Edgar Filing: SALISBURY BANCORP INC

form10q-116291_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, 2011

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 (§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 16, 2011, is 1,687,661.

TABLE OF CONTENTS

		Page

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010	3

	Consolidated Statements of Income for the three month periods
	ended March 31, 2011 and March 31, 2010 (unaudited)	4

	Consolidated Statements of Changes in Shareholders' Equity for the three month
	periods ended March 31, 2011 and March 31, 2010 (unaudited)	5

	Consolidated Statements of Cash Flows for the three month periods ended
	March 31, 2011 and March 31, 2010 (unaudited)	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition
	and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosure of Market Risk	32

Item 4.	Controls and Procedures	33

PART II Other Information

Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults upon Senior Securities	34
Item 4.	Removed and Reserved	34
Item 5.	Other information	34
Item 6.	Exhibits	34

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PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

in thousands (except share data) unaudited	March 31, 2011			December 31, 2010
ASSETS
Cash and due from banks	$	5,349		$	6,694
Interest bearing demand deposits with other banks		37,742			20,214
Total cash and cash equivalents		43,091			26,908
Interest bearing time deposits with other banks		5,000			5,000
Securities
Available-for-sale at fair value		125,223			147,422
Held-to-maturity at amortized cost (fair value: $56 and $58)		55			56
Federal Home Loan Bank of Boston stock at cost		6,032			6,032
Loans held-for-sale		187			1,184
Loans receivable, net (allowance for loan losses: $3,978 and $3,920)		361,238			352,449
Investment in real estate		75			75
Other real estate owned		866			610
Bank premises and equipment, net		12,303			12,190
Goodwill		9,829			9,829
Intangible assets (net of accumulated amortization: $1,357 and $1,301)		1,186			1,242
Accrued interest receivable		2,002			2,132
Cash surrender value of life insurance policies		3,893			3,854
Deferred taxes		2,260			2,540
Other assets		3,654			3,947
Total Assets	$	576,894		$	575,470
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	74,690		$	71,565
Demand (interest bearing)		59,311			63,258
Money market		106,468			77,089
Savings and other		97,407			93,324
Certificates of deposit		114,503			125,053
Total deposits		452,379			430,289
Repurchase agreements		8,241			13,190
Federal Home Loan Bank of Boston advances		55,888			72,812
Accrued interest and other liabilities		4,438			4,163
Total Liabilities		520,946			520,454
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		8,743			8,738
Common stock - $.10 per share par value
Authorized: 3,000,000;
Issued: 1,686,701 and 1,685,861		168			168
Common stock warrants outstanding		112			112
Paid-in capital		13,200			13,200
Retained earnings		36,923			36,567
Accumulated other comprehensive loss, net		(3,198	)		(3,769	)
Total Shareholders' Equity		55,948			55,016
Total Liabilities and Shareholders' Equity	$	576,894		$	575,470

See accompanying notes to consolidated financial statements.

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

Three months ended March 31, (in thousands except per share amounts) unaudited	2011		2010
Interest and dividend income
Interest and fees on loans	$	4,664	$	4,487
Interest on debt securities
Taxable		783		926
Tax exempt		554		560
Other interest and dividends		38		46
Total interest and dividend income		6,039		6,019
Interest expense
Deposits		871		1,198
Repurchase agreements		15		27
Federal Home Loan Bank of Boston advances		646		758
Total interest expense		1,532		1,983
Net interest income		4,507		4,036
Provision for loan losses		330		180
Net interest and dividend income after provision for loan losses		4,177		3,856
Non-interest income
Trust and wealth advisory		667		545
Service charges and fees		499		453
Gains on securities		11		-
Gains on sales of mortgage loans, net		133		42
Mortgage servicing, net		32		33
Other		59		56
Total non-interest income		1,401		1,129
Non-interest expense
Salaries		1,729		1,571
Employee benefits		634		630
Premises and equipment		583		515
Data processing		377		408
Professional fees		280		402
FDIC insurance		223		171
Marketing and community support		68		62
Amortization of intangibles		56		56
Other		474		497
Total non-interest expense		4,424		4,312
Income before income taxes		1,154		673
Income tax provision		211		79
Net income	$	943	$	594
Net income available to common shareholders	$	828	$	479

Basic and diluted earnings per share	$	0.49	$	0.28
Common dividends per share		0.28		0.28

See accompanying notes to consolidated financial statements.

