form10q-108642_sal.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended March 31, 2010

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

Commission file number 0-24751
SALISBURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Connecticut
06-1514263
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer 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 x No o

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 (Sec.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 o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares of Common Stock outstanding as of May 17, 2010, is 1,687,661.
 
 
1
 

TABLE OF CONTENTS

   
Page
     
PART I  FINANCIAL INFORMATION
     
Item 1.
  
     
 
3
     
   
 
4
     
   
 
5
     
   
 
6
     
 
8
     
Item 2.
  
 
18
     
Item 3.
28
     
Item 4T.
30
     
PART II Other Information
     
Item 1.
30
Item 1A.
31
Item 2.
31
Item 3.
31
Item 4.
31
Item 5.
31
Item 6.
31

 
2

PART I - FINANCIAL INFORMATION
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
             
(in thousands, except par value) unaudited
  
March 31,
2010
    
December 31,
2009
  
ASSETS
            
Cash and due from banks
   $ 5,878     $ 6,248  
Interest bearing demand deposits with other banks
     13,851       37,050  
Total cash and cash equivalents
     19,729       43,298  
Interest bearing time deposits with other banks
     5,000       5,000  
Securities
                
Available-for-sale at fair value
     166,179       145,031  
Held-to-maturity at amortized cost (fair value: $62 and $62)
     60       62  
Federal Home Loan Bank of Boston stock at cost
     6,032       6,032  
Loans held-for-sale
     1,178       665  
Loans receivable, net (allowance for loan losses: $3,649 and $3,473)
     329,600       327,257  
Investment in real estate
     75       75  
Other real estate owned
     275       275  
Bank premises and equipment, net
     11,398       10,434  
Goodwill
     9,829       9,829  
Intangible assets (net of accumulated amortization: $1,135 and $1,079)
     1,409       1,464  
Accrued interest receivable
     2,093       2,177  
Cash surrender value of life insurance policies
     3,727       3,685  
Deferred taxes
     2,957       3,285  
Other assets
     3,577       3,778  
Total Assets
   $ 563,118     $ 562,347  
LIABILITIES and SHAREHOLDERS' EQUITY
                
Deposits
                
Demand (non-interest bearing)
   $ 68,852     $ 70,026  
Demand (interest bearing)
     50,148       43,845  
Money market
     68,317       64,477  
Savings and other
     88,699       86,316  
Certificates of deposit
     146,473       153,539  
Total deposits
     422,489       418,203  
Repurchase agreements
     7,973       11,415  
Federal Home Loan Bank of Boston advances
     75,356       76,364  
Accrued interest and other liabilities
     4,277       4,010  
Total Liabilities
     510,095       509,992  
Commitments and contingencies
     -       -  
Shareholders' Equity
                
Preferred stock - $.01 per share par value
                
Authorized: 25,000; Shares issued: 8,816;
                
Liquidation preference: $1,000 per share
     -       -  
Common stock - $.10 per share par value
                
Authorized: 3,000,000 and 3,000,000;
                
Issued: 1,686,701 and 1,685,861
     168       168  
Common stock warrants outstanding
     112       112  
Paid-in capital
     21,899       21,894  
Retained earnings
     35,266       35,259  
Accumulated other comprehensive loss, net
     (4,422 )     (5,078 )
Total Shareholders' Equity
     53,023       52,355  
Total Liabilities and Shareholders' Equity
   $ 563,118     $ 562,347  

 
3

Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
             
Three months ended March 31, (in thousands except per share amounts) unaudited
  
2010
    
2009
  
Interest income
            
Interest and fees on loans
   $ 4,487     $ 4,483  
Interest on debt securities
                
Taxable
     926       1,331  
Tax exempt
     560       644  
Other interest
     46       2  
Total interest income
     6,019       6,460  
Interest expense
                
Deposits
     1,198       1,483  
Repurchase agreements
     27       39  
Federal Home Loan Bank of Boston advances
     758       762  
Total interest expense
     1,983       2,284  
Net interest income
     4,036       4,176  
Provision for loan losses
     180       430  
Net interest income after provision for loan losses
     3,856       3,746  
Non-interest income
                
