Edgar Filing: SALISBURY BANCORP INC

form10q-117448_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 June 30, 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	(I.R.S. Employer
of incorporation or organization)	Identification No.)
5 Bissell Street, Lakeville, CT	06039
(Address of principal executive offices)	(Zip code)

(860) 435-9801

(Registrant's telephone number, including area code)

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

Yes [X] No [ ]

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

Yes_________ No_________

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

Large accelerated filer 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 [ ] No [X]

The number of shares of Common Stock outstanding as of August 1, 2011, is 1,688,731.

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		Page

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010	3

	Consolidated Statements of Income for the three and six month periods ended June 30, 2011 and 2010 (unaudited)	4

	Consolidated Statements of Changes in Shareholders' Equity for the six month periods ended June 30, 2011 and 2010 (unaudited)	5

	Consolidated Statements of Cash Flows for the six month periods ended June 30, 2011 and 2010 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures of Market Risk	39

Item 4.	Controls and Procedures	40

PART II Other Information

Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults upon Senior Securities	41
Item 4.	Removed and Reserved	41
Item 5.	Other information	41
Item 6.	Exhibits	41

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PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

in thousands (except share data)	June 30, 2011 Unaudited			December 31, 2010
ASSETS
Cash and due from banks	$	7,570		$	6,694
Interest bearing demand deposits with other banks		36,374			20,214
Total cash and cash equivalents		43,944			26,908
Interest bearing time deposits with other banks		-			5,000
Securities
Available-for-sale at fair value		139,407			147,422
Held-to-maturity at amortized cost (fair value: $54 and $58)		53			56
Federal Home Loan Bank of Boston stock at cost		6,032			6,032
Loans held-for-sale		146			1,184
Loans receivable, net (allowance for loan losses: $3,979 and $3,920)		364,854			352,449
Investment in real estate		75			75
Other real estate owned		452			610
Bank premises and equipment, net		12,307			12,190
Goodwill		9,829			9,829
Intangible assets (net of accumulated amortization: $1,412 and $1,301)		1,131			1,242
Accrued interest receivable		2,086			2,132
Cash surrender value of life insurance policies		3,934			3,854
Deferred taxes		1,328			2,540
Other assets		2,737			3,947
Total Assets	$	588,315		$	575,470
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	78,985		$	71,565
Demand (interest bearing)		63,651			63,258
Money market		113,316			77,089
Savings and other		93,341			93,324
Certificates of deposit		109,736			125,053
Total deposits		459,029			430,289
Repurchase agreements		12,359			13,190
Federal Home Loan Bank of Boston advances		55,460			72,812
Accrued interest and other liabilities		3,358			4,163
Total Liabilities		530,206			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		8,749			8,738
Common stock - $.10 per share par value
Authorized: 3,000,000;
Issued: 1,688,731 and 1,687,661		169			168
Common stock warrants outstanding		112			112
Paid-in capital		13,227			13,200
Retained earnings		37,216			36,567
Accumulated other comprehensive loss, net		(1,364	)		(3,769	)
Total Shareholders' Equity		58,109			55,016
Total Liabilities and Shareholders' Equity	$	588,315		$	575,470

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

	Three months ended					Six months ended
Periods ended June 30, (in thousands except per share amounts) unaudited	2011			2010		2011		2010
Interest and dividend income
Interest and fees on loans	$	4,695		$	4,601	$	9,359	$	9,088
Interest on debt securities
Taxable		733			1,033		1,516		1,959
Tax exempt		554			559		1,108		1,119
Other interest and dividends		38			38		75		84
Total interest and dividend income		6,020			6,231		12,058		12,250
Interest expense
Deposits		829			1,125		1,700		2,324
Repurchase agreements		12			19		27		46
Federal Home Loan Bank of Boston advances		562			761		1,207		1,518
Total interest expense		1,403			1,905		2,934		3,888
Net interest income		4,617			4,326		9,124		8,362
Provision for loan losses		350			260		680		440
Net interest and dividend income after provision for loan losses		4,267			4,066		8,444		7,922
Non-interest income
Trust and wealth advisory		596			491		1,263		1,036
Service charges and fees		522			499		1,022		952
Gains on sales of mortgage loans, net		59			122		192		164
Mortgage servicing, net		(5	)		27		26		60
Gains on securities, net		-			1		11		1
Other		58			89		117		146
Total non-interest income		1,230			1,229		2,631		2,359
Non-interest expense
Salaries		1,657			1,668		3,386		3,239
Employee benefits		650			586		1,283		1,216
Premises and equipment		568			495		1,151		1,011
Data processing		285			363		662		772
Professional fees		300			455		577		857
Collections and OREO		243			21		367		43
FDIC insurance		182			182		405		354
Marketing and community support		92			59		160		121
Amortization of intangibles		56			56		111		111
Other		399			360		754		833
Total non-interest expense		4,432			4,245		8,856		8,557
Income before income taxes		1,065			1,050		2,219		1,724
Income tax provision		183			172		394		251
Net income	$	882		$	878	$	1,825	$	1,473
Net income available to common shareholders	$	766		$	763	$	1,594	$	1,243