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

	Common Stock				Preferred				Paid-in		Retained			Accumulated other comp-			Total share-holders'
(dollars in thousands) unaudited	Shares		Amount		Stock		Warrants		capital		earnings			rehensive loss			equity
Balances at December 31, 2009		1,686,701	$	168	$	8,717	$	112	$	13,177	$	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		8,722		112		13,177		35,266			(4,422	)		53,023
Balances at December 31, 2010		1,687,661	$	168	$	8,738	$	112	$	13,200	$	36,567		$	(3,769	)	$	55,016
Net income for period		-		-		-		-		-		943			-			943
Other comprehensive income, net of tax		-		-		-		-		-		-			571			571
Total comprehensive income																		1,514
Amortization (accretion) of preferred stock		-		-		5		-		-		(5	)		-			-
Common stock dividends paid		-		-		-		-		-		(472	)		-			(472	)
Preferred stock dividends paid		-		-		-		-		-		(110	)		-			(110	)
Balances March 31, 2011		1,687,661	$	168	$	8,743	$	112	$	13,200	$	36,923		$	(3,198	)	$	55,948

See accompanying notes to consolidated financial statements.

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended March 31, (in thousands) unaudited	2011			2010
Operating Activities
Net income	$	943		$	594
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion), amortization and depreciation
Securities		62			174
Bank premises and equipment		206			193
Core deposit intangible		56			56
Mortgage servicing rights		58			31
Fair value adjustment on loans		11			11
Sales and calls of securities available-for-sale		(11	)		-
Write down of other real estate owned		57			-
Provision for loan losses		330			180
Decrease (increase) in loans held-for-sale		998			(513	)
Increase in deferred loan origination fees and costs, net		(57	)		(41	)
Mortgage servicing rights originated		(77	)		(28	)
Decrease in mortgage servicing rights impairment reserve		(2	)		(2	)
Decrease in interest receivable		130			85
Deferred tax benefit		(14	)		(8	)
Decrease in prepaid expenses		73			68
Increase in cash surrender value of life insurance policies		(39	)		(42	)
Decrease in income tax receivable		224			69
Decrease (increase) in other assets		25			(25	)
Increase in accrued expenses		537			431
Decrease in interest payable		(101	)		(40	)
Decrease in other liabilities		(143	)		(111	)
Net cash provided by operating activities		3,266			1,082
Investing Activities
Purchases of securities available-for-sale		-			(33,985	)
Proceeds from calls of securities available-for-sale		22,997			1,550
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		(9,394	)		(2,499	)
Recoveries of loans previously charged-off		7			6
Capital expenditures		(327	)		(1,068	)
Net cash provided (utilized) by investing activities		13,284			(23,906	)

Three months ended March 31, (in thousands) unaudited	2011			2010
Financing Activities
Increase in deposit transaction accounts, net		32,640			11,352
Decrease in time deposits, net		(10,550	)		(7,065	)
Decrease in securities sold under agreements to repurchase, net		(4,949	)		(3,442	)
Principal payments on Federal Home Loan Bank of Boston advances		(16,925	)		(1,008	)
Common stock dividends paid		(473	)		(472	)
Preferred stock dividends paid		(110	)		(110	)
Net cash utilized by financing activities		(367	)		(745	)
Net increase (decrease) in cash and cash equivalents		16,183			(23,569	)
Cash and cash equivalents, beginning of period		26,908			43,298
Cash and cash equivalents, end of period	$	43,091		$	19,729
Cash paid during period
Interest	$	633		$	2,023
Income taxes		449			139
Non-cash transfers
Transfer from loans to other real estate owned		314			-

See accompanying notes to consolidated financial statements.

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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, shareholders’ 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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2010 Annual Report on Form 10-K for the period ended December 31, 2010.

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 April 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011. Additional disclosures are also required under this ASU. Salisbury is currently evaluating the impact of this ASU. The ASU is expected to cause more loan modifications to be classified as TDRs and Salisbury is evaluating its modification programs and practices in light of the new ASU.

In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. Early adoption is not permitted.

In December 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-28, “Intangibles - Goodwill and Other.” This ASU addresses when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For public entities, the amendments in this ASU are effective for fiscal years and interim periods beginning after December 15, 2010.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.

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In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU is created to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This ASU is intended to provide additional information to assist financial statement users in assessing the entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The amendments in this ASU are effective as of the end of a reporting period for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.

In April 2010, the FASB issued ASU 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset.” As a result of this ASU, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity continues to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this ASU are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010, with the amendments to be applied prospectively. This ASU did not have a significant impact on Salisbury’s financial position or results of operations.

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. Salisbury adopted ASU 2010-06 as of January 1, 2010. The required disclosures are included in Note 10, “Fair Value Measurements,” to the consolidated Financial Statements. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in the Level 3 of the fair value measurement hierarchy are effective for interim and annual reporting periods beginning after December 15, 2010.