Trust and wealth advisory
     545       540  
Service charges and fees
     469       398  
Gains on securities, net
     -       427  
Gains on sales of mortgage loans, net
     60       82  
Mortgage servicing, net
     15       42  
Other
     57       137  
Total non-interest income
     1,146       1,626  
Non-interest expense
                
Salaries
     1,746       1,753  
Employee benefits
     471       438  
Premises and equipment
     515       484  
Data processing
     408       383  
Professional fees
     402       356  
FDIC insurance
     171       114  
Marketing and community support
     88       76  
Amortization of intangibles
     56       41  
Other
     472       383  
Total non-interest expense
     4,329       4,028  
Income before income taxes
     673       1,344  
Income tax provision
     79       263  
Net income
   $ 594     $ 1,081  
Net income available to common shareholders
   $ 479     $ 1,081  
                 
Basic and diluted earnings per share
   $ 0.28     $ 0.64  
Common dividends per share
     0.28       0.28  

See accompanying notes to consolidated financial statements.

 
4

Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                           
   
Common Stock
                 Paid-in     Retained    
Accumulated
other comp-
    
Total
share-
holders'
  
(dollars in thousands)
  
Shares
    
Amount
    
Preferred Stock
    
Warrants
    
capital
    
earnings
    
rehensive loss
    
equity
  
Balances at December 31, 2009
     1,686,701     $ 168     $   -     $   112     $  21,894      $   35,259     $   (5,078 )    $  52,355   
Net income for period
     -       -       -       -       -       594       -       594  
Other comprehensive income, net of tax
     -       -       -       -       -       -       656       656  
Total comprehensive income
                                                             1,250  
Amortization (accretion) of preferred stock
     -       -       -       -       5       (5 )     -       -  
Common stock dividends paid
     -       -       -       -       -       (472 )     -       (472 )
Preferred stock dividends paid
     -       -       -       -       -       (110 )     -       (110 )
Balances at March 31, 2010
     1,686,701       168       -       112       21,899       35,266       (4,422 )     53,023  
Balances at December 31,  2008
     1,685,861       168       -       -       13,158       34,518       (8,905 )     38,939  
Net income for period
     -       -       -       -       -       1,081       -       1,081  
Other comprehensive loss, net of tax
     -       -       -       -       -       -       (2,107 )     (2,107 )
Total comprehensive loss
                                                             (1,026 )
Issuance of preferred stock and warrants
     -       -       -       112       8,704       -       -       8,816  
Common stock dividends declared
     -       -       -       -       -       (472 )     -       (472 )
Balances March 31, 2009
     1,685,861     $ 168     $ -     $ 112     $ 21,862     $ 35,127     $ (11,012 )   $ 46,257  

See accompanying notes to consolidated financial statements.

 
5

Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended March 31, (in thousands)
  
2010
    
2009
  
Operating Activities
            
Net income
   $ 594     $ 1,081  
Adjustments to reconcile net income to net cash provided by operating activities:
                
(Accretion), amortization and depreciation
                
Securities
     174       101  
Bank premises and equipment
     193       174  
Core deposit intangible
     56       41  
Mortgage servicing rights
     31       33  
Fair value adjustment on loans
     11       12  
Fair value adjustment on deposits and borrowings
     -       (33 )
(Gains) and losses
                
Sales and calls of securities available-for-sale, net
     -       (427 )
Provision for loan losses
     180       430  
(Increase) decrease in loans held-for-sale
     (513 )     1,507  
Increase in deferred loan origination fees and costs, net
     (41 )     (7 )
Mortgage servicing rights originated
     (28 )     (61 )
Decrease in mortgage servicing rights impairment reserve
     (2 )     (41 )
Increase in unearned income on loans
     -       6  
Decrease in interest receivable
     85       229  
Deferred tax (benefit)
     (8 )     (1 )
Decrease (increase) in prepaid expenses
     68       (63 )
Increase in cash surrender value of life insurance policies
     (42 )     (125 )
Increase in income tax receivable
     69       155  
Increase in other assets
     (25 )     (81 )
Increase in accrued expenses
     431       377  
(Decrease) increase in interest payable
     (40 )     21  
Decrease in other liabilities
     (111 )     (67 )
Net cash provided by operating activities
     1,082       3,261  
Investing Activities
                
