Edgar Filing: SALISBURY BANCORP INC

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 March 31, 2015

☐

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 May 13, 2015 is 2,728,516.

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
CONSOLIDATED BALANCE SHEETS (March 31, 2015 - unaudited)	3
CONSOLIDATED STATEMENTS OF INCOME (unaudited)	4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)	5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)	5
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)	6
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	44
Item 4. CONTROLS AND PROCEDURES	45
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS	45
Item 1A. RISK FACTORS	47
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	47
Item 3. DEFAULTS UPON SENIOR SECURITIES	47
Item 4. MINE SAFETY DISCLOSURES	47
Item 5. OTHER INFORMATION	47
Item 6. EXHIBITS	47

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)		March 31, 2015			December 31, 2014
ASSETS		(unaudited)
Cash and due from banks	$	15,094		$	13,280
Interest bearing demand deposits with other banks		37,806			22,825
Total cash and cash equivalents		52,900			36,105
Securities
Available-for-sale at fair value		81,179			91,312
Federal Home Loan Bank of Boston stock at cost		3,515			3,515
Loans held-for-sale		328			568
Loans receivable, net (allowance for loan losses: $5,182 and $5,358)		676,734			673,330
Other real estate owned		875			1,002
Bank premises and equipment, net		14,261			14,431
Goodwill		12,552			12,552
Intangible assets (net of accumulated amortization: $2,427 and $2,258)		2,821			2,990
Accrued interest receivable		2,356			2,334
Cash surrender value of life insurance policies		13,406			13,314
Deferred taxes		2,569			2,428
Other assets		1,541			1,546
Total Assets	$	865,037		$	855,427
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	163,387		$	161,386
Demand (interest bearing)		115,099			117,169
Money market		173,492			174,274
Savings and other		131,794			121,387
Certificates of deposit		141,138			141,210
Total deposits		724,910			715,426
Repurchase agreements		3,278			4,163
Federal Home Loan Bank of Boston advances		28,403			28,813
Capital lease liability		423			424
Accrued interest and other liabilities		4,812			4,780
Total Liabilities		761,826			753,606
Shareholders' Equity
Preferred stock - $.01 per share par value		16,000			16,000
Authorized: 25,000; Issued: 16,000 (Series B);
Liquidation preference: $1,000 per share
Common stock - $.10 per share par value		273			272
Authorized: 5,000,000 and 3,000,000;
Issued: 2,728,516 and 2,720,766
Paid-in capital		41,231			41,077
Retained earnings		44,110			42,677
Unearned compensation - restricted stock awards		(271	)		(313	)
Accumulated other comprehensive income		1,868			2,108
Total Shareholders' Equity		103,211			101,821
Total Liabilities and Shareholders' Equity	$	865,037		$	855,427

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Three months ended March 31, (in thousands except per share amounts)		2015			2014
Interest and dividend income
Interest and fees on loans	$	7,922		$	4,596
Interest on debt securities
Taxable		326			381
Tax exempt		390			445
Other interest and dividends		33			21
Total interest and dividend income		8,671			5,443
Interest expense
Deposits		444			351
Repurchase agreements		1			1
Capital lease		18			18
Federal Home Loan Bank of Boston advances		282			298
Total interest expense		745			668
Net interest and dividend income		7,926			4,775
(Benefit) provision for loan losses		(200	)		337
Net interest and dividend income after (benefit) provision for loan losses		8,126			4,438
Non-interest income
Gains on sales of available-for-sale securities, net		175			—
Trust and wealth advisory		822			779
Service charges and fees		731			542
Gains on sales of mortgage loans, net		94			11
Mortgage servicing, net		(40	)		28
Other		114			78
Total non-interest income		1,896			1,438
Non-interest expense
Salaries		2,540			1,844
Employee benefits		1,005			741
Premises and equipment		908			673
Data processing		474			399
Professional fees		650			358
Collections and OREO		244			135
FDIC insurance		198			98
Marketing and community support		110			113
Amortization of core deposit intangibles		169			56
Merger and acquisition related expenses		—			261
Other		537			432
Total non-interest expense		6,835			5,110
Income before income taxes		3,187			766
Income tax provision		953			215
Net income	$	2,234		$	551
Net income available to common shareholders	$	2,194		$	505

Basic earnings per common share	$	0.81		$	0.29
Diluted earnings per common share		0.80			0.29
Common dividends per share		0.28			0.28

