured   428,489    15,050    15,018    91        458,648 
Commercial and industrial   72,887    1,214    555    1        74,657 
Municipal   9,566                    9,566 
Consumer   6,171    18    6            6,195 
Loans receivable, gross  $517,113   $16,282   $15,579   $92   $   $549,066 

Acquired Loans

  (in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2015                              
Residential 1-4 family  $6,824   $199   $776   $   $   $7,799 
Residential 5+ multifamily   6,136                    6,136 
Construction of residential 1-4 family                        
Home equity lines of credit                        
Residential real estate   12,960    199    776            13,935 
Commercial   80,406    4,005    4,418            88,829 
Construction of commercial   4,612        262            4,874 
Commercial real estate   85,018    4,005    4,680            93,703 
Farm land                        
Vacant land                        
Real estate secured   97,978    4,204    5,456            107,638 
Commercial and industrial   45,363    875    443    83        46,764 
Municipal                        
Consumer   71    6                77 
Loans receivable, gross  $143,412   $5,085   $5,899   $83   $   $154,479 

14
 

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, 2016                           
Residential 1-4 family  $281,558   $1,892   $313   $679   $74   $2,147   $3,213   $   $3,017 
Residential 5+ multifamily   7,690                                167 
Construction of residential 1-4 family   9,824                                 
Home equity lines of credit   34,949    69    151    90    54    157    452        681 
Residential real estate   334,021    1,961    464    769    128    2,304    3,665        3,865 
Commercial   158,272    1,251    1,917    252        910    3,079        2,993 
Construction of commercial   4,066                                 
Commercial real estate   162,338    1,251    1,917    252        910    3,079        2,993 
Farm land   2,514    795                724    724        1,009 
Vacant land   5,784    46                            28 
Real estate secured   504,657    4,053    2,381    1,021   128    3,938    7,468        7,895 
Commercial and industrial   99,230    1,105    627    161        23    811        23 
Municipal   8,475                                 
Consumer   5,555    19    9    10            19         
Loans receivable, gross  $617,917   $5,177   $3,017   $1,192   $128   $3,961   $8,298   $   $7,918 

Acquired Loans

September 30, 2016                           
Residential 1-4 family  $5,961   $282   $   $   $   $779   $779   $   $779 
Residential 5+ multifamily   5,299        442            123    565        123 
Construction of residential 1-4 family                                    
Home equity credit lines of credit                                    
Residential real estate   11,260    282    442            902    1344        902 
Commercial   74,978    2,695    1,503        974    1,591    4,068    365    2,199 
Construction of commercial   1,881                    258    258        258 
Commercial real estate   76,859    2,695    1,503        974    1,849    4,326    365    2,457 
Farm land                                    
Vacant land                                    
Real estate secured   88,119    2,977    1,945        974    2,751    5,670    365    3,359 
Commercial and industrial   27,711    622    543    1,103    30        1,676    30     
Municipal                                    
Consumer   68                                 
Loans receivable, gross  $115,898   $3,599   $2,488   $1,103   $1,004   $2,751   $7,346   $395   $3,359 

15
 

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 30, 2015                           
Residential 1-4 family  $254,152   $1,781   $1,931   $683   $973   $1,975   $5,562   $   $5,671 
Residential 5+ multifamily   6,254        68            89    157        89 
Construction of residential 1-4 family   7,826    172                             
Home equity lines of credit   33,744    363    306    101    113    390    910        601 
Residential real estate   301,976    2,316    2,305    784    1,086    2,454    6,629        6,361 
Commercial   126,440    1,618    474        233    681    1,388        2,349 
Construction of commercial   6,525                                 
Commercial real estate   132,965    1,618    474        233    681    1,388        2,349 
Farm land   2,172    298                723    723        1,031 
Vacant land   5,734        6            2,823    2,829        2,855 
Real estate secured   442,847    4,232    2,785    784    1,319    6,681    11,569        12,596 
Commercial and industrial   73,698    906    35            18    53        461 
Municipal   9,566                                 
Consumer   6,096    61    21    17            38        80 
Loans receivable, gross  $532,207   $5,199   $2,841   $801   $1,319   $6,699   $11,660   $   $13,137 

Acquired Loans

December 30, 2015                           
Residential 1-4 family  $6,823   $   $   $110   $   $866   $976   $90   $776 
Residential 5+ multifamily   6,136                                 
Construction of residential 1-4 family                                    
Home equity lines of credit                                    
Residential real estate   12,959            110        866    976    90    776 
Commercial   81,140    4,848    916            1,925    2,841        2,000 
Construction of commercial   4,612                    262    262        262 
Commercial real estate   85,752    4,848    916            2,187    3,103        2,262 
Farm land                                    
Vacant land                                    
Real estate secured   98,711    4,848    916    110        3,053    4,079    90    3,038 
Commercial and industrial   46,128    471    83    82            165         
Municipal                                    
Consumer   77                                 
Loans receivable, gross  $144,916   $5,319   $999   $192   $   $3,053   $4,244   $90   $3,038 

Interest on non-accrual loans that would have been recorded as additional interest income for the nine months ended September 30, 2016 and 2015 had the loans been current in accordance with their original terms totaled $666,000 and $609,000, respectively.

16
 

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

Business Activities Loans

   Nine months ended
   September 30, 2016  September 30, 2015
  (in thousands)  Quantity 

Pre-

modification balance

 

Post-

modification balance

  Quantity 

Pre-

modification balance

 

Post-

modification balance

Residential real estate   4   $683   $683    2   $923   $923 
Commercial real estate   2    2,123    2,123    1    294    294 
Home equity lines of credit               1    35    35 
Troubled debt restructurings   6   $2,806   $2,806    4    1,252    1,252 
Rate reduction and term extension   1   $174   $174    1   $294   $294 
Interest only and term extension                        
Debt consolidation   1    1,863    1,863             
Debt consolidation and term extension   1    260    260             
Note bifurcation               1    48    48 
Term extension   3    509    509    2    910    910 
Troubled debt restructurings   6   $2,806   $2,806    4    1,252    1,252 

Acquired Loans

   Nine months ended
   September 30, 2016  September 30, 2015
  (in thousands)  Quantity 

Pre-

modification balance

 

Post-

modification balance

  Quantity 

Pre-

modification balance

 

Post-

modification balance

Residential real estate   1   $88   $88       $   $ 
Commercial real estate               1    184    184 
Home equity lines of credit                        
Troubled debt restructurings   1   $88   $88    1   $184   $184 
Rate reduction and term extension   1   $88   $88    1   $184   $184 
Interest only and term extension                        
Interest only                        
Debt consolidation and term extension                        
Term extension                        
Troubled debt restructurings   1   $88   $88    1   $184   $184 

Seven loans were modified in troubled debt restructurings during 2016, one of which was past due at September 30, 2016.

As of September 30, 2016, there were no commitments to lend additional amounts on troubled debt restructurings.

As of September 30, 2016, the Bank had $2,793,000 in loans collateralized by residential real estate property in the process of foreclosure.

17
 

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, 2016  Three months ended September 30, 2016
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,248   $224   $(155)  $8   $2,325   $69   $5   $   $   $74 
Commercial   1,734    29    (1)       1,762    134    37            171 
Land   166    82    (42)       206                     
Real estate   4,148    335    (198)   8    4,293    203    42            245 
Commercial and industrial   851    (16)   (2)   25    858    37    (11)       8    34 
Municipal   56    (3)           53                     
Consumer   89    17    (17)   5    94                     
Unallocated   334    (19)           315                     
Totals  $5,478   $314   $(217)  $38   $5,613   $240   $31   $   $8   $279 
   Business Activities Loans  Acquired Loans
  (in thousands)  Nine months ended September 30, 2016  Nine months ended September 30, 2016
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance
Residential  $2,477   $370   $(550)  $28   $2,325   $79   $(5)  $   $   $74 
Commercial   1,466    332    (37)   1    1,762    132    133    (98)   4    171 
Land   188    106    (88)       206                     
Real estate   4,131    808    (675)   29    4,293    211    128    (98)   4    245 
Commercial and industrial   683    167    (32)   40    858    24    403    (416)   23    34 
Municipal   61    (8)           53                     
Consumer   124    1    (46)   15    94                     
Unallocated   482    (167)           315                     
Totals  $5,481   $801   $(753)  $84   $5,613   $235   $531   $(514)  $27   $279 
   Business Activities Loans  Acquired Loans
  (in thousands)  Three months ended September 30, 2015  Three months ended September 30, 2015
   Beginning balance 

Provision

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

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

 

Charge-

offs

 

Reco-

veries

  Ending balance  Beginning balance 

Provision

 