Purchases of securities available-for-sale
     (33,985 )     (53,864 )
Proceeds from sales of securities available-for-sale
     -       24,956  
Proceeds from calls of securities available-for-sale
     1,550       18,000  
Proceeds from maturities of securities available-for-sale
     12,089       -  
Proceeds from maturities of securities held-to-maturity
     1       1  
Loan originations and principle collections, net
     (2,499 )     (1,554 )
Purchases of loans
     -       (76 )
Recoveries of loans previously charged-off
     6       10  
Capital expenditures
     (1,068 )     (1,303 )
Net cash utilized by investing activities
   $ (23,906 )   $ (13,830 )

 
6

Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Three months ended March 31, (in thousands)
  
2010
    
2009
  
Financing Activities
            
Increase in deposit transaction accounts, net
   $ 11,352     $ 7,986  
(Decrease) increase in time deposits, net
     (7,065 )     13,852  
Decrease in securities sold under agreements to repurchase, net
     (3,442 )     (2,122 )
Federal Home Loan Bank of Boston advances
     -       12,000  
Principle payments on Federal Home Loan Bank of Boston advances
     (1,008 )     (405 )
Decrease in short term Federal Home Loan Bank of Boston advances, net
     -       (20,878 )
Proceeds from issuance of preferred stock
     -       8,816  
Common stock dividends paid
     (472 )     (472 )
Preferred stock dividends paid
     (110 )     -  
Net cash (utilized) provided by financing activities
     (745 )     18,777  
Net (decrease) increase in cash and cash equivalents
     (23,569 )     8,208  
Cash and cash equivalents, beginning of period
     43,298       9,660  
Cash and cash equivalents, end of period
   $ 19,729     $ 17,868  
Cash paid during period
                
Interest
   $ 2,023     $ 2,295  
Income taxes
     139       110  
See accompanying notes to consolidated financial statements.

 
7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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,  shareholder's equity and cash flows for the interim periods presented.

The financial statements have been prepared in accordance with 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.  In connection with the determination of the allowance for loan losses and valuation of real estate, management obtains independent appraisals for significant properties.

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 three month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.  The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2009 Annual Report on Form 10-K for the period ended December 31, 2009.

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 provide 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 June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets,” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).”  These standards are effective for the first interim reporting period of 2010.  SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a qualifying special-purpose entity (“QSPE”) and changes some of the requirements for derecognizing financial assets. SFAS No. 167 amends the consolidation guidance in ASC 810-10.  Specifically, the amendments will (a) eliminate the exemption for QSPEs from the new guidance, (b) shift the determination of which enterprise should consolidate a variable interest entity (“VIE”) to a current control approach, such that an entity that has both the power to make decisions and right to receive benefits or absorb losses that could potentially be significant, will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE. These standards did not have a significant impact on the Company’s financial statements.

In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives.”  The ASU clarifies that certain embedded derivatives, such as those contained in certain securitizations, CDOs and structured notes, should be considered embedded credit derivatives subject to potential bifurcation and separate fair value accounting.  The ASU allows any beneficial interest issued by a securitization vehicle to be accounted for under the fair value option at transition.  At transition, the Company may elect to reclassify various debt securities (on an instrument-by-instrument basis) from held-to-maturity (HTM) or available-for-sale (AFS) to trading.  The new rules are effective July 1, 2010.  The Company is currently analyzing the impact of the changes to determine the population of instruments that may be reclassified to trading upon adoption.

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements.”  The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 of the fair value hierarchy and describing the reasons for the transfers.  The disclosures are effective for reporting periods beginning after December 15, 2009.  The Company adopted ASU 2010-06 as of January 1, 2010.  The required disclosures are included in Note 16.  Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in the Level 3 of the fair value

 
8

measurement hierarchy will be required for fiscal years beginning after December 15, 2010.

Acquisition

Salisbury assumed approximately $11 million in deposits and acquired approximately $2.5 million in loans and the branch office located at 10 Granite Ave., Canaan, Connecticut from Webster Bank, National Association, as of the close of business on December 4, 2009. Salisbury recorded a core deposit intangible of $463,000 for deposits assumed.