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Three months ended March 31, (in thousands)		2015			2014
Net income	$	2,234		$	551
Other comprehensive (loss) income
Net unrealized (losses) gains on securities available-for-sale		(193	)		1,757
Reclassification of net realized gains in net income⁽¹⁾		(175	)		—
Unrealized (losses) gains on securities available-for-sale		(368	)		1,757
Income tax benefit (expense)		128			(598	)
Unrealized (losses) gains on securities available-for-sale, net of tax		(240	)		1,159
Change in unrecognized pension plan costs		—			—
Income tax (benefit) expense		—			—
Pension plan income (loss), net of tax		—			—
Other comprehensive (loss) income, net of tax		(240	)		1,159
Comprehensive income	$	1,994		$	1,710

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

(dollars in thousands) unaudited	Common Stock					Preferred stock		Paid-in capital			Retained earnings			Unearned compensation - restricted stock awards			Accumulated other comprehensive income			Total shareholders' equity
	Shares			Amount
Balances at December 31, 2013		1,710,121		$	171	$	16,000	$	13,668		$	42,240		$	(335	)	$	1,046		$	72,790
Net income for period		—			—		—		—			551			—			—			551
Other comprehensive income, net of tax		—			—		—		—			—			—			1,159			1,159
Common stock dividends declared		—			—		—		—			(479	)		—			—			(479	)
Preferred stock dividends declared		—			—		—		—			(46	)		—			—			(46	)
Issuance of restricted common stock		3,000			—		—		80			—			(80	)		—			—
Forfeiture of restricted common stock		(2,000	)		—		—		(50	)		—			50			—			—
Stock based compensation - restricted stock awards		—			—		—		—			—			26			—			26
Balances at March 31, 2014		1,711,121		$	171	$	16,000	$	13,698		$	42,266		$	(339	)	$	2,205		$	74,001
Balances at December 31, 2014		2,720,766		$	272	$	16,000	$	41,077		$	42,677		$	(313	)	$	2,108		$	101,821
Net income for period		—			—		—		—			2,234			—			—			2,234
Other comprehensive loss, net of tax		—			—		—		—			—			—			(240	)		(240	)
Common stock dividends declared		—			—		—		—			(761	)		—			—			(761	)
Preferred stock dividends declared		—			—		—		—			(40	)		—			—			(40	)
Stock options exercised		6,750			1		—		125			—			—			—			126
Issuance of common stock for executives		1,000			—		—		29			—			—			—			29
Stock based compensation - restricted stock awards		—			—		—		—			—			42			—			42
Balances at March 31, 2015		2,728,516		$	273	$	16,000	$	41,231		$	44,110		$	(271	)	$	1,868		$	103,211

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three months ended March 31, (in thousands)		2015			2014
Operating Activities
Net income	$	2,234		$	551
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion), amortization and depreciation:
Securities		38			60
Bank premises and equipment		311			225
Core deposit intangible		169			56
Mortgage servicing rights		119			79
Fair value adjustment on loans		(650	)		8
Fair value adjustment on deposits		(135	)		—
(Gains) and losses, including write-downs
Gain on sales of securities available-for-sale, net		(175	)		—
Gain on sales of loans, excluding capitalized servicing rights		(32	)		(6	)
Write-downs of other real estate owned		127			—
Loss on sale/disposals of premises and equipment		45			1
(Benefit) provision for loan losses		(200	)		337
Proceeds from loans sold		2,134			501
Loans originated for sale		(1,862	)		(442	)
Increase in deferred loan origination fees and costs, net		(3	)		(4	)
Mortgage servicing rights originated		(62	)		(5	)
Increase (decrease) in mortgage servicing rights impairment reserve		10			(11	)
Increase in interest receivable		(22	)		(44	)
Deferred tax benefit		(13	)		(12	)
Increase in prepaid expenses		(126	)		(46	)
Increase in cash surrender value of life insurance policies		(92	)		(58	)
Decrease in income tax receivable		—			(7	)
Increase in income taxes payable		55			—
Decrease (increase) in other assets		64			(22	)
(Decrease) increase in accrued expenses		(184	)		304
Increase in interest payable		—			1
Increase in other liabilities		161			982
Stock based compensation-restricted stock awards		71			26
Net cash provided by operating activities		1,982			2,474
Investing Activities
Maturity (purchase) of interest-bearing time deposits with other banks		—			738
Redemption of Federal Home Loan Bank of Boston stock		—			—
Purchases of securities available-for-sale		(3	)		—
Proceeds from sales of securities available-for-sale		3,861			—
Proceeds from calls of securities available-for-sale		3,740			1,120
Proceeds from maturities of securities available-for-sale		2,304			2,393
Proceeds from maturities of securities held-to-maturity		—			—
Loan originations and principal collections, net		(3,011	)		(8,689	)
Loans purchased		—			—
Recoveries of loans previously charged off		460			8
Proceeds from sales of other real estate owned		—			—
Purchase of life insurance policies		—			—
Capital expenditures		(186	)		(664	)
Net cash provided (utilized) by investing activities		7,165			(5,094	)