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 

18
 

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, 2016                              
Residential 1-4 family  $280,711   $1,698   $5,952   $147   $286,663   $1,845 
Residential 5+ multifamily   5,860    54    1,830        7,690    54 
Construction of residential 1-4 family   9,824    85            9,824    85 
Home equity lines of credit   34,674    324    796    17    35,470    341 
Residential real estate   331,069    2,161    8,578    164    339,647    2,325 
Commercial   158,185    1,646    4,417    69    162,602    1,715 
Construction of commercial   3,949    48    117        4,066    48 
Commercial real estate   162,134    1,694    4,534    69    166,668    1,763 
Farm land   3,025    27    1,008    9    4,033    36 
Vacant land   5,589    166    241    4    5,830    170 
Real estate secured   501,817    4,048    14,361    246    516,178    4,294 
Commercial and industrial   101,063    853    83    4    101,146    857 
Municipal   8,475    53            8,475    53 
Consumer   5,593    94            5,593    94 
Unallocated allowance       315                315 
Totals  $616,948   $5,363   $14,444   $250   $631,392   $5,613 

Acquired Loans

(in thousands)  Collectively evaluated  Individually evaluated  ASC 310-30 loans   Total portfolio 
    Loans    Allowance    Loans    Allowance    Loans    Allowance    Loans    Allowance 
September 30, 2016                                        
Residential 1-4 family  $6,244   $   $779   $74   $   $   $7,023   $74 
Residential 5+ multifamily   5,741        123                5,864     
Construction of residential 1-4 family                                
Home equity lines of credit                                
Residential real estate   11,985        902    74            12,887    74 
Commercial   74,858    22    2,955    82    3,928    64    81,741    168 
Construction of commercial   1,881    3    258                2,139    3 
Commercial real estate   76,739    25    3,213    82    3,928    64    83,880    171 
Farm land                                
Vacant land                                
Real estate secured   88,724    25    4,115    156    3,928    64    96,767    245 
Commercial and industrial   29,676    26            332    8    30,008    34 
Municipal                                
Consumer   52                16        68     
Unallocated allowance                                
Totals  $118,452   $51   $4,115   $156   $4,276   $72   $126,843   $279 

 

19
 

Business Activities Loans

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2015                              
Residential 1-4 family  $253,156   $1,415   $8,339   $610   $261,495   $2,025 
Residential 5+ multifamily   4,640    33    1,771        6,411    33 
Construction of residential 1-4 family   7,998    65            7,998    65 
Home equity lines of credit   34,298    286    719    68    35,017    354 
Residential real estate   300,092    1,799    10,829    678    310,921    2,477 
Commercial   125,173    1,265    4,273    113    129,446    1,378 
Construction of commercial   6,403    87    122    1    6,525    88 
Commercial real estate   131,576    1,352    4,395    114    135,971    1,466 
Farm land   2,162    23    1,031    14    3,193    37 
Vacant land   5,486    122    3,077    29    8,563    151 
Real estate secured   439,316    3,296    19,332    835    458,648    4,131 
Commercial and industrial   74,131    673    526    10    74,657    683 
Municipal   9,566    61            9,566    61 
Consumer   6,115    124    80        6,195    124 
Unallocated allowance       482                482 
Totals  $529,128   $4,636   $19,938   $845   $549,066   $5,481 

Acquired Loans

(in thousands)  Collectively evaluated  Individually evaluated  ASC 310-30 loans   Total portfolio 
    Loans    Allowance    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2015                                        
Residential 1-4 family  $7,023   $   $776   $79   $   $   $7,799   $79 
Residential 5+ multifamily   6,136                        6,136     
Construction of residential 1-4 family                                
Home equity lines of credit                                
Residential real estate   13,159        776    79            13,935    79 
Commercial   81,300    19    2,742    107    4,787    2    88,829    128 
Construction of commercial   4,612    4    262                4,874    4 
Commercial real estate   85,912    23    3,004    107    4,787    2    93,703    132 
Farm land                                
Vacant land                                
Real estate secured   99,071    23    3,780    186    4,787    2    107,638    211 
Commercial and industrial   45,650    24            1,114        46,764    24 
Municipal                                
Consumer   61                16        77     
Unallocated allowance                                
Totals  $144,782   $47   $3,780   $186   $5,917   $2   $154,479   $235 

20
 

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

Business Activities Loans

  September 30, 2016 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $612,039   $4,849   $   $   $612,039   $4,849 
Potential problem loans   4,909    200            4,909    200 
Impaired loans           14,444    250    14,444    250 
Unallocated allowance       315                315 
Totals  $616,948   $5,364   $14,444   $250   $631,392   $5,614 

Acquired Loans

  September 30, 2016 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $120,106   $70   $   $   $120,106   $70 
Potential problem loans   2,622    53            2,622    53 
Impaired loans           4,115    156    4,115    156 
Totals  $122,728   $123   $4,115   $156   $126,843   $279 

Business Activities Loans

  December 30, 2015 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $527,905   $4,110   $   $   $527,905   $4,110 
Potential problem loans   1,223    44            1,223    44 
Impaired loans           19,938    845    19,938    845 
Unallocated allowance       482                482 
Totals  $529,128   $4,636   $19,938   $845   $549,066   $5,481 

Acquired Loans

  December 30, 2015 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $148,580   $46   $   $   $148,580   $46 
Potential problem loans   2,119    2            2,119    2 
Impaired loans           3,780    187    3,780    187 
Unallocated allowance                        
Totals  $150,699   $48   $3,780   $187   $154,479   $235 

21
 

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

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, 2016                                             
Residential  $5,530   $6,080   $6,418   $147   $72   $2,252   $2,409   $2,683   $69 
Home equity lines of credit   410    436    463    17    1    386    419    346    5 
Residential real estate   5,940    6,516    6,881    164    73    2,638    2,828    3,029    74 
Commercial   3,568    3,958    3,393    69    73    849    1,106    996    17 
Construction of commercial           72            117    123    47    5 
Farm land   723    784    440    9        286    358    580     
Vacant land   46    46    2,305    4    2    195    232    201    8 
Real estate secured   10,277    11,304    13,091    246    148    4,085    4,647    4,853    104 
Commercial and industrial   4    4    40    4        78    106    217    2 
Consumer                               8     
Totals  $10,281   $11,308   $13,131   $250   $148   $4,163   $4,753   $5,078   $106 

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, 2016                                             
Residential 1-4 family  $779   $893   $637   $74   $3   $123   $123   $267   $ 
Home equity lines of credit                                    
Residential real estate   779    893    637    74    3    123    123    267     
Commercial   1,146    1,557    577    82    111    1,809    2,268    2,085    158 
Construction of commercial                       258    272    259     
Farm land                                    
Vacant land                                    
Real estate secured   1,925    2,450    1,214    156    114    2,190    2,663    2,611    158 
Commercial and industrial           100                    24     
Consumer                                    
Totals  $1,925   $2,450   $1,314   $156   $114   $2,190   $2,663   $2,635   $158 

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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, 2015               
Residential 1-4 family  $7,482   $8,094   $6,213   $610   $109   $2,628   $2,770   $3,043   $82 
Home equity lines of credit   535    659    176    68    6    184    199    611    2 
Residential real estate   8,017    8,753    6,389    678    115    2,812    2,969    3,654    84 
Commercial   3,131    3,405    2,629    113    113    1,142    1,393    2,130    12 
Construction of commercial   122    128        1                127    6 
Farm land   733    773    445    14        298    352    270    15 
Vacant land   2,870    3,836    3,058    29    2    207    241    5    7 
Real estate secured   14,873    16,895    12,521    835    230    4,459    4,955    6,186    124 
Commercial and industrial   95    98    120    10    8    431    481    464    7 
Consumer                       80    108         
Totals  $14,968   $16,993   $12,641   $845   $238   $4,970   $5,544   $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 
December 31, 2015               
Residential 1-4 family  $599   $716   $176   $79   $   $177   $177   $436   $4 
Home equity lines of credit                                    
Residential real estate   599    716    176    79        177    177    436    4 
Commercial   675    826    557    107    61    2,067    2,843    2,097    10 
Construction of commercial                       262    273    138    16 
Farm land                                    
Vacant land                                    
Real estate secured   1,274    1,542    733    186    61    2,506    3,293    2,671    30 
Commercial and industrial           4        1        4         
Consumer                                    
Totals  $1,274   $1,542   $737   $186   $62   $2,506   $3,297   $2,671   $30 

(1) The table above reflects the book, note and specific allowance as of December 31, 2015, while the average balances and income recognized are for the nine months ended September 30, 2015.

23
 

NOTE 4 - MORTGAGE SERVICING RIGHTS

September 30, (in thousands)    2016      2015  
Residential mortgage loans serviced for others  $125,988   $132,201 
Fair value of mortgage servicing rights   962    1,429 

Changes in mortgage servicing rights are as follows:

     Three months      Nine months  
Periods ended September 30, (in thousands)    2016      2015      2016      2015  
Mortgage Servicing Rights                    
Balance, beginning of period  $416   $599   $487   $694 
Originated   27    22    71    124 
Amortization (1)   (67)   (86)   (182)   (282)
Balance, end of period   376    535    376    536 
Valuation Allowance                    
Balance, beginning of period   (25)   (2)   (4)   1 
(Increase) decrease in impairment reserve (1)   8    2    (13)   (2)
Balance, end of period   (17)      (17)   (1)
Loan servicing rights, net  $359   $535   $359   $535 
(1)Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

NOTE 5 - PLEDGED ASSETS

(in thousands)    September 30, 2016      December 31, 2015  
Securities available-for-sale (at fair value)  $65,357   $67,750 
Loans receivable   196,077    153,269 
Total pledged assets  $261,434   $221,019 

At September 30, 2016, securities were pledged as follows: $59.6 million to secure public deposits, $5.7 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.