NOTE 2 - SECURITIES

The composition of securities is as follows:
                         
   
Amortized
    
Gross un-
    
Gross un-
    
Fair
  
(in thousands)
  
cost (1)
    
realized gains
    
realized losses
    
value
  
March 31, 2010
                        
Available-for-sale
                        
U.S. Treasury notes
   $ 4,999     $ -     $ (17 )   $ 4,982  
U.S. Government Agency notes
     50,253       197       (18 )     50,432  
Municipal bonds
     51,803       125       (4,374 )     47,553  
Mortgage backed securities
                                
U.S. Government Agencies
     27,641       593       (125 )     28,109  
Collateralized mortgage obligations
                                
U.S. Government Agencies
     5,324       3       (31 )     5,296  
Non-agency
     23,690       717       (2,066 )     22,341  
SBA bonds
     6,196       57       -       6,253  
Corporate bonds
     1,082       48       -       1,130  
Preferred Stock
     20       62       -       82  
Total securities available-for-sale
   $ 171,008     $ 1,802     $ (6,631 )   $ 166,179  
Held-to-maturity
                                
Mortgage backed security
   $ 60     $ 2     $ -     $ 62  
Non-marketable securities
                                
Federal Home Loan Bank of Boston stock
   $ 6,032     $ -     $ -     $ 6,032  
December 31, 2009
                                
Available-for-sale
                                
U.S. Treasury bills
   $ 1,999     $ 1     $ -     $ 2,000  
U.S. Government Agency notes
     24,833       125       (126 )     24,832  
Municipal bonds
     51,775       113       (4,735 )     47,153  
Mortgage backed securities
                                
U.S. Government Agencies
     33,535       535       (143 )     33,927  
Collateralized mortgage obligations
                                
U.S. Government Agencies
     5,696       -       (58 )     5,638  
Non-agency
     25,317       433       (2,121 )     23,629  
SBA bonds
     6,581       59       -       6,640  
Corporate bonds
     1,079       49       -       1,128  
Preferred Stock
     20       64       -       84  
Total securities available-for-sale
   $ 150,835     $ 1,379     $ (7,183 )   $ 145,031  
Held-to-maturity
                                
Mortgage backed security
   $ 62     $ -     $ -     $ 62  
Non-marketable securities
                                
Federal Home Loan Bank of Boston stock
   $ 6,032     $ -     $ -     $ 6,032  

(1)
Net of other-than-temporary impairment write-down recognized in earnings.

Sales of securities available-for-sale and gains realized are as follows:
             
Three months ended March 31, (in thousands)
  
2010
    
2009
  
Proceeds
   $ -     $ 21,347  
Gains realized
     -       435  
Losses realized
     -       8  
Net gains realized
     -       427  
Income tax provision
     -       145  

 
9

Included in non-agency Collateralized Mortgage Obligations (“CMOs”) are seven securities issued by Wells Fargo with an aggregate amortized cost basis and fair value of $6,827,000 and $5,943,000, respectively, that exceeded 10% of shareholders’ equity as of March 31, 2010.

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:
                   
   
Less than 12 Months
    
12 Months or Longer
    
Total
  
   
Fair
    
Unrealized
    
Fair
    
Unrealized
    
Fair
    
Unrealized
  
(in thousands)
  
Value
    
losses
    
value
    
losses
    
value
    
losses
  
March 31, 2010
                                    
Available-for-sale
                                    
U.S. Government Agency notes
   $ 4,472     $ 35     $ -     $ -     $ 4,472     $ 35  
Municipal Bonds
     11,100       377       30,579       3,997       41,679       4,374  
Mortgage backed securities
     2,937       14       1,652       111       4,589       125  
Collateralized mortgage obligations
                                                
U.S. Government Agencies
     2,621       31       -       -       2,621       31  
Non-agency
     3,180       60       7,464       591       10,644       651  
Total temporarily impaired securities
     24,310       517       39,695       4,699       64,005       5,216  
Other-than-temporarily impaired securities
                                                
Collateralized mortgage obligations
                                                
Non-agency
     584       57       3,229       1,358       3,813       1,415  
Total temporarily impaired and other-than-
                                                
temporarily impaired securities
   $ 24,894     $ 574     $ 42,924     $ 6,057     $ 67,818     $ 6,631  

Salisbury evaluates its individual available-for-sale investment securities for OTTI on at least a quarterly basis. 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 believes that principal and interest on U.S Treasury securities, mortgage-backed securities or securities backed by a U.S. government sponsored entity and the Small Business Administration and bank qualified insured municipal securities are deemed recoverable.