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Three months ended March 31, (in thousands)		2015			2014
Financing Activities
Increase in deposit transaction accounts, net		9,556			2,140
Increase (decrease) in time deposits, net		63			(1,997	)
(Decrease) increase in securities sold under agreements to repurchase, net		(885	)		89
Principal payments on Federal Home Loan Bank of Boston advances		(410	)		(394	)
Decrease in capital lease obligation		(1	)		—
Stock options exercised		126			—
Common stock dividends paid		(761	)		(479	)
Series B preferred stock dividends paid		(40	)		(46	)
Net cash provided (utilized) by financing activities		7,648			(687	)
Net increase (decrease) in cash and cash equivalents		16,795			(3,307	)
Cash and cash equivalents, beginning of year		36,105			12,711
Cash and cash equivalents, end of period	$	52,900		$	9,404
Cash paid during year
Interest	$	745		$	667
Income taxes		911			1,234

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

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

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

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2014 Annual Report on Form 10-K for the year ended December 31, 2014.

The allowance for loan losses is a significant accounting policy and is presented in the Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis, which provides information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

Impact of New Accounting Pronouncements Issued

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

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

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

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

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
March 31, 2015
Available-for-sale
U.S. Treasury notes	$	2,699	$	98	$	—		$	2,797
U.S. Government agency notes		2,980		23		—			3,003
Municipal bonds		34,424		1,014		(29	)		35,409
Mortgage-backed securities
U.S. Government agencies and U.S. Government-sponsored enterprises		25,633		707		(2	)		26,338
Collateralized mortgage obligations
U.S. Government agencies		2,493		20		—			2,513
Non-agency		5,713		547		(7	)		6,253
SBA bonds		3,886		99		—			3,985
CRA mutual funds		505		7		—			512
Preferred stock		20		349		—			369
Total securities available-for-sale	$	78,353	$	2,864	$	(38	)	$	81,179
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,515	$	—	$	—			3,515
(in thousands)	Amortized cost (1)		Gross un- realized gains		Gross un- realized losses			Fair value
December 31, 2014
Available-for-sale
U.S. Treasury notes	$	2,699	$	107	$	—		$	2,806
U.S. Government agency notes		5,850		24		—			5,874
Municipal bonds		38,962		1,455		(65	)		40,352
Mortgage-backed securities
U.S. Government agencies and U.S. Government-sponsored enterprises		27,036		688		(15	)		27,709
Collateralized mortgage obligations
U.S. Government agencies		2,657		22		—			2,679
Non-agency		6,056		552		(12	)		6,596
SBA bonds		4,336		129		—			4,465
CRA mutual funds		502		2		—			504
Preferred stock		20		307		—			327
Total securities available-for-sale	$	88,118	$	3,286	$	(92	)	$	91,312
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,515	$	—	$	—		$	3,515

Net of other-than-temporary impairment write-downs recognized in earnings.

Salisbury sold $3.9 million in securities available-for-sale during the three month period ended March 31, 2015, and did not sell any securities available-for-sale during the three month period ended March 31, 2014.

The following table summarizes, for all securities in an unrealized loss position, including debt securities for which a portion of other-than-temporary impairment has been recognized in other comprehensive income, 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
March 31, 2015
Available-for-sale
Municipal bonds	$	1,303	$	(29	)	$	—	$	—	$	1,303	$	(29	)
Mortgage-backed securities		239		(2	)		—		—		239		(2	)
Collateralized mortgage obligations							—		—
Non-agency		291		(7	)		—		—		291		(7	)
Total temporarily impaired securities		1,833		(38	)		—		—		1,833		(38	)
Other-than-temporarily impaired securities
Collateralized mortgage obligations
Non-agency		—		—			—		—		—		—
Total temporarily impaired and other-than-temporarily impaired securities	$	1,833	$	(38	)	$	—	$	—	$	1,833	$	(38	)

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 March 31, 2015.