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, except share and per share data)   2016      2015      2016      2015  
Net income  $1,922   $1,985   $5,165   $6,290 
Less: Preferred stock dividends declared       (40)       (120)
Net income available to common shareholders   1,922    1,945    5,165    6,170 
Less: Undistributed earnings allocated to participating securities   (15)   (17)   (41)   (54)
Net income allocated to common stock  $1,907   $1,928   $5,124   $6,116 
Weighted-average common shares issued   2,758    2,731    2,754    2,728 
Less: Unvested restricted stock awards   (21)   (24)   (22)   (24)
Weighted-average common shares outstanding used to calculate basic earnings per common share   2,737    2,707    2,732    2,704 
Add: Dilutive effect of stock options   14    17    15    17 
Weighted-average common shares outstanding used to calculate diluted earnings per common share   2,751    2,724    2,747    2,721 
Earnings per common share (basic)  $0.70   $0.71   $1.88   $2.26 
Earnings per common share (diluted)  $0.69   $0.71   $1.87   $2.25 

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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 and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Board of Governors of the Federal Reserve System (FRB) and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for bank holding companies and their bank subsidiaries. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by Salisbury and the Bank. The rules 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. The initial implementation of the capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each subsequent January 1, 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.

As of September 30, 2016, Salisbury and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s category.

Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for Salisbury and the Bank 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, 2016                              
Total Capital (to risk-weighted assets)                              
Salisbury  $94,948    13.25%  $57,330    8.0%   n/a     
Bank   92,739    12.94    57,330    8.0    71,662    10.0%
Tier 1 Capital (to risk-weighted assets)                              
Salisbury   78,875    11.01    42,997    6.0    n/a     
Bank   86,666    12.09    42,997    6.0    57,329    8.0 
Common Equity Tier 1 Capital (to risk-weighted assets)                              
Salisbury   78,875    11.01    41,868    4.5    n/a     
Bank   86,666    12.09    41,871    4.5    60,481    6.5 
Tier 1 Capital (to average assets)                              
Salisbury   78,875    8.47    37,216    4.0    n/a     
Bank   86,666    9.30    37,219    4.0    46,524    5.0 
December 31, 2015                               
Total Capital (to risk-weighted assets)                              
Salisbury  $92,030    13.51%  $54,509    8.0%   n/a     
Bank   89,249    13.10    54,504    8.0   $68,131    10.0%
Tier 1 Capital (to risk-weighted assets)                              
Salisbury   76,120    11.17    40,878    6.0    n/a     
Bank   83,340    12.23    40,878    6.0    54,504    8.0 
Common Equity Tier 1 Capital (to risk-weighted assets)                              
Salisbury   76,120    11.17    30,659    4.5    n/a     
Bank   83,340    12.23    30,659    4.5    44,285    6.5 
Tier 1 Capital (to average assets)                              
Salisbury   76,120    8.56    36,102    4.0    n/a     
Bank   83,340    9.37    35,593    4.0    44,491    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 December 21, 2015, notes that, as a general matter, the Board of Directors of a Bank Holding Company (“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.

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 qualified as Tier 1 capital for regulatory purposes and ranked senior to the Common Stock.

During fourth quarter 2015, Salisbury completed an offering of $10 million of unsecured 6.00% fixed-to–floating rate subordinated notes due in 2025. The notes qualify as Tier II capital and are included as such within Salisbury’s total risk-based capital ratio.

The net proceeds of the offering, along with cash on hand, were used during the fourth quarter 2015 to redeem the $16 million of Senior Non-Cumulative Perpetual Preferred Stock issued in conjunction with Salisbury’s participation in the U.S. Treasury’s SBLF program.

NOTE 8 – BENEFITS

Salisbury’s 401(k) Plan expense was $179,000 and $166,000, respectively, for the three month periods ended September 30, 2016 and 2015, and $568,000 and $516,000, respectively, for the nine month periods ended September 30, 2016 and 2015. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $19,000 and $22,000, respectively, for the three month periods ended September 30, 2016 and 2015, and $56,000 and $53,000, respectively, for the nine month periods ended September 30, 2016 and 2015.

In 2014, Salisbury terminated the Defined Benefit Pension Plan.  Excess assets in the amount of $1,018,000 were distributed to the Bank’s Defined Contribution Plan (401k) and the Employee Stock Ownership Plan (ESOP) for future allocations to employees.  The division of the excess pension assets was 66.67% to the 401k account (or $679,000) and 33.33% to the ESOP account (or $339,000).

ESOP

Salisbury offers an ESOP to eligible employees.  Under the Plan, Salisbury may make discretionary contributions to the Plan, which generally vest in full upon six years of qualified service.

Salisbury’s ESOP expense was $51,000 and $96,000, respectively, for the three month periods ended September 30, 2016 and 2015, and $132,000 and $287,000, respectively, for the nine month periods ended September 30, 2016 and 2015.

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 of the Code.

In 2015, 2014, and 2013 the Bank awarded six (6), seven (7) and six (6) Executives, respectively, with discretionary contributions to the plan. Expenses related to this Plan amounted to $56,000 for the third quarter of 2016 and $34,000 for the third quarter of 2015. Additionally, expenses related to this plan amounted to $168,000 and $95,000 for the nine months ended September 30, 2016 and 2015, respectively. Based on the Executive’s date of retirement, the vesting schedule ranges from 7.7% per year to 50% per year.

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On January 29, 2016, the Compensation Committee granted a total of 47,470 Phantom Stock Appreciation Units pursuant to its 2011 Long Term Incentive Plan, which was approved by shareholders at the 2011 Annual Meeting, including 23,012 units to three Named Executive Officers. Richard J. Cantele, Jr., President and Chief Executive Officer received 11,484 units, John Davies, President of the New York Region and Chief Lending Officer received 5,963 units and Donald E. White, Chief Financial Officer received 5,565 units. The units will vest on the third anniversary of the grant date.

Grants of Restricted Stock and Options

On February 16, 2016, 1,350 shares of stock options were exercised at $21.48 per share by one former Riverside Bank executive.

On January 29, 2016, Salisbury granted a total of 15,800 shares of restricted stock pursuant to its 2011 Long Term Incentive Plan, which was approved by shareholders at the 2011 Annual Meeting, to 42 employees, including 6,000 shares to three Named Executive Officers. Richard J. Cantele, Jr., President and Chief Executive Officer received 5,000 and John Davies, President New York Region and Chief Lending Officer and Donald E. White, Chief Financial Officer each received 500 shares. The fair value of all such stock as of the grant date was determined to be $466,000 and the stock will be vested three years from the grant date. On July 29, 2016, the Board of Directors approved the accelerated vesting of 200 shares for a recently retired employee.  

On January 26, 2016, 2,700 shares of stock options were exercised at $21.48 per share by two former Riverside Bank executives.

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.

On March 27, 2015, Salisbury granted a total of 1,000 shares of restricted stock, pursuant to its 2011 Long Term Incentive Plan, to one (1) Named Executive Officer, Richard J. Cantele, Jr., President and Chief Executive Officer. The fair value of the stock as of the grant date was determined to be $29,000 and the stock vested immediately.

Expense related to such grants in the three months ended September 30, 2016 and 2015 totaled $57,000 and $52,000, respectively, and for the nine months ended September 30, 2016 and 2015 totaled $164,000 and $167,000, respectively. Unrecognized compensation cost relating to the awards as of September 30, 2016 and 2015 totaled $431,000 and $186,000, respectively. There were 100 shares forfeited in the nine months ended September 30, 2016 and a total of 300 shares were forfeited in the nine months ended September 30, 2015.

NOTE 9 –ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income are as follows:

(in thousands)    September 30, 2016      December 31, 2015
Unrealized gains on securities available-for-sale, net of tax  $883   $1,125 
Accumulated other comprehensive income, net  $883   $1,125 

 

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.

Accounting Standards Codification (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:

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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 quarter ended September 30, 2016.

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 exchange-traded equity securities. 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.
Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. 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.
Mortgage servicing assets are accounted for at cost, subject to impairment testing. When the carrying cost exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors; as such, the primary risk inherent in valuing mortgage servicing assets is the impact of fluctuating interest rates on the servicing revenue stream. Mortgage servicing assets are classified within Level 2 of the fair value hierarchy.