Salisbury adopted ASC 320-10-65, “Investments-Debt and Equity Securities/Transition and Open Effective Date Information”, (previously FSP FAS No. 115-2 and FAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments), effective April 1, 2009. ASC 320-10-65 requires an assessment of OTTI whenever the fair value of a security is less than its amortized cost basis at the balance sheet date. Amortized cost basis includes adjustments made to the cost of a security for accretion, amortization, collection of cash and previous OTTI recognized into earnings.

Salisbury performed a detailed cash flow analysis of its non-agency CMOs at March 31, 2010 to assess whether any of the securities were OTTI. Salisbury uses a third party provider to generate cash flow forecasts of 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.

During 2009, Salisbury determined that five non-agency CMO securities reflected OTTI and recognized credit losses of $1,128,000. Salisbury judged all other CMO securities not to be OTTI as of March 31, 2010. It is possible that future loss assumptions could change and cause future OTTI credit losses in these securities.

Salisbury does not intend to sell the securities which it has judged to be OTTI and it is not more likely than not that it will be required to sell these securities before its anticipated recovery of each security’s remaining amortized cost basis. For the remainder of Salisbury’s securities portfolio that have experienced decreases in the fair value, the decline is considered to be temporary as Salisbury expects to recover the entire amortized cost basis on the securities and neither intends to sell these securities nor is it more likely than not that it will be required to sell these securities.

 
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NOTE 3 - LOANS

The composition of the loan portfolio is as follows:
             
(in thousands)
  
March 31, 2010
    
December 31, 2009
  
Loans receivable, net
            
Real estate mortgages:
            
Residential
   $ 164,119     $ 163,863  
Commercial
     77,210       70,066  
Construction, land & land development
     23,801       31,011  
Home equity credit
     32,830       33,099  
Total mortgage loans
     297,960       298,039  
Commercial and industrial
     29,162       26,400  
Consumer
     5,224       5,436  
Other
     276       269  
Total loans, gross
     332,622       330,144  
Deferred loan origination fees and costs, net
     627       586  
Allowance for loan losses
     (3,649 )     (3,473 )
Total loans, net
   $ 329,600     $ 327,257  
Loans held-for-sale
                
Residential mortgages
   $ 1,178     $ 665  

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:
             
Three months ended March 31, (in thousands)
  
2010
    
2009
  
Balance, beginning of period
   $ 3,473     $ 2,724  
Provision for losses
     180       430  
Charge-offs
     (10 )     (160 )
Recoveries
     6       11  
Balance, end of period
   $ 3,649     $ 3,005  

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in northwestern Connecticut and nearby 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.

Mortgage Servicing Rights

Loans serviced for others are not included in the Consolidated Balance Sheets. The balance of loans serviced for others and the fair value of mortgage servicing rights are as follows:
             
Three months ended March 31, (in thousands)
  
2010
    
2009
  
Residential mortgage loans serviced for others
   $ 75,414     $ 55,652  
Fair value of mortgage servicing rights
     493       227  

 
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Changes in mortgage servicing rights are as follows:
             
Three months ended March 31, (in thousands)
  
2010
    
2009
  
Loan Servicing Rights
            
Balance, beginning of period
   $ 427     $ 227  
Originated
     28       61  
Amortization (1)
     (31 )     (33 )
Balance, end of period
     424       255  
Valuation Allowance
                
Balance, beginning of period
     (30 )     (118 )
Decrease (increase) in impairment reserve (1)
     2       41  
Balance, end of period
     (28 )     (77 )
Loan servicing rights, net
   $ 396     $ 178  

(1)
Amortization expense and changes in the impairment reserve are recorded in loan servicing fee income.