U.S. Government agency mortgage-backed securities: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these securities to be OTTI at March 31, 2015.

Municipal bonds: Contractual cash flows are performing as expected. Salisbury purchased substantially all of these securities during 2006-to-2008 as bank qualified, insured, AAA rated general obligation or revenue bonds. Salisbury’s portfolio is mostly comprised of tax-exempt general obligation bonds or public-purpose revenue bonds for schools, municipal offices, sewer infrastructure and fire houses, for small towns and municipalities across the United States. In the wake of the financial crisis, most monoline bond insurers had their ratings downgraded or withdrawn because of excessive exposure to insurance for collateralized debt obligations. Where appropriate Salisbury performs credit underwriting reviews of issuers, including some that have had their ratings withdrawn and are insured by insurers that have had their ratings withdrawn, to assess default risk. For all completed reviews, pass credit risk ratings have been assigned. Management expects to recover the entire amortized cost basis of these securities. It is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management does not consider these securities to be OTTI at March 31, 2015.

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at March 31, 2015, to assess whether any of the securities were OTTI. Salisbury uses cash flow forecasts for each security based on a variety of market driven assumptions and securitization terms, including prepayment speed, default or delinquency rate, and default severity for losses including interest, legal fees, property repairs, expenses and realtor fees, that, together with the loan amount are subtracted from collateral sales proceeds to determine severity. In 2009, Salisbury determined that five non-agency CMO securities reflected OTTI and recognized losses for deterioration in credit quality of $1,128,000. Salisbury judged the four remaining securities not to have additional OTTI and all other CMO securities not to be OTTI as of March 31, 2015. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI for further deterioration in credit quality. Salisbury evaluates these securities for strategic fit and depending upon such factor could reduce its position in these securities, although it has no present intention to do so, and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost base.

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:

Three months ended March 31 (in thousands)		2015		2014
Balance, beginning of period	$	1,128	$	1,128
Credit component on debt securities in which OTTI was not previously recognized		—		—
Balance, end of period	$	1,128	$	1,128

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank’s FHLBB stock as of March 31, 2015. Further 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:

	March 31, 2015									December 31, 2014
(In thousands)	Business Activities Loans			Acquired Loans			Total			Business Activities Loans			Acquired Loans			Total
Residential 1-4 family	$	258,642		$	9,513		$	268,155		$	252,258		$	9,223		$	261,481
Residential 5+ multifamily		5,792			6,406			12,198			5,556			8,735			14,291
Construction of residential 1-4 family		3,681			—			3,681			2,004			—			2,004
Home equity credit		34,414			—			34,414			34,627			—			34,627
Residential real estate		302,529			15,919			318,448			294,445			17,958			312,403
Commercial		102,194			94,846			197,040			98,498			97,899			196,397
Construction of commercial		14,814			9,913			24,727			18,602			9,045			27,647
Commercial real estate		117,008			104,759			221,767			117,100			106,944			224,044
Farm land		3,207			—			3,207			3,239			—			3,239
Vacant land		9,268			—			9,268			9,342			—			9,342
Real estate secured		432,012			120,678			552,690			424,126			124,902			549,028
Commercial and industrial		55,923			61,280			117,203			49,204			68,714			117,918
Municipal		6,109			—			6,109			6,083			—			6,083
Consumer		4,598			110			4,708			4,334			122			4,456
Loans receivable, gross		498,642			182,068			680,710			483,747			193,738			677,485
Deferred loan origination fees and costs, net		1,206			—			1,206			1,203			—			1,203
Allowance for loan losses		(5,119	)		(63	)		(5,182	)		(5,337	)		(21	)		(5,358	)
Loans receivable, net	$	494,729		$	182,005		$	676,734		$	479,613		$	193,717		$	673,330
Loans held-for-sale
Residential 1-4 family	$	328		$	—		$	328		$	568		$	—		$	568

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in Litchfield County Connecticut, Dutchess, Orange, Columbia Counties New York and Berkshire County Massachusetts, which constitute Salisbury's service area. Salisbury offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, equipment loans, and a variety of consumer loans, including home equity lines of credit, and installment and collateral loans. 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.