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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, 2016                    
Assets at fair value on a recurring basis                    
Municipal bonds  $   $18,604   $   $18,604 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government-sponsored enterprises       48,176        48,176 
Collateralized mortgage obligations:                    
U.S. Government agencies       1,604        1,604 
Non-agency       4,032        4,032 
SBA bonds       2,286        2,286 
CRA mutual funds       838        838 
Corporate bonds       1,020        1,020 
Preferred stock   241            241 
Securities available-for-sale  $241   $76,560   $   $76,801 
Assets at fair value on a non-recurring basis                    
Collateral dependent impaired loans           11,801    11,801 
Mortgage servicing rights       962        962 
December 31, 2015                    
Assets at fair value on a recurring basis                    
U.S. Treasury notes  $   $2,541   $   $2,541 
U.S. Government agency notes       498        498 
Municipal bonds       30,385        30,385 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government-sponsored enterprises       32,202        32,202 
Collateralized mortgage obligations:                    
U.S. Government agencies       2,014        2,014 
Non-agency       4,948        4,948 
SBA bonds       3,096        3,096 
CRA mutual funds       764        764 
Preferred stock   246            246 
Securities available-for-sale  $246   $76,448   $   $76,694 
Assets at fair value on a non-recurring basis                    
Collateral dependent impaired loans           15,211    15,211 
Mortgage servicing rights       1,315        1,315 

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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, 2016            
Financial Assets                         
Cash and cash equivalents  $42,638   $42,638   $42,638   $   $ 
Securities available-for-sale   76,801    76,801    241    76,560     
Federal Home Loan Bank stock   2,937    2,937        2,937     
Loans held-for-sale   837    852            852 
Loans receivable, net   753,623    765,433            765,433 
Accrued interest receivable   2,260    2,260    2,260         
Cash surrender value of life insurance   13,952    13,952    13,952         
Mortgage servicing rights   359    962        962     
Financial Liabilities                         
Demand (non-interest-bearing)  $210,396   $210,396   $   $   $210,396 
Demand (interest-bearing)   126,064    126,064            126,064 
Money market   201,504    201,504            201,504 
Savings and other   127,595    127,595            127,595 
Certificates of deposit   121,171    122,448            122,448 
Deposits   786,730    788,007            788,007 
Repurchase agreements   3,581    3,581            3,581 
FHLBB advances   27,134    28,004            28,004 
Subordinated debt   9,782    10,432            10,432 
Note payable   351    385            385 
Capital lease liability   419    903            903 
Accrued interest payable   275    275    275         
December 31, 2015                         
Financial Assets                         
Cash and cash equivalents  $62,118   $62,118   $62,118   $   $ 
Securities available-for-sale   76,694    76,694    246    76,448     
Federal Home Loan Bank stock   3,176    3,176        3,176     
Loans held-for-sale   763    778            778 
Loans receivable, net   699,018    707,154            707,154 
Accrued interest receivable   2,307    2,307    2,307         
Cash surrender value of life insurance   13,685    13,685    13,685         
Mortgage servicing rights   597    1,383        1,383     
Financial Liabilities                         
Demand (non-interest-bearing)  $201,340   $201,340   $   $   $201,340 
Demand (interest-bearing)   125,465    125,465            125,465 
Money market   183,783    183,783            183,783 
Savings and other   119,651    119,651            119,651 
Certificates of deposit   124,294    125,437            125,437 
Deposits   754,533    755,676            755,676 
Repurchase agreements   3,914    3,914            3,914 
FHLBB advances   26,979    28,559            28,559 
Subordinated debt   9,764    9,764            9,764 
Note payable   376    405            405 
Capital lease liability   422    870            870 
Accrued interest payable   150    150    150         

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

NOTE 11 – SUBSEQUENT EVENT

On October 28, 2016, the Board of Directors of Salisbury declared a common stock dividend of $0.28 per common share payable on November 25, 2016 to shareholders of record on November 11, 2016.

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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, 2015. 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 management and operations 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. The Bank’s trust and wealth advisory services are based 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 financial statements. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the 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 reasonableness of the timing and the amount of cash to be collected. Subsequent decreases 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 “Basis of Presentation” 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.

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 affect their value or estimated lives could have a material adverse impact on the results of operations.

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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 $928.4 million at September 30, 2016, up $37.2 million from December 31, 2015. Loans receivable, net, were $753.6 million at September 30, 2016, up $54.6 million, or 7.2%, from December 31, 2015. Non-performing assets were $14.5 million at September 30, 2016, down $1.8 million from $16.3 million at December 31, 2015. Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, was 0.78%, 0.81% and 0.82%, at September 30, 2016, December 31, 2015 and September 30, 2015, respectively. Deposits were $786.7 million at September 30, 2016 and $754.5 million at December 31, 2015. FHLBB advances increased $0.1 million from December 31, 2015 to September 30, 2016.

At September 30, 2016, book value and tangible book value per common share were $33.92 and $28.69, respectively. Salisbury’s Tier 1 leverage, total risk-based and common equity Tier 1 capital ratios were 8.47%, 13.25%, and 11.01%, respectively.

Securities and Short Term Funds

During the first nine months of 2016, securities increased $0.1 million to $76.8 million at September 30, 2016. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) decreased $19.5 million.

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 previously recognized OTTI, to be OTTI at September 30, 2016.

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, 2016, that additional recognition of OTTI was not required. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI.

Loans

Net loans receivable increased $54.6 million to $753.6 million at September 30, 2016, compared with $699.0 million at December 31, 2015 and increased $65.9 million from $687.7 million at September 30, 2015.

Loan Credit Quality

During the first nine months of 2016, total impaired and potential problem loans decreased to $26.1 million, or 3.4% of gross loans receivable at September 30, 2016, from $27.1 million, or 3.8% of gross loans receivable at December 31, 2015 and decreased from $31.7 million at September 30, 2015. The percentage of such loans at September 30, 2016 when compared to September 30, 2015 improved from 4.5% of gross loans.

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Changes in impaired and potential problem loans are as follows:

   September 30, 2016   September 30, 2015 
                                         
Three months ended Impaired loans    Potential        Impaired loans    Potential      
(in thousands)  Non-        problem         Non-         problem      
    accrual    Accruing    loans    Total    accrual    Accruing    loans    Total 
Loans placed on non-accrual status  $877   $(289)  $(578)  $10   $2,385   $(973)  $   $1,412 
Foreclosed to OREO   (2,823)           (2,823)                    
Loans restored to accrual status                   (325)   86    236    (3)
Loan risk rating downgrades to substandard           643    643                 
Loan risk rating upgrades from substandard                                
Loan repayments   (619)   (205)   (124)   (948)   (428)   (202)   (74)   (704)
Loan charge-offs   (116)           (116)   (175)           (175)
Increase (decrease) in TDR loans       231        231        35        35 
Inter-month tax advances                                
(Decrease) increase in loans  $(2,681)  $(263)  $(59)  $(3,003)  $1,457   $(1,054)  $162   $565 

During the third quarter of 2016, Salisbury placed $0.9 million of loans on non-accrual status as a result of deteriorated payment and financial performance and charged-off $116,000 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.

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 probable that Salisbury will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreements.
Non-accrual loans, a sub-set of impaired loans, are loans for which the accrual of interest has been discontinued because, in the opinion of management, full collection of principal or interest is unlikely.
Non-performing loans consist of non-accrual loans, and accruing loans past due 90 days and over that are well collateralized, in the process of collection and where full collection of principal and interest is reasonably assured. 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 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 and are not classified as impaired.

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 banks 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.

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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.

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, 2016      December 31, 2015  
Accruing troubled debt restructured loans  $7,281   $7,544 
Non-accrual troubled debt restructured loans   3,617    3,044 
Non-accrual loans, excluding troubled debt restructured loans   7,660    13,131 
Total impaired loans  $18,558   $23,719 
Commitments to lend additional amounts to impaired borrowers  $   $ 

Non-Performing Assets

Non-performing assets decreased $1.8 million to $14.5 million, or 1.6% of assets at September 30, 2016, from $16.3 million, or 1.8% of assets at December 31, 2015, and decreased $2.1 million from $16.6 million, or 1.8% of assets at September 30, 2015.

The 11% decrease in non-performing assets in 2016 resulted primarily from $2.4 million of loans reinstated to accrual status, $1.3 million in payoffs and repayments, $0.3 million change in 90+ past due and accruing, $0.7 million inter-month tax advance, and $0.3 million charged off. This decrease was offset in part by $2.9 million placed on non-accrual status.

The components of non-performing assets are as follows:

(in thousands)    September 30, 2016      December 31, 2015  
Residential 1-4 family  $3,918   $6,447 
Residential 5+ multifamily   167    89 
Home equity lines of credit   681    601 
Commercial   5,451    4,611 
Farm land   1,008    1,031 
Vacant land   28    2,855 
Real estate secured   11,253    15,634 
Commercial and industrial   24    461 
Consumer       80 
Non-accruing loans   11,277    16,175 
Accruing loans past due 90 days and over   396    90 
Non-performing loans   11,673    16,265 
Real estate acquired in settlement of loans   2,823     
Non-performing assets  $14,496   $16,265 

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The past due status of non-performing loans is as follows:
(in thousands)    September 30, 2016      December 31, 2015  
Current  $1,466   $4,497 
Past due 001-029 days   452    362 
Past due 030-059 days   1,886    306 
Past due 060-089 days   26    27 
Past due 090-179 days   1,133    1,320 
Past due 180 days and over   6,710    9,753 
Total non-performing loans  $11,673   $16,265 

At September 30, 2016, 12.57% of non-performing loans were current with respect to loan payments, compared with 27.65% at December 31, 2015. Loans past due 180 days exclude a former $2.8 million loan secured by vacant land (residential building lots) as foreclosure was completed in the third quarter and the balance is now reflected in Other Real Estate Owned.