NOTE 4 - IMPAIRED LOANS

Impaired loans are loans for which it is probable that Salisbury will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogenous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. The components of impaired loans are as follows:
             
(in thousands)
  
March 31, 2010
    
December 31, 2009
  
Non-accrual loans, excluding troubled debt restructured loans
   $ 5,798     $ 5,098  
Non-accrual troubled debt restructured loans
     6,263       2,341  
Accruing troubled debt restructured loans
     5,046       4,566  
Total impaired loans
   $ 17,107     $ 12,004  
Requiring valuation allowance
   $ 4,551     $ 3,388  
Not requiring valuation allowance
     12,556       9,379  
Total impaired loans
   $ 17,107     $ 12,004  
Valuation allowance
   $ 517     $ 388  
Average impaired loans
     13,791       9,443  
Commitments to lend additional amounts to impaired borrowers
     -       -  

NOTE 5 - PLEDGED ASSETS

The following securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase, FHLBB advances and credit facilities available.

             
 (in thousands)
  
March 31, 2010
    
December 31, 2009
  
Securities available-for-sale (at fair value)
   $ 60,081     $ 63,097  
Loans receivable
     108,246       104,960  
Total pledged assets
   $ 168,327     $ 168,057  

At March 31, 2010, securities were pledged as follows: $42 million to secure public deposits and Treasury Tax and Loan deposits, $10.2 million to secure repurchase agreements and $7.9 million to secure FHLBB advances. Loans receivable were pledged to secure FHLBB advances and credit facilities.

 
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NOTE 6 – EARNINGS PER SHARE

The calculation of earnings per share is as follows:
             
Three months ended March 31, (in thousands, except per share amounts)
  
2010
    
2009
  
Net income
   $ 594     $ 1,081  
Preferred stock net accretion
     5       -  
Preferred stock dividends paid
     110       -  
Net income available to common shareholders
   $ 479     $ 1,081  
Weighted average common stock outstanding - basic
     1,687       1,686  
Weighted average common and common equivalent stock outstanding- diluted
     1,687       1,686  
Earnings per common and common equivalent share
                
Basic
   $ 0.28     $ 0.64  
Diluted
     0.28       0.64  

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 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.

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, 2010, that Salisbury and the Bank meet all of their capital adequacy requirements.

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:
                   
   
Actual
    
For Capital Adequacy Purposes
    
To be Well Capitalized Under Prompt Corrective Action Provisions
  
(dollars in thousands)
  
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
March  31, 2010
                                    
Total Capital (to risk-weighted assets)
                                    
Salisbury
   $ 49,916       12.75 %   $ 31,311       8.0 %     n/a       -  
Bank
     40,420       10.36       31,227       8.0     $ 38,034       10.0 %
Tier 1 Capital (to risk-weighted assets)
                                                
Salisbury
     46,207       11.81       15,656       4.0       n/a       -  
Bank
     36,712       9.41       15,613       4.0       23,420       6.0  
Tier 1 Capital (to average assets)
                                                
Salisbury
     46,207       8.40       22,387       4.0       n/a       -  
Bank
     36,712       6.68       21,996       4.0       27,494       5.0  
March 31, 2009
                                                
Total Capital (to risk-weighted assets)
                                                
Salisbury
     49,354       14.55       27,130       8.0       n/a       -  
Bank
     39,556       11.74       26,965       8.0       33,707       10.0  
Tier 1 Capital (to risk-weighted assets)
                                                
Salisbury
     46,317       13.66       13,565       4.0       n/a       -  
Bank
     36,516       10.83       13,483       4.0       20,224       6.0  
Tier 1 Capital (to average assets)
                                                
Salisbury
     46,317       9.48       19,535       4.0       n/a       -  
Bank
     36,519       7.52       19,426       4.0       24,282       5.0  

 
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Restrictions on 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.

Federal Reserve Board (“FRB”) Supervisory Letter SR 09-4, February 24, 2009, revised March 27, 2009, 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.

Further restrictions on cash dividends are imposed on Salisbury because of Salisbury’s issuance of Preferred Stock on March 13, 2009 in the United States Treasury’s Troubled Asset Relief Program’s Capital Purchase Program (the “CPP”). These preclude the payment of any common stock cash dividends if Salisbury is not paying the preferred stock dividend.  Additionally, the common stock dividend may not be increased without prior approval from the Treasury for the first three years Salisbury is a CPP participant unless all CPP preferred shares are redeemed or transferred to third parties.