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. The requirements are effective July 1, 2010. This standard did not have a significant impact on Salisbury’s financial position or results of operations.

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, 2011
Available-for-sale
U.S. Treasury notes	$	5,000	$	186	$	-		$	5,186
U.S. Government Agency notes		22,587		306		(79	)		22,814
Municipal bonds		51,359		236		(4,903	)		46,692
Mortgage backed securities
U.S. Government Agencies		17,665		567		(26	)		18,206
Collateralized mortgage obligations
U.S. Government Agencies		8,602		9		(42	)		8,569
Non-agency		17,609		708		(293	)		18,024
SBA bonds		4,353		73		-			4,426
Corporate bonds		1,092		38		-			1,130
Preferred Stock		20		156		-			176
Total securities available-for-sale	$	128,287	$	2,279	$	(5,343	)	$	125,223
Held-to-maturity
Mortgage backed security	$	55	$	1	$	-		$	56
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.

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(in thousands)	Amortized cost (1)		Gross un- realized gains		Gross un-realized losses			Fair value
December 31, 2010
Available-for-sale
U.S. Treasury notes	$	4,999	$	197	$	-		$	5,196
U.S. Government Agency notes		41,590		380		(92	)		41,878
Municipal bonds		51,330		139		(5,371	)		46,098
Mortgage backed securities
U.S. Government Agencies		19,190		566		(20	)		19,736
Collateralized mortgage obligations
U.S. Government Agencies		9,283		29		(1	)		9,311
Non-agency		19,002		714		(599	)		19,117
SBA bonds		4,831		70		-			4,901
Corporate bonds		1,089		41		-			1,130
Preferred Stock		20		35		-			55
Total securities available-for-sale	$	151,334	$	2,171	$	(6,083	)	$	147,422
Held-to-maturity
Mortgage backed security	$	56	$	2	$	-		$	58
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.

Salisbury did not sell any securities available-for-sale during the three month periods ended March 31, 2011 and 2010.

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 $6,020,000 and $6,342,000, respectively, that exceeded 10% of shareholders’ equity as of March 31, 2011.

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
(in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
March 31, 2011
Available-for-sale
U.S. Government Agency notes	$	9,921	$	79	$	-	$	-	$	9,921	$	79
Municipal Bonds		26,099		1,535		14,351		3,368		40,450		4,903
Mortgage backed securities		1,171		26		-		-		1,171		26
Collateralized mortgage obligations
U.S. Government Agencies		4,180		42		-		-		4,180		42
Non-agency		-		-		2,171		185		2,171		185
Total temporarily impaired securities		41,371		1,682		16,522		3,553		57,893		5,235
Other-than-temporarily impaired securities
Collateralized mortgage obligations
Non-agency		1,030		80		784		28		1,814		108
Total temporarily impaired and other-than-
temporarily impaired securities	$	42,401	$	1,762	$	17,306	$	3,581	$	59,707	$	5,343

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

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at March 31, 2011.

U.S Government Agency notes, U.S. Government Agency mortgage-backed securities and U.S. Government Agency CMOs: 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 does not intend to sell these securities and 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. Therefore, management does not consider these securities to be OTTI at March 31, 2011.

Municipal bonds: Contractual cash flows are performing as expected. The decline in fair values at March 31, 2011 as compared with December 31, 2010, is primarily due to an increase in interest rates and risk premium spreads for municipal bonds in 2011 compared to 2010. Late in 2010 and continuing into 2011 the municipal bond market experienced significant price declines as uncertainty about the health of local and state government finances caused investors to exit the market. 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. Salisbury has performed credit underwriting reviews of certain issuers, including those that have had their ratings withdrawn and those that are insured by insurers that have had their ratings withdrawn, to assess their default risk. For all completed reviews pass credit risk ratings have been assigned. Management believes that unrealized losses on its municipal bonds are a function of interest rate movements and changes in investor spreads for credit sensitive securities. Management expects to recover the entire amortized cost basis of these securities. Salisbury does not intend to sell these securities and 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. Management does not consider these securities to be OTTI at March 31, 2011.

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at March 31, 2011 to assess whether any of the securities were OTTI. Salisbury uses third party provided 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. 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 these five securities not to have additional OTTI and all other CMO securities not to be OTTI as of March 31, 2011. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI for further deterioration in credit quality. Salisbury does not intend to sell these securities and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis.