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
March 31, 2015
Residential 1-4 family	$	240,831	$	10,712	$	7,006	$	93	$	—	$	258,642
Residential 5+ multifamily		3,764		1,064		964		—		—		5,792
Construction of residential 1-4 family		3,681		—		—		—		—		3,681
Home equity credit		32,482		816		1,116		—		—		34,414
Residential real estate		280,758		12,592		9,086		93		—		302,529
Commercial		83,920		10,623		7,651		—		—		102,194
Construction of commercial		14,224		15		575		—		—		14,814
Commercial real estate		98,144		10,638		8,226		—		—		117,008
Farm land		758		1,342		1,107		—		—		3,207
Vacant land		5,974		137		3,157		—		—		9,268
Real estate secured		385,634		24,709		21,576		93		—		432,012
Commercial and industrial		51,644		3,497		782		—		—		55,923
Municipal		6,109		—		—		—		—		6,109
Consumer		4,545		44		9		—		—		4,598
Loans receivable, gross	$	447,932	$	28,250	$	22,367	$	93	$	—	$	498,642

Acquired Loans

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
March 31, 2015
Residential 1-4 family	$	8,942	$	—	$	571	$	—	$	—	$	9,513
Residential 5+ multifamily		6,406		—		—		—		—		6,406
Construction of residential 1-4 family		—		—		—		—		—		—
Home equity credit		—		—		—		—		—		—
Residential real estate		15,348		—		571		—		—		15,919
Commercial		86,710		3,923		3,699		514		—		94,846
Construction of commercial		9,913		—		—		—		—		9,913
Commercial real estate		96,623		3,923		3,699		514		—		104,759
Farm land		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—
Real estate secured		111,971		3,923		4,270		514		—		120,678
Commercial and industrial		58,986		1,568		639		87		—		61,280
Municipal		—		—		—		—		—		—
Consumer		84		7		1		18		—		110
Loans receivable, gross	$	171,041	$	5,498	$	4,910	$	619	$	—	$	182,068

Business Activities Loans

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

Acquired Loans

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

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		and		90 days			accrual
												over		over		and over
March 31, 2015
Residential 1-4 family	$	249,563		$	2,091	$	5,140	$	319	$	292	$	1,237	$	6,988		$	—	$	4,447
Residential 5+ multifamily		5,703			—		—		—		—		89		89			—		89
Construction of residential 1-4 family		3,681			—		—		—		—		—		—			—		—
Home equity credit		33,737			395		98		108		66		10		282			—		634
Residential real estate		292,684			2,486		5,238		427		358		1,336		7,359			—		5,170
Commercial		98,600			2,165		264		248		—		917		1,429			—		2,597
Construction of commercial		14,799			—		—		15		—		—		15			—		—
Commercial real estate		113,399			2,165		264		263		—		917		1,444			—		2,597
Farm land		2,100			—		—		723		—		384		1,107			—		383
Vacant land		6,370			24		—		13		38		2,823		2,874			—		2,861
Real estate secured		414,553			4,675		5,502		1,426		396		5,460		12,784			—		11,011
Commercial and industrial		54,358			1,031		65		451		—		18		534			—		488
Municipal		6,109			—		—		—		—		—		—			—		—
Consumer		4,531			52		12		3		—		—		15			—		—
Loans receivable, gross	$	479,551		$	5,758	$	5,579	$	1,880	$	396	$	5,478	$	13,333		$	—	$	11,499

Acquired Loans

March 31, 2015
Residential 1-4 family	$	8,730	$	212	$	—	$	—	$	—	$	571	$	571	$	—	$	571
Residential 5+ multifamily		6,406		—		—		—		—		—		—		—		—
Construction of residential 1-4 family		—		—		—		—		—		—		—		—		—
Home equity credit		—		—		—		—		—		—		—		—		—
Residential real estate		15,136		212		—		—		—		571		571		—		571
Commercial		88,380		4,399		518		133		472		944		2,067		—		1,930
Construction of commercial		8,882		746		—		285		—		—		285		—		—
Commercial real estate		97,262		5,145		518		418		472		944		2,352		—		1,930
Farm land		—		—		—		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—		—		—		—
Real estate secured		112,398		5,357		518		418		472		1,515		2,923		—		2,501
Commercial and industrial		60,120		922		238		—		—		—		238		—		—
Municipal		—		—		—		—		—		—		—		—		—
Consumer		105		—		5		—		—		—		5		—		—
Loans receivable, gross	$	172,623	$	6,279	$	761	$	418	$	472	$	1,515	$	3,166	$	—	$	2,501

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

Acquired Loans

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

Interest on non-accrual loans that would have been recorded as additional interest income for the quarters ended March 31, 2015 and 2014 had the loans been current in accordance with their original terms totaled $135,000 and $146,000, respectively.