Preferred Stock

In March 2009, Salisbury issued to the U.S. Treasury Department (“Treasury”) $8,816,000 of Preferred Stock under the CPP of the Emergency Economic Stabilization Act of 2008.

The Preferred Stock qualifies as Tier 1 capital for regulatory purposes and ranks senior to the Common Stock. The Preferred Stock pays a cumulative dividend of 5 percent per annum for the first five years it is outstanding and thereafter at a rate of 9 percent per annum. The Preferred Stock is non-voting, other than voting rights on matters that could adversely affect the Preferred Stock. The Preferred Stock is redeemable at one hundred percent of the issue price plus any accrued and unpaid dividends.

As part of the CPP, Salisbury issued to the Treasury a 10-year Warrant to purchase 57,671 shares of Common Stock at an exercise price of $22.93 per share. If the Warrant were fully exercised, Salisbury estimates that the ownership percentage of the current shareholders would be diluted by approximately 3.3% percent.

NOTE 8 – PENSION AND OTHER BENEFITS

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

             
Three months ended March 31, (in thousands)
  
2010
    
2009
  
Service cost
   $ 100     $ 107  
Interest cost on benefit obligation
     91       101  
Expected return on plan assets
     (100 )     (90 )
Amortization of prior service cost
     -       -  
Amortization of net loss
     18       33  
Net periodic benefit cost
   $ 109     $ 151  

Salisbury’s 401(k) Plan contribution expense was $41,000 and $30,000, respectively, for the three month periods ended March 31, 2010 and 2009. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $12,000 and $11,000, respectively, for the three month periods ended March 31, 2010 and 2009.

NOTE 9 - COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes net income (loss) and any changes in equity from non-owner sources that are not recorded in the income statement (such as changes in net unrealized gains (losses) on securities).  The purpose of

 
14

reporting comprehensive income (loss) is to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners.

The components of comprehensive income (loss) are as follows:
             
Three months ended March 31, (in thousands)
  
2010
    
2009
  
Net income
   $ 594     $ 1,081  
Other comprehensive income (loss)
                
Net unrealized gains (losses) on securities available-for-sale
     975       (3,225 )
Reclassification of net realized gains in net income
     -       427  
Unrealized gains (losses) on securities available-for-sale
     975       (2,798 )
Income tax (expense) benefit
     (331 )     670  
Unrealized gains (losses) on securities available-for-sale, net of tax
     644       (2,128 )
Pension plan income
     18       32  
Income tax expense
     (6 )     (11 )
Pension plan income, net of tax
     12       21  
Other comprehensive income (loss), net of tax
     656       (2,107 )
Comprehensive income (loss)
   $ 1,250     $ (1,026 )

The components of accumulated other comprehensive loss are as follows:
             
Three months ended March 31, (in thousands)
  
2010
    
2009
  
Unrealized losses on securities available-for-sale, net of tax
   $ (3,186 )   $ (9,096 )
Unrecognized pension plan expense, net of tax
     (1,236 )     (1,916 )
Accumulated other comprehensive loss, net
   $ (4,422 )   $ (11,012 )

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, Salisbury may be required to record at fair value other assets 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.

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.

Level 1 - 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 - 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 - 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.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of Salisbury’s financial assets and financial liabilities carried at fair value for December 31, 2009 and March 31, 2010.

Salisbury’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of

 
15

price transparency.

Salisbury’s investments in debt securities and mortgage-backed securities available-for-sale are generally classified within level 2 of the fair value hierarchy.  For these securities, Salisbury obtains fair value measurements from independent pricing services.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

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.

Salisbury’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using level 2 inputs based upon appraisals of similar properties obtained from a third party. For level 3 inputs, fair values are based upon management’s estimates.
             