The following table presents activity related to credit losses recognized into earnings on the non-agency CMOs held by Salisbury for which a portion of an OTTI charge was recognized in accumulated other comprehensive income:

Three months ended March 31 (in thousands)	2011		2010
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

Federal Home Loan Bank of Boston (“FHLBB”): The Bank is a member of the FHLBB. The 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. In 2008, the FHLBB announced to its members that it is focusing on preserving capital in response to ongoing market volatility including the extension of a moratorium on excess stock repurchases and in 2009 announced the suspension of its quarterly dividends. On February 22, 2011, the FHLBB declared a modest cash dividend payable to its members on March 2, 2011. The FHLBB also announced that it expects to continue to declare modest cash dividends through 2011. 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, 2011. 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.

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NOTE 3 - LOANS

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

(in thousands)	March 31, 2011			December 31, 2010
Residential 1-4 family	$	183,194		$	176,892
Residential 5+ multifamily		3,271			2,889
Construction of residential 1-4 family		4,564			5,988
Home equity credit		34,608			34,164
Residential real estate		225,637			219,933
Commercial		74,519			75,495
Construction of commercial		7,777			7,312
Commercial real estate		82,296			82,807
Farm land		5,221			5,690
Vacant land		12,757			12,979
Real estate secured		325,911			321,409
Commercial and industrial		29,289			25,123
Municipal		4,563			4,338
Consumer		4,574			4,677
Loans receivable, gross		364,337			355,547
Deferred loan origination fees and costs, net		879			822
Allowance for loan losses		(3,978	)		(3,920	)
Loans receivable, net	$	361,238		$	352,449
Loans held-for-sale
Residential 1-4 family	$	187		$	1,184

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

			Past due
	Current		1-29		30-59		60-89		90-179		180 days		30 days		Accruing 90		Non-accural
			days		days		days		days		and over		and over		days and over
Residential 1-4 family	$	175,498	$	3,018	$	1,663	$	822	$	1,152	$	1,041	$	4,678	$	100	$	2,524
Residential 5+ multifamily		3,111		-		160		-		-		-		160		-		-
Residential 1-4 family construction		4,564		-		-		-		-		-		-		-		-
Home equity credit		33,582		199		788		14		-		25		827		-		359
Residential real estate		216,755		3,217		2,611		836		1,152		1,066		5,665		100		2,883
Commercial		71,057		1,737		834		541		351		-		1,726		-		3,061
Construction of commercial		7,756		-		21		-		-		-		21		-		-
Commercial real estate		78,813		1,737		855		541		351		-		1,747		-		3,061
Farm land		4,523		383		-		315		-		-		315		-		-
Vacant land		8,637		564		159		-		-		3,397		3,556		-		3,933
Real estate secured		308,728		5,901		3,625		1,692		1,503		4,463		11,283		100		9,877
Commercial and industrial		28,441		140		45		492		171		-		708		50		848
Municipal		4,563		-		-		-		-		-		-		-		-
Consumer		4,383		132		50		9		-		-		59		-		-
Loans receivable, gross	$	346,115	$	6,173	$	3,720	$	2,193	$	1,674	$	4,463	$	12,050	$	150	$	10,725

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Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	March 31, 2011
Three months ended (in thousands)	Beginning balance		Provision			Charge-offs			Reco-veries		Ending balance
Residential	$	1,504	$	60		$	(101	)	$	-	$	1,463
Commercial		1,132		291			(80	)		-		1,343
Land		392		(18	)		(79	)		-		295
Real estate		3,028		333			(260	)		-		3,101
Commercial & industrial		541		(9	)		-			-		532
Municipal		51		4			-			-		55
Consumer		164		16			(19	)		7		168
Unallocated		136		(14	)		-			-		122
Total	$	3,920	$	330		$	(279	)	$	7	$	3,978

The composition of loans receivable and the allowance for loan losses at March 31, 2011 is as follows:

	Collectively evaluated				Individually evaluated				Total portfolio
March 31, 2011 (in thousands)	Loan balance		Allowance		Loan balance		Allowance		Loan Balance		Allowance
Residential 1-4 family	$	176,460	$	768	$	6,734	$	283	$	183,194	$	1,051
Residential 5+ multifamily		3,271		27		-		-		3,271		27
Construction of residential 1-4 family		4,564		18		-		-		4,564		18
Home equity credit		34,249		367		359		-		34,608		367
Residential real estate		218,544		1,180		7,093		283		225,637		1,463
Commercial		66,873		865		7,646		425		74,519		1,290
Construction of commercial		7,777		53		-		-		7,777		53
Commercial real estate		74,650		918		7,646		425		82,296		1,343
Farm land		5,221		54		-		-		5,221		54
Vacant land		8,665		97		4,092		144		12,757		241
Real estate secured		307,080		2,249		18,831		852		325,911		3,101
Commercial and industrial		28,167		395		1,122		137		29,289		532
Municipal		4,563		55		-		-		4,563		55
Consumer		4,574		168		-		-		4,574		165
Unallocated allowance		-		122		-		-		-		122
Totals	$	344,384	$	2,989	$	19,953	$	989	$	364,337	$	3,978