Basic and diluted earnings per share	$	0.45		$	0.45	$	0.94	$	0.74
Common dividends per share		0.28			0.28		0.56		0.56

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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		-		-		-		-		-		1,473			-			1,473
Other comprehensive income, net of tax		-		-		-		-		-		-			1,703			1,703
Total comprehensive income																		3,176
Amortization (accretion) of preferred stock		-		-		10		-		-		(10	)		-			-
Common stock dividends paid		-		-		-		-		-		(945	)		-			(945	)
Preferred stock dividends paid		-		-		-		-		-		(220	)		-			(220	)
Issuance of common stock for director fees		960		-		-		-		23		-			-			23
Balances at June 30, 2010		1,687,661	$	168	$	8,727	$	112	$	13,200	$	35,557		$	(3,375	)	$	54,389

Balances at December 31, 2010		1,687,661	$	168	$	8,738	$	112	$	13,200	$	36,567		$	(3,769	)	$	55,016
Net income for period		-		-		-		-		-		1,825			-			1,825
Other comprehensive income, net of tax		-		-		-		-		-		-			2,405			2,405
Total comprehensive income																		4,230
Amortization (accretion) of preferred stock		-		-		11		-		-		(11	)		-			-
Common stock dividends paid		-		-		-		-		-		(945	)		-			(945	)
Preferred stock dividends paid		-		-		-		-		-		(220	)		-			(220	)
Issuance of common stock for director fees		1,070		1		-		-		27		-			-			28
Balances June 30, 2011		1,688,731	$	169	$	8,749	$	112	$	13,227	$	37,216		$	(1,364	)	$	58,109

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended June 30, (in thousands) unaudited	2011			2010
Operating Activities
Net income	$	1,825		$	1,473
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion), amortization and depreciation
Securities		163			305
Bank premises and equipment		414			396
Core deposit intangible		111			111
Mortgage servicing rights		114			74
Fair value adjustment on loans		22			22
Gain of calls of securities available-for-sale		(11	)		(1	)
Write down of other real estate owned		163			-
Provision for loan losses		680			440
Decrease in loans held-for-sale		1,038			152
Increase in deferred loan origination fees and costs, net		(116	)		(44	)
Mortgage servicing rights originated		(106	)		(112	)
Decrease (increase) in mortgage servicing rights impairment reserve		15			(5	)
Decrease (increase) in interest receivable		45			(74	)
Deferred tax benefit		(27	)		(42	)
Decrease in prepaid expenses		391			415
Increase in cash surrender value of life insurance policies		(80	)		(84	)
Decrease (increase) in income tax receivable		715			(194	)
Decrease in other assets		17			40
(Decrease) increase in accrued expenses		(29	)		46
Decrease in interest payable		(128	)		(85	)
(Decrease) increase in other liabilities		(613	)		130
Issuance of shares for directors’ fee		27			23
Net cash provided by operating activities		4,631			2,986
Investing Activities
Proceeds from maturities of interest-bearing time deposits		5,000			-
Purchases of securities available-for-sale		(15,034	)		(37,987	)
Proceeds from calls of securities available-for-sale		19,000			12,190
Proceeds from maturities of securities available-for-sale		7,507			17,645
Proceeds from maturities of securities held-to-maturity		3			3
Loan originations and principle collections, net		(13,326	)		(15,029	)
Recoveries of loans previously charged-off		22			14
Proceeds from sale of other real estate owned		308			-
Capital expenditures		(467	)		(1,416	)
Net cash provided (utilized) by investing activities		3,013			(24,580	)
Financing Activities
Increase in deposit transaction accounts, net		44,058			27,560
Decrease in time deposits, net		(15,318	)		(21,772	)
Decrease in securities sold under agreements to repurchase, net		(831	)		(3,295	)
Principal payments on Federal Home Loan Bank of Boston advances		(17,352	)		(1,418	)
Common stock dividends paid		(945	)		(945	)
Preferred stock dividends paid		(220	)		(220	)
Net cash provided (utilized) by financing activities		9,392			(90	)
Net increase (decrease) in cash and cash equivalents		17,036			(21,684	)
Cash and cash equivalents, beginning of period		26,908			43,298
Cash and cash equivalents, end of period	$	43,944		$	21,614
Cash paid during period
Interest	$	3,062		$	3,973
Income taxes		449			79
Non-cash transfers
Transfer from loans to other real estate owned		321			-

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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 interim period ended June 30, 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 June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Under this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. An entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.” The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.