On a combined basis, the five largest non-performing loan relationships account for 49% of the non-performing assets while the combined largest ten loan relationships account for 68% 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 seven of these are actively moving through the legal process.

Troubled Debt Restructured Loans

Troubled debt restructured loans decreased $0.3 million during the nine (9) month period ended September 30, 2016 to $10.9 million, or 1.40% of gross loans receivable at September 30, 2016, from $10.6 million, or 1.50% of gross loans receivable at December 31, 2015.

The components of troubled debt restructured loans are as follows:

(in thousands)    September 30, 2016      December 31, 2015  
Residential  $4,599   $4,351 
Home equity lines of credit   115    118 
Personal       222 
Vacant land   213    122 
Commercial   2,295    2,666 
Real estate secured   7,222    7,479 
Commercial and industrial   59    65 
Accruing troubled debt restructured loans   7,281    7,544 
Residential   1,304    1,149 
Commercial   2,313    1,554 
Real estate secured   3,617    2,703 
Commercial and industrial       341 
Non-accrual troubled debt restructured loans   3,617    3,044 
Troubled debt restructured loans  $10,898   $10,588 
The past due status of troubled debt restructured loans is as follows:
(in thousands)    September 30, 2016      December 31, 2015  
Current  $6,621   $6,771 
Past due 1-29 days   589    453 
Past due 30-59 days       320 
Past due 60-89 days   71     
Past due 90-179 days        
Accruing troubled debt restructured loans   7,281    7,544 
Current   739    1,810 
Past due 01-29 days   53     
Past due 30-59 days   1,811    28 
Past due 60-89 days   26     
Past due 90-179 days       1,206 
Past due 180 days and over   988     
Non-accrual troubled debt restructured loans   3,617    3,044 
Total troubled debt restructured loans  $10,898   $10,588 

At September 30, 2016, 67.54% of troubled debt restructured loans were current with respect to loan payments, as compared with 81.04% at December 31, 2015.

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Past Due Loans

Loans past due 30 days or more decreased $0.3 million during 2016 to $15.6 million, or 2.06% of gross loans receivable at September 30, 2016, compared with $15.9 million, or 2.26% of gross loans receivable at December 31, 2015.

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

(in thousands)    September 30, 2016      December 31, 2015  
Past due 030-059 days  $3,620   $3,534 
Past due 060-089 days   2,269    966 
Past due 090-179 days   396     
Past due 180 days and over       90 
Accruing loans   6,285    4,590 
Past due 030-059 days   1,886    306 
Past due 060-089 days   26    27 
Past due 090-179 days   737    1,319 
Past due 180 days and over   6,710    9,662 
Non-accrual loans   9,359    11,314 
Total loans past due 30 days or greater  $15,644   $15,904 

Potential Problem Loans

Potential problem loans increased $4.2 million during the first nine months of 2016 to $7.5 million, or 0.99% of gross loans receivable at September 30, 2016, compared with $3.3 million, or 0.48% of gross loans receivable at December 31, 2015.

The components of potential problem loans are as follows:

(in thousands)    September 30, 2016      December 31, 2015  
Residential 1-4 family  $537   $655 
Home equity credit   124    150 
Residential real estate   661    805 
Commercial real estate   6,113    2,030 
Vacant land       23 
Real estate secured   6,774    2,858 
Commercial and industrial   757    478 
Consumer       6 
Other classified loans receivable  $7,531   $3,342 

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

(in thousands)    September 30, 2016      December 31, 2015  
Current  $5,165   $2,716 
Past due 001-029 days   1,003    229 
Past due 030-059 days   1,020    150 
Past due 060-089 days   343    247 
Total potential problem loans  $7,531   $3,342 

At September 30, 2016, 68.58% of potential problem loans were current with respect to loan payments, as compared with 81.27% at December 31, 2015.

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, totaling $786.7 million, increased $32.2 million during the nine months ended September 30, 2016 as compared to balances at December 31, 2015 of $754.5 million. Deposits increased $25.2 million year-over-year from $761.5 million at September 30, 2015. Retail repurchase agreements decreased $0.3 million during the nine months ended September 30, 2016 to $3.6 million compared with $3.9 million at December 31, 2015, and decreased $0.6 million for year-over-year compared with $4.2 million at September 30, 2015.

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Federal Home Loan Bank of Boston (FHLBB) advances increased $0.1 million during the nine months ended September 30, 2016 to $27.1 million at September 30, 2016, from $27.0 million at December 31, 2015, and increased $0.2 million year-over-year from $26.9 million at September 30, 2015. Salisbury has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLB, whereby upon the Bank’s request an irrevocable letter of credit is issued to secure municipal transactional deposit accounts.  These letters of credit primarily are secured by residential mortgage loans.  The amount of funds available from the FHLB to the Bank is reduced by any letters of credit outstanding.  At September 30, 2016, there were no municipal letters of credit outstanding.

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 assets, primarily 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, 2016, 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 20.29%, down from 22.67% at December 31, 2015. Management believes Salisbury’s funding sources will meet anticipated funding needs.

Operating activities for the nine-month period ended September 30, 2016 provided net cash of $9.4 million. Investing activities used net cash of $58.7 million primarily to fund loan growth of $57.3 million and purchase investments of $45.3 million. Investment activities generated $44.8 million of funds from the sale, principal payments, calls and maturities of securities available-for-sale. Financing activities provided net cash of $29.8 million, principally due to the $35.3 million increase in deposit transaction accounts. Financing activities also utilized net cash of $2.3 million for the payment of common stock dividends.

At September 30, 2016, Salisbury had outstanding commitments to fund new loan originations of $27.2 million and unused lines of credit of $109.7 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.

RESULTS OF OPERATIONS

For the three month periods ended September 30, 2016 and 2015

OVERVIEW

Net income allocated to common stock was $1.9 million, or $0.70 per common share, for the third quarter ended September 30, 2016, compared with $1.9 million, or $0.71 per common share, for the third quarter ended September 30, 2015.

  Earnings Per Share increased 11.1% to $0.70 for the third quarter 2016 as compared with the $0.63 for the second quarter 2016. 
     
  Trust and Wealth Advisory Assets under administration increased $84.9 million, or 20%, from the second quarter 2016 and have increased $159.5 million, or 46%, from third quarter 2015.
     
  Total deposits increased $32 million, or 4%, from the second quarter of 2016.
     
  Salisbury’s efficiency ratio improved to 64.13% for the quarter ended September 30, 2016 as compared to 66.51% in the prior quarter. 
     
  Tangible book value per common share of $28.69 at September 30, 2016 increased $0.41 from $28.28 at June 30, 2016, and $1.42 as compared to $27.21 at September 30, 2015. 

Net Interest Income

Tax equivalent net interest income for third quarter 2016 decreased $218,000, or 2.7%, versus third quarter 2015. Average earning assets increased $55.7 million versus third quarter 2015. Average total interest bearing deposits increased $37.9 million versus third quarter 2015. The net interest margin of 3.59% for the third quarter 2016 decreased by 34 basis points as compared to 3.93% for the third quarter 2015.

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 $440,000. The third quarter 2015 interest income was benefitted by $726,000 from a similar adjustment.

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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)    2016      2015      2016      2015      2016      2015  
Loans (a)(d)  $757,207   $690,075   $8,250   $8,070    4.32%   4.64%
Securities (c)(d)   78,845    78,214    618    819    3.13    4.19 
FHLBB stock   3,430    3,515    31    29    3.57    3.24 
Short term funds (b)   47,979    59,984    60    30    0.50    0.20 
Total interest-earning assets   887,461    831,788    8,959    8,948    4.01    4.27 
Other assets   57,371    58,603                     
Total assets  $944,832   $890,391                     
Interest-bearing demand deposits  $125,365   $125,220    81    80    0.26    0.25 
Money market accounts   225,443    181,668    160    120    0.28    0.26 
Savings and other   127,553    124,405    59    57    0.18    0.18 
Certificates of deposit   122,091    131,289    265    206    0.86    0.62 
Total interest-bearing deposits   600,452    562,582    565    463    0.37    0.33 
Repurchase agreements   5,135    5,279    2    2    0.17    0.18 
Note payable   353    169    5    1    6.05    1.61 
Subordinated debt   9,779        156        6.38     
Capital lease   419    423    17    18    16.61    16.57 
FHLBB advances   30,638    27,689    237    269    3.03    3.81 
Total interest-bearing liabilities   646,776    596,142    982    753    0.60    0.50 
Demand deposits   194,169    180,276                     
Other liabilities   10,596    8,705                     
Shareholders’ equity   93,291    105,268                     
Total liabilities & shareholders’ equity  $944,832   $890,391                     
Net interest income            $7,977   $8,195           
Spread on interest-bearing funds                       3.41    3.77 
Net interest margin (e)                       3.59    3.93 

 (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 benefit of $295,000 and $298,000, respectively, for 2016 and 2015 on tax-exempt securities and loans 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) 2016 versus 2015
Change in interest due to   Volume    Rate    Net 
Interest-earning assets               
Loans  $758   $(578)  $180 
Securities   6    (207)   (201)
FHLBB stock   (1)   3    2 
Short term funds   (11)   41    30 
Total   752    (741)   11 
Interest-bearing liabilities               
Deposits   14    88    102 
Repurchase agreements            
Note payable   3    1    4 
Subordinated debt   78    78    156 
Capital lease   (1)       (1)
FHLBB advances   26    (58)   (32)
Total   120    109    229 
Net change in net interest and dividend income  $632   $(850)  $(218)

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Interest Income

Interest income (FTE) on loans increased $180,000 due to the $67.1 million or 9.7% increase in average volume to $757.2 million for the third quarter of 2016 compared to $690.1 million for the third quarter of 2015. The favorable impact on interest income (FTE) of the average loan growth was partially offset by the 32 basis point decrease in the loan yield from 4.64% for the third quarter of 2015 to 4.32% for the third quarter of 2016. Interest income (FTE) on securities decreased $201,000 due primarily to the 106 basis point decrease in yield from 4.19% for the third quarter of 2015 to 3.13% for the third quarter of 2016. The decrease in the yield of securities reflects the replacement of securities at lower yields as compared to those securities which comprised the September 2015 investment portfolio.