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

Business Activities Loans

	March 31, 2015						December 31, 2014
(in thousands)	Quantity		Pre- modification balance		Post- modification balance		Quantity		Pre- modification balance		Post- modification balance
Residential real estate		1	$	51	$	51		4	$	308	$	308
Commercial real estate		1		297		297		4		1,076		1,076
Construction of commercial		—		—		—		1		131		131
Troubled debt restructurings		2	$	348	$	348		9	$	1,515	$	1,515
Rate reduction and term extension		1	$	297	$	297		—	$	—	$	—
Interest only pursuant to sale		—		—		—		1		24		24
Interest only and term extension		—		—		—		1		48		48
Interest only pursuant to sale and term extension		—		—		—		1		230		230
Interest only		—		—		—		1		30		30
Debt consolidation and term extension		—		—		—		2		447		447
Debt consolidation, rate reduction, term extension and note bifurcation		1		51		51		1		399		399
Term extension		—		—		—		2		337		337
Troubled debt restructurings		2	$	348	$	348		9	$	1,515	$	1,515

Acquired Loans

	March 31, 2015						December 31, 2014
(in thousands)	Quantity		Pre- modification balance		Post- modification balance		Quantity		Pre- modification balance		Post- modification balance
Commercial real estate		—	$	—	$	—		1	$	571	$	571
Troubled debt restructurings		—	$	—	$	—		1	$	571	$	571
Rate reduction		—	$	—	$	—		1	$	571	$	571
Troubled debt restructurings		—	$	—	$	—		1	$	571	$	571

Two loans were modified in troubled debt restructures during 2015, neither of which was past due at March 31, 2015.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Business Activities Loans												Acquired Loans
(in thousands)	March 31, 2015												March 31, 2015
	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision		Charge- offs		Reco- veries		Ending balance
Residential	$	2,306	$	372		$	(293	)	$	1	$	2,386	$	—	$	—	$	—	$	—	$	—
Commercial		1,697		(270	)		(72	)		—		1,355		7		11		—		—		18
Land		164		12			—			—		176		—		—		—		—		—
Real estate		4,167		114			(365	)		1		3,917		7		11		—		—		18
Commercial and industrial		583		(340	)		(56	)		450		637		14		24		—		7		45
Municipal		61		—			—			—		61		—		—		—		—		—
Consumer		117		16			(15	)		2		120		—		—		—		—		—
Unallocated		409		(25	)		—			—		384		—		—		—		—		—
Totals	$	5,337	$	(235	)	$	(436	)	$	453	$	5,119	$	21	$	35	$	—	$	7	$	63

	Business Activities Loans												Acquired Loans
(in thousands)	December 31, 2014												December 31, 2014
	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision		Charge- offs		Reco- veries		Ending balance
Residential	$	1,938	$	657		$	(307	)	$	18	$	2,306	$	—	$	—	$	—	$	—	$	—
Commercial		1,385		355			(84	)		41		1,697		—		7		—		—		7
Land		226		58			(121	)		1		164		—		—		—		—		—
Real estate		3,549		1,070			(512	)		60		4,167		—		7		—		—		7
Commercial and industrial		561		25			(19	)		16		583		—		14		—		—		14
Municipal		43		18			—			—		61		—		—		—		—		—
Consumer		105		16			(28	)		24		117		—		—		—		—		—
Unallocated		425		(16	)		—			—		409		—		—		—		—		—
Totals	$	4,683	$	1,113		$	(559	)	$	100	$	5,337	$	—	$	21	$	—	$	—	$	21