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 does not expect this ASU to have a significant impact on its financial position or results of operations.

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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.

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.

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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
June 30, 2011
Available-for-sale
U.S. Treasury notes	$	4,999	$	373	$	-		$	5,372
U.S. Government Agency notes		22,573		422		-			22,995
Municipal bonds		51,388		459		(3,062	)		48,785
Mortgage backed securities
U.S. Government Agencies		30,895		938		(1	)		31,832
Collateralized mortgage obligations
U.S. Government Agencies		8,052		41		-			8,093
Non-agency		16,624		499		(282	)		16,841
SBA bonds		4,062		80		-			4,142
Corporate bonds		1,095		28		-			1,123
Preferred Stock		20		204		-			224
Total securities available-for-sale	$	139,708	$	3,044	$	(3,345	)	$	139,407
Held-to-maturity
Mortgage backed security	$	53	$	1	$	-		$	54
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	6,032	$	-	$	-		$	6,032
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 June 30, 2011 and 2010.

Included in non-agency Collateralized Mortgage Obligations (“CMOs”) are eight securities issued by Wells Fargo with an aggregate amortized cost basis and fair value of $5,671,000 and $5,867,000, respectively, that exceeded 10% of shareholders’ equity as of June 30, 2011.

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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
June 30, 2011
Available-for-sale
U.S. Government Agency notes	$	-	$	-	$	-	$	-	$	-	$	-
Municipal Bonds		14,410		630		15,321		2,432		29,731		3,062
Mortgage backed securities		58		1		-		-		58		1
Collateralized mortgage obligations
U.S. Government Agencies		-		-		-		-		-		-
Non-agency		1,004		15		2,068		151		3,072		166
Total temporarily impaired securities		15,472		646		17,389		2,583		32,861		3,229
Other-than-temporarily impaired securities
Collateralized mortgage obligations
Non-agency		3,186		71		750		45		3,936		116
Total temporarily impaired and other-than-
temporarily impaired securities	$	18,658	$	717	$	18,139	$	2,628	$	36,797	$	3,345

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 June 30, 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 June 30, 2011.

Municipal bonds: Contractual cash flows are performing as expected. The decline in fair values at June 30, 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 June 30, 2011.

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

Six months ended June 30 (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 announced the resumption of modest quarterly cash dividends to its members through 2011 and on June 27, 2011 the FHLBB announced that its excess stock pool will be discontinued effective June 28, 2011, and designating December 28, 2011, as the required stock purchase date. 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 June 30, 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.

NOTE 3 - LOANS

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

(in thousands)	June 30, 2011			December 31, 2010
Residential 1-4 family	$	182,764		$	173,931
Residential 5+ multifamily		3,068			2,889
Construction of residential 1-4 family		8,046			8,949
Home equity credit		33,657			34,164
Residential real estate		227,535			219,933
Commercial		79,976			75,495
Construction of commercial		4,502			7,312
Commercial real estate		84,478			82,807
Farm land		5,767			5,690
Vacant land		12,687			12,979
Real estate secured		330,467			321,409
Commercial and industrial		30,060			25,123
Municipal		2,768			4,338
Consumer		4,599			4,677
Loans receivable, gross		367,894			355,547
Deferred loan origination fees and costs, net		939			822
Allowance for loan losses		(3,979	)		(3,920	)
Loans receivable, net	$	364,854		$	352,449
Loans held-for-sale
Residential 1-4 family	$	146		$	1,184

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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 mortgage loan and consumer loan 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.

Credit Quality

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

June 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Residential 1-4 family	$	163,345	$	13,210	$	6,209	$	-	$	-	$	182,764
Residential 5+ multifamily		2,538		530		-		-		-		3,068
Construction of residential 1-4 family		3,971		416		3,659		-		-		8,046
Home equity credit		30,960		1,465		1,232		-		-		33,657
Residential real estate		200,814		15,621		11,100		-		-		227,535
Commercial		60,896		6,101		12,979		-		-		79,976
Construction of commercial		3,840		191		471		-		-		4,502
Commercial real estate		64,736		6,292		13,450		-		-		84,478
Farm land		3,139		1,779		849		-		-		5,767
Vacant land		7,603		894		4,190		-		-		12,687
Real estate secured		276,292		24,586		29,589		-		-		330,467
Commercial and industrial		20,030		8,315		1,715		-		-		30,060
Municipal		2,768		-		-		-		-		2,768
Consumer		4,330		196		73		-		-		4,599
Loans receivable, gross	$	303,420	$	33,097	$	31,377	$	-	$	-	$	367,894

Credit quality segments of loans receivable by risk rating grade are as follows:

June 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Performing loans	$	303,151	$	33,097	$	-	$	-	$	-	$	336,248
Potential problem loans		-		-		15,154		-		-		15,154
Troubled debt restructurings – accruing		269		-		1,661		-		-		1,930
Troubled debt restructuring - non-accrual		-		-		7,691		-		-		7,691
All other non-accrual loans		-		-		6,871		-		-		6,871
Impaired loans		269		-		16,223		-		-		16,492
Loans receivable, gross	$	303,420	$	33,097	$	31,377	$	-	$	-	$	367,894

Potential problem loans are performing loans risk rated substandard that are not classified as impaired. Impaired loans are loans for which it is probable that Salisbury will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreements.