Interest Expense

Interest expense increased $229,000, or 30.4%, to $982,000 for the third quarter of 2016 as compared to $753,000 for the third quarter of 2015. Interest expense on the subordinated debt issued in December 2015 was $156,000 for the third quarter of 2016 as compared to no such expense in the third quarter of 2015. Proceeds from the issuance of the subordinated debt, along with cash on hand, was used to fully redeem $16.0 million of outstanding Series B Preferred Stock, which was issued pursuant to Salisbury’s participation in the U. S. Treasury‘s SBLF program. Interest expense on interest bearing deposits increased $102,000 or 22.0% from $463,000 for the third quarter of 2015 to $565,000 for the third quarter of 2016. The increase in interest expense related to interest bearing deposits was due to the 4 basis point increase in the average rate, from 0.33% to 0.37%, due to higher interest rates paid on interest bearing deposits and the change in product mix. The average volume of interest bearing deposits increased $37.9 million or 6.73% increase from $562.6 million for the third quarter of 2015 to $600.5 million for the third quarter of 2016. The growth in interest bearing deposits was primarily due to the $43.8 million increase in the average volume of money market accounts from $181.7 million for the third quarter of 2015 to $225.4 million for the third quarter of 2016. Interest expense on FHLB borrowings decreased $32,000 or 11.9% as the cost of these funds decreased 78 basis points from 3.81% for the third quarter of 2015 to 3.03% for the third quarter of 2016. The decrease substantially reflects a third quarter 2015 advance modification on $21.0 million of advances, in accordance with ASC 470-50, which extended maturities to a weighted average 39 months and lowered the effective rate.The favorable impact on interest expense of the decrease in the average rate on these borrowings as a result of this modification was partially offset by the $2.9 million or 10.7% increase in the average volume of these borrowings to support loan growth.

Provision and Allowance for Loan Losses

The provision for loan losses was $344,000 for third quarter 2016, compared with $655,000 for third quarter 2015. Included in the provision are impairments related to acquired loans accounted for under ASC 310-30 of $34,000 and $142,000 for the third quarter of 2016 and 2015, respectively. Net loan charge-offs were $171,000 and $55,000 for the respective quarters.

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

Three months ended September 30,    2016      2015  
Net charge-offs to average loans receivable, gross   0.02%   0.03%
Non-performing loans to loans receivable, gross   1.54    2.37 
Accruing loans past due 30-89 days to loans receivable, gross   0.78    0.36 
Allowance for loan losses to loans receivable, gross   0.78    0.82 
Allowance for loan losses to non-performing loans   50.47    34.43 
Non-performing assets to total assets   1.56    1.84 

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, decreased to 0.78% at September 30, 2016 compared to 0.82% at September 30, 2015.

Non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) amounted to $11.7 million or 1.3% of assets at September 30, 2016 as compared to 1.8% at September 30, 2015. Accruing loans past due 30-89 days increased $3.4 million to $5.9 million at September 30, 2016, or 0.8% of gross loans receivable from 0.36% at September 30, 2015. See “Financial Condition – Loan Credit Quality” above for further discussion and analysis.

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.

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Impaired loans and certain potential problem loans, when warranted, are individually evaluated for impairment. Impairment is measured for each individual loan, or for a borrower’s aggregate loan exposure, using either the fair value of the collateral, less estimated costs to sell if the loan is collateral dependent, or the present value of expected future cash flows discounted at the loan’s effective interest rate. A specific allowance is generally established when the collateral value or discounted cash flows of the loan is lower than the carrying value of that loan.

The component of the allowance for loan losses related to loans collectively evaluated for impairment is estimated by stratifying loans into segments as well as 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. There were no significant changes in Salisbury’s policies or methodology pertaining to the general component of the allowance for loan losses during the first nine months of 2016.

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. Additionally reserves are established for off balance sheet exposures.

Determining the adequacy of the allowance and reserves 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 credit exposure related to loans 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 and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at September 30, 2016.

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 basis 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) 2016      2015      2016 vs. 2015  
Trust and wealth advisory fees  $849   $798   $51    6.40%
Service charges and fees   840    798    42    5.26%
Gains on sales of mortgage loans, net   55    47    8    17.02%
Mortgage servicing, net   28    5    23    4.60%
Gains on sales and calls of available-for-sale securities, net   10    6    4    66.66%
Other   113    115    (2)   (1.74)%
Total non-interest income  $1,895   $1,769   $126    7.12%

Non-interest income for third quarter 2016 increased $126,000 versus third quarter 2015.

Trust and wealth advisory revenues increased $51,000, or 6%, to $849,000 for the third quarter 2016 as compared to $798,000 for the third quarter 2015. Revenue generated from Managed Asset balances at September 30, 2016 was $783,000 for the third quarter, an increase of 6% from $738,000 for the third quarter 2015. Non-Managed asset revenue of $66,000 in the third quarter 2016 increased 10% from $60,000 in revenue for the third quarter 2015. Balances of $509.6 million of Assets under Administration (AUA) at September 30, 2016 increased $158.8 million, or 45%, from $350.8 million of AUA at September 30, 2015. AUA are comprised of Managed Assets and Non-Managed Assets. Managed Asset balances at September 30, 2016 of $361.3 million increased 29% as compared to balances of $280.2 million at September 30, 2015. Non-Managed asset balances of $148.2 million at September 30, 2016 increased 110% as compared to third quarter 2015 balances of $70.6 million.

Service charges and fees increased $42,000 versus third quarter 2015. The third quarter increase was a result of higher fees due to increased transactional volume, mainly attributable to interchange fees, and Master Card Enrollment fees. The Master Card Enrollment fees, which began in June 2016, were $25,000 in the third quarter of 2016, with no such fees in the third quarter 2015. Income from sales and servicing of mortgage loans increased $31,000 versus third quarter 2015 due primarily to favorable changes in the valuation of mortgage servicing which increased $23,000. Third quarter 2016 mortgage loan sales totaled $3.3 million versus $1.4 million for third quarter 2015. Third quarter 2016, and third quarter 2015 included mortgage servicing valuation charges of $42,000, and $85,000, respectively. Gains on sales and calls of securities for the third quarter 2016, and third quarter 2015 totaled $10,000 and $6,000, respectively. Other income includes bank owned life insurance income and rental income.

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Non-Interest Expense

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

Three months ended September 30, (dollars in thousands) 2016      2015      2016 vs. 2015  
Salaries  $2,757   $2,531   $226    8.93%
Employee benefits   924    916    8    0.87%
Premises and equipment   809    863    (54)   6.26%
Data processing   472    404    68    16.83%
Professional fees   459    398    61    15.33%
Collections, OREO and loan related   109    125    (16)   (12.80)%
FDIC insurance   164    163    1    0.61%
Marketing and community support   144    174    (30)   (17.24)%
Amortization of intangible assets   148    161    (13)   (8.07)%
Other   513    467    46    9.85%
Non-interest expense  $6,499   $6,202   $297    4.76%

Non-interest expense for third quarter 2016 increased $297,000 versus third quarter 2015. Total compensation expense increased $234,000 versus third quarter 2015, which reflects increased staffing levels, market and merit adjustments. Premises and equipment expense decreased $54,000 versus third quarter 2015. The year-over-year decrease is mainly related to lower fuel, utilities, and building repair costs. Data processing increased $68,000 versus third quarter 2015. The increase is mainly due to increases in data communications and processing. Professional fees increased $61,000 versus third quarter 2015. Third quarter 2016 included increased Trust and Wealth Advisory related investment management fees. Loan related expenses decreased $16,000 versus third quarter 2015 mainly due to lower appraisal fees, which were partially offset by increased expense related to customer delinquent taxes. Other expense increased $46,000 versus third quarter 2015 due primarily to the change in the off balance sheet provision between the two periods; the third quarter 2016 provision expense of $3,000 contrasts to a benefit of $29,000 recognized in the third quarter 2015.

Income Taxes

The effective income tax rates for third quarter 2016, second quarter 2016 and third quarter 2015 were 29.71%, 27.83% and 29.31%, 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, tax-exempt loans and bank owned life insurance.