Credit Quality Information

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

March 31, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Residential 1-4 family	$	161,295	$	13,306	$	8,593	$	-	$	-	$	183,194
Residential 5+ multifamily		2,189		994		88		-		-		3,271
Construction of residential 1-4 family		3,450		1,114		-		-		-		4,564
Home equity credit		31,723		1,696		1,189		-		-		34,608
Residential real estate		198,657		17,110		9,870		-		-		225,637
Commercial		52,414		9,926		12,179		-		-		74,519
Construction of commercial		6,814		492		471		-		-		7,777
Commercial real estate		59,228		10,418		12,650		-		-		82,296
Farm land		3,164		884		1,173		-		-		5,221
Vacant land		8,315		262		4,180		-		-		12,757
Real estate secured		269,364		28,674		27,873		-		-		325,911
Commercial and industrial		19,129		8,430		1,730		-		-		29,289
Municipal		4,563		-		-		-		-		4,563
Consumer		4,342		159		65		8		-		4,574
Loans receivable, gross	$	297,398	$	37,263	$	29,668	$	8	$	-	$	364,337

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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.

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, 2011		December 31, 2010
Non-accrual loans, excluding troubled debt restructured loans	$	7,080	$	5,791
Non-accrual troubled debt restructured loans		3,645		4,254
Accruing troubled debt restructured loans		5,323		5,330
Total impaired loans	$	16,048	$	15,375
Commitments to lend additional amounts to impaired borrowers	$	-	$	-

Certain data with respect to loans individually evaluated for impairment at March 31, 2011 is as follows:

	Impaired loans with specific allowance										Impaired loans with no specific allowance
	Loan balance						Specific allowance		Income recognized		Loan balance						Income recognized
	Book		Note		Average		Specific allowance		Income recognized		Book		Note		Average		Income recognized
Residential 1-4 family	$	2,048	$	2,217	$	1,657	$	150	$	6	$	3,853	$	3,852	$	4,278	$	29
Home equity credit		-		-		-		-		-		359		361		361		3
Residential real estate		2,048		2,217		1,657		150		6		4,212		4,213		4,639		32
Commercial		2,701		2,803		2,395		179		41		2,032		2,380		2,429		11
Vacant land		670		774		787		64		-		3,263		3,627		3,202		-
Real estate secured		5,419		5,794		4,839		393		47		9,507		10,220		10,270		43
Commercial and industrial		396		403		229		137		1		726		1,252		673		3
Totals	$	5,815	$	6,197	$	5,068	$	530	$	48	$	10,233	$	11,472	$	10,943	$	46

NOTE 4 - 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:

March 31, (in thousands)	2011		2010
Residential mortgage loans serviced for others	$	101,636	$	75,414
Fair value of mortgage servicing rights		948		493

Changes in mortgage servicing rights are as follows:

Three months ended March 31, (in thousands)	2011			2010
Loan Servicing Rights
Balance, beginning of period	$	683		$	427
Originated		77			28
Amortization (1)		(59	)		(31	)
Balance, end of period		701			424
Valuation Allowance
Balance, beginning of period		(10	)		(30	)
Decrease in impairment reserve (1)		2			2
Balance, end of period		(8	)		(28	)
Loan servicing rights, net	$	693		$	396

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

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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, 2011		December 31, 2010
Securities available-for-sale (at fair value)	$	61,866	$	62,764
Loans receivable		116,489		114,424
Total pledged assets	$	178,355	$	177,188

At March 31, 2011, securities were pledged as follows: $46.1 million to secure public deposits and Treasury Tax and Loan deposits, $12.5 million to secure repurchase agreements and $3.4 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)	2011		2010
Net income	$	943	$	594
Preferred stock net accretion		5		5
Preferred stock dividends paid		110		110
Net income available to common shareholders	$	828	$	479
Weighted average common stock outstanding - basic		1,688		1,687
Weighted average common and common equivalent stock outstanding- diluted		1,688		1,687
Earnings per common and common equivalent share
Basic	$	0.49	$	0.28
Diluted		0.49		0.28

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, 2011, 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, 2011
Total Capital (to risk-weighted assets)
Salisbury	$	52,209		14.01	%	$	29,810		8.0	%		n/a		-
Bank		42,628		11.23			30,366		8.0		$	37,957		10.0	%
Tier 1 Capital (to risk-weighted assets)
Salisbury		48,131		12.92