The components of impaired loans are as follows:

(in thousands)	June 30, 2011		December 31, 2010
Troubled debt restructurings – accruing	$	1,930	$	5,330
Troubled debt restructuring - non-accrual		7,691		4,254
All other non-accrual loans		6,871		5,791
Impaired loans	$	16,492	$	15,375
Commitments to lend additional amounts to impaired borrowers	$	-	$	-

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

June 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Current	$	301,609	$	30,228	$	20,121	$	-	$	-	$	351,958
Past due 001-029		1,726		1,950		3,571		-		-		7,247
Past due 030-059		69		731		376		-		-		1,176
Past due 060-089		16		188		925		-		-		1,129
Past due 090-179		-		-		1,038		-		-		1,038
Past due 180+		-		-		5,346		-		-		5,346
Loans receivable, gross	$	303,420	$	33,097	$	31,377	$	-	$	-	$	367,894

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

			Past due
June 30, 2011 (in thousands)	Current		1-29 days		30-59 days		60-89 days		90-179 days		180 days and over		30 days and over		Accruing 90 days and over		Non- accrual
Residential 1-4 family	$	176,930	$	3,748	$	445	$	303	$	504	$	834	$	2,086	$	-	$	6,288
Residential 5+ multifamily		2,794		-		274		-		-		-		274		-		-
Residential 1-4 family construction		8,046		-		-		-		-		-		-		-		-
Home equity credit		32,850		645		37		86		14		24		161		-		200
Residential real estate		220,620		4,393		756		389		518		858		2,521		-		6,488
Commercial		76,815		1,717		283		125		495		541		1,444		-		3,134
Construction of commercial		4,482		21		-		-		-		-		-		-		-
Commercial real estate		81,297		1,738		283		125		495		541		1,444		-		3,134
Farm land		5,334		433		-		-		-		-		-		-		-
Vacant land		8,645		16		64		565		-		3,397		4,026		-		3,933
Real estate secured		315,896		6,580		1,103		1,079		1,013		4,796		7,991		-		13,555
Commercial and industrial		28,842		590		20		34		25		550		629		-		1,008
Municipal		2,768		-		-		-		-		-		-		-		-
Consumer		4,452		77		53		16		-		-		69		-		-
Loans receivable, gross	$	351,958	$	7,247	$	1,176	$	1,129	$	1,038	$	5,346	$	8,689	$	-	$	14,563

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Three months ended June 30												Six months ended June 30
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance
2011 Periods
Residential	$	1,462	$	139		$	(20	)	$	2	$	1,583	$	1,504	$	197		$	(121	)	$	3	$	1,583
Commercial		1,343		(9	)		(96	)		-		1,238		1,132		282			(175	)		-		1,239
Land		296		(25	)		-			-		271		392		(42	)		(79	)		-		271
Real estate		3,101		105			(116	)		2		3,092		3,028		437			(375	)		3		3,093
Commercial & industrial		531		79			(89	)		-		521		541		69			(89	)		-		521
Municipal		55		(27	)		-			-		28		51		(23	)		-			-		28
Consumer		167		70			(159	)		13		91		164		86			(179	)		19		92
Unallocated		124		123			-			-		247		136		111			-			-		245
Totals	$	3,978	$	350		$	(364	)	$	15	$	3,979	$	3,920	$	680		$	(643	)	$	22	$	3,979
2010 Periods
Totals	$	3,649	$	260		$	(149	)	$	8	$	3,768	$	3,473	$	440		$	(159	)	$	14	$	3,768

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

	Collectively evaluated				Individually evaluated				Total portfolio
June 30, 2011 (in thousands)	Loan balance		Allowance		Loan balance		Allowance		Loan Balance		Allowance
Residential 1-4 family	$	177,466	$	749	$	5,299	$	427	$	182,764	$	1,176
Residential 5+ multifamily		3,068		20		-		-		3,068		20
Construction of residential 1-4 family		4,387		16		3,659		-		8,046		16
Home equity credit		33,418		371		239		-		33,657		371
Residential real estate		218,339		1,156		9,197		427		227,535