Salisbury did not incur Connecticut income tax in 2016 (to date) or 2015, 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, 2016 and 2015

Overview

Net income allocated available to common stock was $5.1 million, or $1.88 per common share, for the nine month period ended September 30, 2016 (nine month period 2016), compared with $6.2 million, or $2.26 per common share, for the nine month period ended September 30, 2015 (nine month period 2015).

During the nine (9) month period ended September 30, 2016, total shareholders’ equity increased to $93.6 million from $90.6 million at December 31, 2015.
Net Loans increased $54.6 million, or 7.8%, in the first nine months of 2016 to $753.6 million and increased $65.9 million, or 9.6% versus the third quarter 2015.
Book value per common share increased $0.79 to $33.92 at September 30, 2016 from $33.13 at December 31, 2015, and $1.20 as compared to $32.72 at September 30, 2015.
Tangible book value per common share of $28.63 at September 30, 2016 increased $0.94 from $27.69 at December 31, 2015, and $1.42 as compared to $27.21 at September 30, 2015.

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Net Interest Income

Tax equivalent net interest income for the nine month period ended September 30, 2016 decreased $648,000, or 2.6%, versus the nine month period ended September 30, 2015. The net interest margin decreased 32 basis points to 3.69% from 4.01%.

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)    2016      2015      2016      2015      2016      2015  
Loans (a) (d)  $740,828   $684,870   $24,470   $24,052    4.38%   4.67%
Securities (c)(d)   76,009    79,765    2,031    2,584    3.56    4.32 
FHLBB stock   3,327    3,515    87    59    3.48    2.29 
Short term funds (b)   37,943    44,881    138    72    0.49    0.22 
Total interest earning assets   858,107    813,031    26,726    26,767    4.13    4.38 
Other assets   57,091    60,304                     
Total assets  $915,198   $873,335                     
Interest-bearing demand deposits  $124,375   $120,266    238    231    0.26    0.26 
Money market accounts   203,088    175,993    433    349    0.28    0.26 
Savings and other   125,284    126,210    168    166    0.18    0.18 
Certificates of deposit   123,149    137,179    764    613    0.83    0.60 
Total interest-bearing deposits   575,896    559,648    1,603    1,359    0.37    0.32 
Repurchase agreements   3,686    4,170    4    5    0.16    0.17 
Note payable   364    57    16    1    5.79    1.61 
Subordinated debt   9,773        468        6.24     
Capital lease   420    423    52    53    16.58    16.57 
FHLBB advances   31,725    28,122    714    832    2.96    3.90 
Total interest-bearing liabilities   621,864    592,420    2,857    2,250    0.61    0.51 
Demand deposits   191,454    168,397                     
Other liabilities   9,634    8,387                     
Shareholders’ equity   92,246    104,131                     
Total liabilities & shareholders’ equity  $915,198   $873,335                     
Net interest and dividend income            $23,869   $24,517           
Spread on interest-bearing funds                       3.52    3.87 
Net interest margin (e)                       3.69    4.01 
(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 benefit of $972,000 and $900,000, respectively for 2016 and 2015 on tax-exempt securities and loans 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) 2016 versus 2015
Change in interest due to   Volume    Rate    Net 
Interest-earning assets               
Loans  $1,907   $(1,489)  $418 
Securities   (111)   (442)   (553)
FHLBB stock   (4)   32    28 
Short term funds   (18)   84    66 
Total   1,774    (1,815)   (41)
Interest-bearing liabilities               
Deposits   (12)   256    244 
Repurchase agreements   (1)       (1)
Note payable   10    5    15 
Subordinated debt   234    234    468 
Capital lease   (1)       (1)
FHLBB advances   94    (212)   (118)
Total   324    283    607 
Net change in net interest and dividend income  $1,450   $(2,098)  $(648)

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Interest Income

Interest income (FTE) on loans increased $418,000, or 1.7%, due to the $55.9 million (8.1%) increase in average volume from $684.9 million for the first nine months of 2015 as compared to $740.8 million for the first nine months of 2016. The favorable impact on interest income (FTE) due to the increase in the average loan growth was partially offset by the 29 basis point (FTE) decrease in the loan yield from 4.67% for the nine months of 2015 to 4.40% for the first nine months of 2016. Interest income (FTE) on securities decreased $553,000 due both to the $3.8 million (4.7%) decrease in average volume and the 76 basis point reduction in average yield which decreased from 4.32% for the first nine months of 2015 to 3.56% for the nine months of 2016. The decrease in the securities reflects the replacement of securities at lower rates than those securities which comprised the September 2015 investment portfolio.

Interest Expense

Interest expense increased $607,000 or 27.0% from $2,250,000 for the first nine months of 2015 to $2,857,000 for the first nine months of 2016. Interest expense related to the subordinated debt issued in December 2015 was $468,000 for the first nine months of 2016 as compared to no such expense in the first nine months of 2015. The issuance of this debt, along with cash on hand, was used to fully redeem $16.0 million of outstanding Series B Preferred Stock issued pursuant to the participation in the U. S. Treasury‘s SBLF program. Interest expense on interest bearing deposits increased $244,000 or 18.0% from $1,359,000 for the first nine months of 2015 to $1,603,000 for the first nine months of 2016. The interest expense increase on interest bearing deposits was due to the 5 basis point increase in the average rate of these deposits from 0.32% to 0.37% resulting from the higher interest rates paid on interest bearing deposits and the change in product mix. The average volume of interest bearing deposits increased $16.2 million or 2.9% from $559.6 million for the first nine months of 2015 to $575.9 million for the first nine months of 2016. Interest expense on FHLB borrowings decreased $118,000 or 14.2% as the cost of these funds decreased 94 basis points from 3.90% for the first nine months of 2015 to 2.96% for the first nine months of 2016. The decrease substantially reflects a third quarter 2015 advance modification on $21.0 million of advances, in accordance with ASC 470-50, which extended maturities to a weighted average 39 months and lowered the effective rate.The favorable impact on interest expense due to the lower rate on these borrowings was partially offset by the $3.6 million or 12.8% increase in average volume.

The $23.0 million or 13.7% increase in the average volume of non-interest bearing demand deposits and the $29.4 million or 5.0% increase in the average volume of interest bearing liabilities for the first nine months of 2016 compared to the first nine months of 2015 substantially provided the funding for the $56.0 million or 8.2% increase in the average loan volume over this same period.

Provision and Allowance for Loan Losses

The provision for loan losses was $1,332,000 for the nine month period ended September 30, 2016 and $651,000 for the nine month period ended September 30, 2015. Included in the provision are impairments related to acquired loans accounted for under ASC 310-30 of $534,000 and $217,000 for the nine months ended September 30, 2016 and 2015, respectively. Net loan charge-offs were $1,156,000 and $350,000 for the respective periods.

Reserve coverage at September 30, 2016, as measured by the ratio of allowance for loan losses to gross loans, at 0.78%, compares with 0.82% a year ago at September 30, 2015. During the first nine months of 2016, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $4.6 million to $11.7 million. Such amount represents 1.54% of gross loans receivable and has declined from 2.31% at December 31, 2015. At September 30, 2016, accruing loans past due 30-89 days increased $1.4 million to $5.9 million or 0.78% of gross loans receivable from 0.64% at December 31, 2015. 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) 2016      2015      2016 vs. 2015  
Trust and wealth advisory fees  $2,517   $2,510   $7    0.28%
Service charges and fees   2,355    2,307    48    2.08%
Gains on sales of mortgage loans, net   152    227    (75)   (33.04)%
Mortgage servicing, net   61    (15)   76    506.67%
Gains on sales and calls of available-for-sale securities, net   157    192    (35)   (18.23)%
Other   342    343    (1)   (0.29)%
Total non-interest income  $5,584   $5,564   $20    0.36%

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Non-interest income for the nine months ended September 30, 2016 increased $20,000 versus the same period in 2015.

Trust and wealth advisory revenues increased $7,000 to $2.5 million for the nine months ending September 30, 2016 from $2.5 million for the same nine month period in 2015. Revenue on managed assets for the first nine months of 2016 was $2.3 million, up $19,000, versus $2.3 million through the first nine months of 2015. Non-managed assets generated revenue of $171,000 for the nine months ending September 30, 2016, down $12,000, versus $183,000 the same nine month period in 2015. Ending balance information for each period is included in the quarterly comments.

Service charges and fees increased $48,000, primarily due to increased transactional volume and also as a result of higher interchange and Master Card Enrollment related fees. Income from sales and servicing of mortgage loans increased $1,000. Mortgage loans sales totaled $6.8 million for the nine months ended September 30, 2016 and $4.9 million for the nine months ended September 30, 2015. The nine months ended September 30, 2016 and 2015 included mortgage servicing amortization of $182,000 and $282,000, respectively. Other income includes bank owned life insurance income and rental income.