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
March 31, 2015
Residential 1-4 family	$	250,403	$	1,091	$	8,239	$	888	$	258,642		$1,979
Residential 5+ multifamily		4,778		61		1,014		3		5,792		64
Construction of residential 1-4 family		3,681		25		—		—		3,681		25
Home equity credit		33,694		310		720		8		34,414		318
Residential real estate		292,556		1,487		9,973		899		302,529		2,386
Commercial		97,585		1,059		4,609		134		102,194		1,193
Construction of commercial		14,687		162		127		—		14,814		162
Commercial real estate		112,272		1,221		4,736		134		117,008		1,355
Farm land		2,823		58		384		10		3,207		68
Vacant land		6,175		66		3,093		42		9,268		108
Real estate secured		413,826		2,832		18,186		1,085		432,012		3,917
Commercial and industrial		55,364		610		559		27		55,923		637
Municipal		6,109		61		—		—		6,109		61
Consumer		4,447		42		151		78		4,598		120
Unallocated allowance		—		384		—		—		—		384
Totals	$	479,746	$	3,929	$	18,896	$	1,190	$	498,642		$5,119

Acquired Loans

(in thousands)	Collectively evaluated				Individually evaluated				ASC 310-30 loans				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance
March 31, 2015
Residential 1-4 family	$	8,942	$	—	$	571	$	—	$	—	$	—	$	9,513	$	—
Residential 5+ multifamily		6,406		—		—		—		—		—		6,406		—
Construction of residential 1-4 family		—		—		—		—		—		—		—		—
Home equity credit		—		—		—		—		—		—		—		—
Residential real estate		15,348		—		571		—		—		—		15,919		—
Commercial		86,842		2		2,499		—		5,505		—		94,846		2
Construction of commercial		9,913		16		—		—		—		—		9,913		16
Commercial real estate		96,755		18		2,499		—		5,505		—		104,759		18
Farm land		—		—		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—		—		—
Real estate secured		112,103		18		3,070		—		5,505		—		120,678		18
Commercial and industrial		59,623		45		—		—		1,658		—		61,281		45
Municipal		—		—		—		—		—		—		—		—
Consumer		91		—		—		—		18		—		109		—
Unallocated allowance		—		—		—		—		—		—		—		—
Totals	$	171,817	$	63	$	3,070	$	—	$	7,181	$	—	$	182,068	$	63

Business Activities Loans

(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2014
Residential 1-4 family	$	245,997	$	1,316	$	6,261	$	549	$	252,258	$	1,865
Residential 5+ multifamily		4,536		66		1,020		3		5,556		69
Construction of residential 1-4 family		2,004		13		—		—		2,004		13
Home equity credit		34,231		350		396		9		34,627		359
Residential real estate		286,768		1,745		7,677		561		294,445		2,306
Commercial		93,784		1,018		4,714		486		98,498		1,504
Construction of commercial		18,474		193		128		—		18,602		193
Commercial real estate		112,258		1,211		4,842		486		117,100		1,697
Farm land		2,855		59		384		—		3,239		59
Vacant land		6,245		67		3,097		38		9,342		105
Real estate secured		408,126		3,082		16,000		1,085		424,126		4,167
Commercial and industrial		48,635		532		569		51		49,204		583
Municipal		6,083		61		—		—		6,083		61
Consumer		4,334		117		—		—		4,334		117
Unallocated allowance		—		—		—		—		—		409
Totals	$	467,178	$	3,792	$	16,569	$	1,136	$	483,747	$	5,337

Acquired Loans

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

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

Business Activities Loans

March 31, 2015 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
Performing loans	$	473,001	$	3,296	$	—	$	—	$	473,001	$	3,296
Potential problem loans		6,745		249		—		—		6,745		249
Impaired loans		—		—		18,896		1,190		18,896		1,190
Unallocated allowance		—		384		—		—		—		384
Totals	$	479,746	$	3,929	$	18,896	$	1,190	$	498,642	$	5,119

Acquired Loans

March 31, 2015 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
Performing loans	$	176,645	$	63	$	—	$	—	$	176,645	$	63
Potential problem loans		2,353		—		—		—		2,353		—
Impaired loans		—		—		3,070		—		3,070		—
Unallocated allowance		—		—		—		—		—		—
Totals	$	178,998	$	63	$	3,070	$	—	$	182,068	$	63