         
Fair Value Measurements at Reporting Date Using
  
(in thousands)
   March 31,    
Quoted prices in Active markets for Identical assets
    
Significant other observable inputs
    
Significant unobservable inputs
  
   
2010
    
Level 1
    
Level 2
    
Level 3
  
Items Measured at Fair Value
                        
Recurring basis
                        
Securities available-for-sale
   $ 166,179     $ 82     $ 166,097     $ -  
Non-recurring basis
                                
Impaired loans
     12,064       9,014       2,999       51  

       
   
Fair Value Measurements using significant
unobservable inputs
  
   
Level 3
  
Three months ended March 31, 2010 (in thousands)
  
Securities available-for-sale
    
Impaired Loans
    
Total
  
Balance, beginning of period
   $ -     $ 116     $ 116  
Total gains or losses (realized/unrealized)
                        
Included in earnings
     -       -       -  
Included in other comprehensive income
     -       -       -  
Principal paydowns of securities, net of accretion
     -       -       -  
Transfers in and/or out of Level 3
     -       (65 )     (65 )
Balance, end of period
   $ -     $ 51     $ 51  
Amount of total gains or losses for the period
                        
included in earnings attributable to the change
                        
in unrealized gains or losses relating to assets
                        
still held at the reporting date
   $ -     $ -     $ -  

 
16

Carrying values and estimated fair values of financial instruments are as follows:
             
   
March 31, 2010
    
December 31, 2009
  
   
Carrying
    
Estimated
    
Carrying
    
Estimated
  
(in thousands)
  
value
    
fair value
    
value
    
fair value
  
Financial Assets
                        
Cash and due from banks
   $ 19,729     $ 19,729     $ 43,298     $ 43,298  
Interest bearing time deposits with other banks
     5,000       5,000       5,000       5,000  
Securities available-for-sale
     166,179       166,179       145,031       145,031  
Security held-to-maturity
     60       62       62       62  
Federal Home Loan Bank stock
     6,032       6,032       6,032       6,032  
Loans held-for-sale
     1,178       1,187       665       670  
Loans receivable net
     329,600       323,567       327,257       321,882  
Accrued interest receivable
     2,093       2,093       2,177       2,177  
Financial Liabilities
                                
Demand (non-interest-bearing)
   $ 68,852     $ 68,852     $ 70,026     $ 70,026  
Demand (interest-bearing)
     50,148       50,148       43,845       43,845  
Money market
     68,317       68,317       64,477       64,477  
Savings and other
     88,699       88,699       86,316       86,316  
Certificates of deposit
     146,473       146,956       153,539       155,441  
Total deposits
     422,489       422,972       418,203       420,105  
FHLBB advances
     75,356       79,092       76,364       80,830  
Repurchase agreements
     7,973       7,973       11,415       11,415  
Accrued interest payable
     484       484       523       523  

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

 
17

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, 2009.

BUSINESS

Salisbury Bancorp, Inc. ("Salisbury"), a Connecticut corporation, formed in 1998, is a bank holding company for Salisbury Bank and Trust Company ("Bank"), a Connecticut-chartered and Federal Deposit Insurance Corporation (the "FDIC") insured commercial bank headquartered in Lakeville, Connecticut.  Salisbury's principal business consists of the business of the Bank.  The Bank, formed in 1848, is engaged in customary banking activities, including general deposit taking and lending activities to both retail and commercial markets, and trust and wealth advisory services. The Bank conducts its banking business from eight full-service offices in the towns of Canaan, Lakeville, Salisbury and Sharon, Connecticut, South Egremont and Sheffield, Massachusetts, Millerton and Dover Plains, New York, and its trust and wealth advisory services from offices in Lakeville, Connecticut.

Acquisition

Salisbury assumed approximately $11 million in deposits and acquired approximately $2.5 million in loans and the branch office located at 10 Granite Ave., Canaan, Connecticut from Webster Bank, National Association, as of the close of business on December 4, 2009. Salisbury recorded a core deposit intangible of $463,000 for deposits assumed.

Application of Critical Accounting Policies

Salisbury’s consolidated financial statements are prepared in accordance with US GAAP and follow general practices within 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. These policies, along with the disclosures presented in Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis, provide 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.

The allowance for loan losses represents management’s estimate of credit losses 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. A discussion of the factors driving changes in the amount of the allowance for loan losses is included in the “Provision and Allowance For Loan Losses” section of Management’s Discussion and Analysis.

RESULTS OF OPERATIONS

For the three month periods ended March 31, 2010 and 2009

Overview
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