Non-interest expense

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

Nine months ended September 30, (dollars in thousands) 2016      2015      2016 vs. 2015  
Salaries  $8,017   $7,520   $497    6.61%
Employee benefits   2,923    2,881    42    1.46%
Premises and equipment   2,546    2,683    (137)   (5.11)%
Data processing   1,369    1,276    93    7.29%
Professional fees   1,403    1,642    (239)   (14.56)%
Collections, OREO and loan related   420    594    (174)   (29.29)%
FDIC insurance   474    494    (20)   (4.05)%
Marketing and community support   524    465    59    12.69%
Amortization of intangible assets   455    494    (39)   (7.89)%
Other   1,844    1,528    316    20.68%
Non-interest expense  $19,975   $19,577   $398    2.03%

Non-interest expense for the nine months ended September 30, 2016 increased $398,000 versus the same period in 2015. Salaries and benefits increased $497,000 primarily due to increased staffing levels, market and merit adjustments. Premises and equipment decreased $137,000 mainly due to lower fuel, utilities, and building repair costs. Data processing increased $93,000 mainly due to expenses related to a terminated contract and imaging set-up fees. Professional fees decreased $239,000 versus 2015 fees, which included due diligence on core data processing providers and IT support. Collections, OREO and loan related expense decreased $174,000 due primarily to write-down of OREO in 2015 and no such expense in 2016. Salisbury had no foreclosed properties at September 30, 2015 and one at September 30, 2016. The FDIC insurance assessment decreased $20,000 due to a 2015 refund of an overpayment. Marketing and community support increased $59,000 due primarily to an increase in general marketing campaigns. Amortization of intangible assets decreased $39,000 reflecting the completion of the intangible asset amortization related to the acquired People’s Bank branch. Other expenses increased $316,000 mainly due to expenses related to loans serviced for others.

Income taxes

The effective income tax rates for the nine months ended September 30, 2016 and September 30, 2015 were 28.00% and 29.70%, 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 $93.6 million at September 30, 2016, up $3.0 million from December 31, 2015. Book value and tangible book value per common share were $33.92 and $28.69, respectively, compared with $33.13 and $27.69, respectively, at December 31, 2015. Contributing to the increase in shareholders’ equity for year-to-date 2016 was net income of $5.2 million and issued stock of $0.3 million, partially offset by other common stock dividends of $2.3 million, and a decrease in other comprehensive income of $0.2 million. Accumulated other comprehensive income consists of unrealized gains on securities available-for-sale, net of tax, of $0.9 million as of September 30, 2016.

In August 2011, Salisbury issued to the Treasury $16 million of its Series B Preferred Stock under 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 qualified as Tier 1 capital for regulatory purposes and ranked senior to the Common Stock.

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The Series B Preferred Stock paid noncumulative dividends. The dividend rate on the Series B Preferred Stock for the initial quarterly dividend period ended September 30, 2011, and each of the next nine quarterly dividend periods the Series B Preferred Stock was outstanding, was determined each quarter based on the increase in the Bank’s Qualified Small Business Lending. The dividend rate for the quarterly dividend period ended December 31, 2015, was 1.0%. For the eleventh quarterly dividend period through four and one-half years after its issuance, the dividend rate on the Series B Preferred Stock was 1.0% and after four and one-half years from its issuance the dividend rate would have been fixed at 9.0% per annum. In December 2015, Salisbury issued $10 million of subordinated debentures and used the proceeds along with other cash-on-hand to redeem all of the Series B Preferred Stock.

On February 16, 2016, 1,350 shares of stock options were exercised at $21.48 per share by one former Riverside Bank executive.

On January 26, 2016, 2,700 shares of stock options were exercised at $21.48 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.

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 January 29, 2016, Salisbury granted a total of 15,800 shares of restricted stock pursuant to its 2011 Long Term Incentive Plan, which was approved by shareholders at the 2011 Annual Meeting, to 42 employees, including 6,000 shares to three Named Executive Officers. Richard J. Cantele, Jr., President and Chief Executive Officer received 5,000 and John Davies, President New York Region and Chief Lending Officer and Donald E. White, Chief Financial Officer each received 500 shares. The fair value of the stock as of the grant date was determined to be $466,000 and the stock will be vested three years from the grant date. On July 29, 2016, the Board of Directors approved the accelerated vesting of 200 shares for a recently retired employee.  

On March 27, 2015, Salisbury granted a total of 1,000 shares of restricted stock, pursuant to its 2011 Long Term Incentive Plan, to one (1) Named Executive Officer, Richard J. Cantele, Jr., President and Chief Executive Officer. The fair value of the stock as of the grant date was determined to be $29,000 and the stock vested immediately.

Capital Requirements

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 and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Salisbury and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. 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.

Under current regulatory definitions, Salisbury and the Bank meet all capital adequacy requirements to which they are subject and the Bank is considered to be well-capitalized. As a result, the Bank pays lower federal deposit insurance premiums than those banks that are not “well-capitalized”. Requirements for classification as a well-capitalized institution and for minimum capital adequacy along with Salisbury’s and the Bank's regulatory capital ratios are as follows:

    September 30, 2016  December 31, 2015
     Salisbury   Bank   Salisbury   Bank
Total Capital (to risk-weighted assets)   13.25%   12.94%   13.51%   13.10%
Tier 1 Capital (to risk-weighted assets)   11.01    12.09    11.17    12.23 
Common Equity Tier 1 Capital (to risk-weighted assets)   11.01    12.09    11.17    12.23 
Tier 1 Capital (to average assets)   8.47    9.30    8.56    9.37 

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, is one which maintains a Total Risk-Based ratio of 10% or above, a Tier 1 Risk-Based ratio of 8% or above, a Common Equity to Tier 1 ratio of 6.5% or above, and a Leverage ratio of 5% or above, and is not 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 and the Bank’s safety and soundness. However, the effective management of capital resources requires generating attractive returns on equity to build value for shareholders while maintaining appropriate levels of capital to fund growth, meet regulatory requirements and be consistent with prudent industry practices.

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The FRB and FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for bank holding companies and their bank subsidiaries. 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 was initially 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 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

As of September 30, 2016, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s category.

Dividends

During the nine months ended September 30, 2016, Salisbury paid $2,314,000 in common stock dividends.

On October 28, 2016, the Board of Directors of Salisbury declared a common stock dividend of $0.28 per common share payable on November 25, 2016 to shareholders of record on November 11, 2016. 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 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 December 31, 2015, states 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 position.

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 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 and related notes thereto presented elsewhere in this Form 10-Q are prepared in conformity with GAAP, which 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 some other types of companies, the financial nature of Salisbury’s consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect Salisbury to some extent because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. There is no precise method, however, to measure the effects of inflation on Salisbury’s consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation. 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 cybersecurity matters;
(e)interest rate fluctuations; and
(f)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 ABOUT 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 a negative impact 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, 2016 analysis, three of the simulations incorporate static growth assumptions over the simulation horizons, with allowances made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. The fourth simulation incorporates management’s balance sheet growth assumptions. 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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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, 2016, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates – immediate parallel upward shift in market interest rates ranging from 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 75 basis points for short term rates to 119 basis points for the 10-year Treasury; and (4) immediately rising interest rates – immediate parallel upward shift in market interest rates ranging from 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 changes in general market conditions including rates. As of September 30, 2016, 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, 2016:

As of September 30, 2016  Months 1-12    Months 13-24  
Immediately rising interest rates (static growth assumptions)   (3.58)%   7.18%
Immediately falling interest rates (static growth assumptions)   (2.01)   (4.77)
Immediately rising interest rates (static growth with assumption sensitivity stress testing)   (1.41)   6.15 

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.

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, 2016 (in thousands)    Rates up 100bp      Rates up 200bp  
U.S. Treasury notes  $   $ 
U.S. Government agency notes        
Municipal bonds   (268)   (518)
Mortgage backed securities   (887)   (2,238)
Collateralized mortgage obligations   (100)   (203)
SBA pools   (5)   (10)
Other   (62)   (119)
Total available-for-sale debt securities  $(1,322)  $(3,088)

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Item 4. CONTROLS 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, 2016. 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, 2016.

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, 2016 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 arising in the ordinary course of business, which management currently believes are not material, individually or in the aggregate, to the business, financial condition or operating results of Salisbury or any of its subsidiaries.

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

 

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

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).
4.1Form of Subordinated Note, dated as of December 10, 2015, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1 of Registrant’s Form 8-K filed December 10, 2015).
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).
10.10Amendment Number Two to 2011 Long Term Incentive Plan dated as of January 29, 2016 (incorporated by reference to Exhibit 10.12 of Registrant’s Annual Report on Form 10-K filed March 30, 2016).
10.11Form of Split-dollar Life Insurance Agreements with Senior Executive Officers (incorporated by reference to Exhibit 10.13 of Registrant’s Form 10-K filed March 30, 2016).
10.12Employment Agreement with John M. Davies (incorporated by reference to Exhibit 10.13 of Registrant’s Form 10-K filed March 30, 2016).
10.13Form of Subordinated Note Purchase Agreement, dated as of December 10, 2015, between Salisbury Bancorp, Inc. and the Purchasers identified therein. (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed December 10, 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.
32Chief 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, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SALISBURY BANCORP, INC.
     
November 14, 2016 By:   /s/ Richard J. Cantele, Jr.  
    Richard J. Cantele, Jr.,
    President and Chief Executive Officer
     
November 14, 2016 By:   /s/ Donald E. White  
    Donald E. White,
    Executive Vice President and Chief Financial Officer

 

 

 

 

 

 

 

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