Business Activities Loans

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

Acquired Loans

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

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

Business Activities Loans

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
March 31, 2015
Residential 1-4 family	$	6,513	$	6,822	$	5,358	$	891	$	58	$	2,740	$	3,007	$	3,021	$	28
Home equity credit		8		23		8		8		—		712		737		634		6
Residential real estate		6,521		6,845		5,366		899		58		3,452		3,744		3,655		34
Commercial		1,854		2,039		2,994		134		23		2,755		3,018		4,181		40
Construction of commercial		—		—		—		—		—		127		132		127		2
Farm land		14		14		7		10		—		370		370		377		5
Vacant land		3,093		3,992		3,095		42		76		—		—		—		—
Real estate secured		11,482		12,890		11,462		1,085		157		6,704		7,264		8,340		81
Commercial and industrial		75		117		90		27		2		484		504		474		8
Consumer		—		—		—		—		—		—		—		—		—
Totals	$	11,557	$	13,007	$	11,552	$	1,112	$	159	$	7,188	$	7,768	$	8,814	$	89

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
March 31, 2015
Residential 1-4 family	$	—	$	—	$	—	$	—	$	—	$	571	$	716	$	562	$	10
Home equity credit		—		—		—		—		—		—		—		—		—
Residential real estate		—		—		—		—		—		571		716		562		10
Commercial		—		—		—		—		—		2,499		3,985		2,502		43
Construction of commercial		—		—		—		—		—		—		—		—		—
Farm land		—		—		—		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—		—		—		—
Real estate secured		—		—		—		—		—		3,070		4,701		3,064		53
Commercial and industrial		—		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—		—
Totals	$	—	$	—	$	—	$	—	$	—	$	3,070	$	4,701	$	3,064	$	53

Business Activities Loans

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

Acquired Loans

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

NOTE 4 - MORTGAGE SERVICING RIGHTS

March 31, (in thousands)		2015		2014
Residential mortgage loans serviced for others	$	137,186	$	144,197
Fair value of mortgage servicing rights		1,355		1,646

Changes in mortgage servicing rights are as follows:

		Three months
Periods ended March 31, (in thousands)		2015			2014
Mortgage Servicing Rights
Balance, beginning of period	$	694		$	980
Originated		62			5
Amortization (1)		(119	)		(79	)
Balance, end of period	$	637		$	906
Valuation Allowance
Balance, beginning of period	$	1		$	(15	)
Decrease in impairment reserve (1)		(10	)		11
Balance, end of period		(9	)		(4	)
Loan servicing rights, net	$	628		$	902

(1)

Amortization expense and changes in the impairment reserve are recorded in loan servicing fee income.

NOTE 5 - PLEDGED ASSETS

(in thousands)		March 31, 2015		December 31, 2014
Securities available-for-sale (at fair value)	$	69,236	$	69,055
Loans receivable		169,216		157,581
Total pledged assets	$	238,452	$	226,636

At March 31, 2015, securities were pledged as follows: $59.0 million to secure public deposits, $10.1 million to secure repurchase agreements and $0.1 million to secure FHLBB advances. Loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 6 – EARNINGS PER SHARE

The Company 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:

Periods ended March 31, (in thousands, except per share data)		2015			2014
Net income	$	2,234		$	551
Less: Preferred stock dividends declared		(40	)		(46	)
Net income available to common shareholders		2,194			505
Less: Undistributed earnings allocated to participating securities		(19	)		(6	)
Net income allocated to common stock	$	2,175		$	499
Common shares issued		2,723			1,712
Less: Unvested restricted stock awards		(24	)		(21	)
Common shares outstanding used to calculate basic earnings per common share		2,699			1,691
Add: Dilutive effect of stock options		17			—
Common shares outstanding used to calculate diluted earnings per common share		2,716			1,691
Earnings per common share (basic)	$	0.81		$	0.29
Earnings per common share (diluted)	$	0.80		$	0.29

NOTE 7 – SHAREHOLDERS’ EQUITY

Capital Requirements

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

Quantitative measures established by regulation to ensure capital adequacy require Salisbury and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined) to average assets (as defined) and total and Tier 1 capital (as defined) to risk-weighted assets (as defined). Management believes, as of March 31, 2015, that Salisbury and the Bank meet all of their capital adequacy requirements and are well-capitalized.

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

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

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

To be Well Capitalized

Actual

For Capital Adequacy Purposes

Under Prompt Corrective Action Provisions

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

March 31, 2015

Total Capital (to risk-weighted assets)

Salisbury

92,891

13.65

54,424

8.0

n/a