Edgar Filing: SALISBURY BANCORP INC

form10q-118710_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 September 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 X 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 November 1, 2011, is 1,688,731.

TABLE OF CONTENTS

		Page

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements:

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

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

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

	Consolidated Statements of Cash Flows for the nine month periods ended September 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	38

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

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

in thousands (except share data)	September 30, 2011 Unaudited		December 31, 2010
ASSETS
Cash and due from banks	$	6,019	$	6,694
Interest bearing demand deposits with other banks		59,498		20,214
Total cash and cash equivalents		65,517		26,908
Interest bearing time deposits with other banks		-		5,000
Securities
Available-for-sale at fair value		151,078		147,422
Held-to-maturity at amortized cost (fair value: $54 and $58)		52		56
Federal Home Loan Bank of Boston stock at cost		6,032		6,032
Loans held-for-sale		1,057		1,184
Loans receivable, net (allowance for loan losses: $4,027 and $3,920)		362,879		352,449
Investment in real estate		75		75
Other real estate owned		37		610
Bank premises and equipment, net		12,126		12,190
Goodwill		9,829		9,829
Intangible assets (net of accumulated amortization: $1,468 and $1,301)		1,075		1,242
Accrued interest receivable		2,042		2,132
Cash surrender value of life insurance policies		3,974		3,854
Deferred taxes		472		2,540
Other assets		2,713		3,947
Total Assets	$	618,958	$	575,470
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	82,425	$	71,565
Demand (interest bearing)		71,303		63,258
Money market		122,184		77,089
Savings and other		97,405		93,324
Certificates of deposit		105,274		125,053
Total deposits		478,591		430,289
Repurchase agreements		14,787		13,190
Federal Home Loan Bank of Boston advances		55,033		72,812
Accrued interest and other liabilities		3,160		4,163
Total Liabilities		551,571		520,454
Commitments and contingencies		-		-
Shareholders' Equity
Preferred stock - $.01 per share par value
Authorized: 25,000; Issued: 16,000 (Series B) and 8,816 (Series A);
Liquidation preference: $1,000 per share		16,000		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		37,553		36,567
Accumulated other comprehensive loss, net		326		(3,769	)
Total Shareholders' Equity		67,387		55,016
Total Liabilities and Shareholders' Equity	$	618,958	$	575,470

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

	Three months ended						Nine months ended
Periods ended September 30, (in thousands except per share amounts) unaudited	2011			2010			2011			2010
Interest and dividend income
Interest and fees on loans	$	4,630		$	4,693		$	13,989		$	13,780
Interest on debt securities
Taxable		743			913			2,268			2,872
Tax exempt		553			558			1,661			1,678
Other interest and dividends		30			42			96			126
Total interest and dividend income		5,956			6,206			18,014			18,456
Interest expense
Deposits		748			1,061			2,449			3,385
Repurchase agreements		19			25			46			71
Federal Home Loan Bank of Boston advances		565			765			1,772			2,283
Total interest expense		1,332			1,851			4,267			5,739
Net interest income		4,624			4,355			13,747			12,717
Provision for loan losses		180			180			860			620
Net interest and dividend income after provision for loan losses		4,444			4,175			12,887			12,097
Non-interest income
Trust and wealth advisory		599			471			1,861			1,507
Service charges and fees		534			528			1,555			1,480
Gains on sales of mortgage loans, net		178			278			370			443
Mortgage servicing, net		(35	)		(33	)		(8	)		27
Gains on securities, net		-			16			11			16
Other		58			62			176			208
Total non-interest income		1,334			1,322			3,965			3,681
Non-interest expense
Salaries		1,816			1,750			5,202			4,989
Employee benefits		636			522			1,919			1,737
Premises and equipment		582			559			1,733			1,570
Data processing		366			308			1,028			1,080
Professional fees		307			393			887			1,248
Collections and OREO		152			12			519			63
FDIC insurance		137			195			541			549
Marketing and community support		85			79			245			200
Amortization of intangibles		56			56			167			167
Other		398			440			1,149			1,268
Total non-interest expense		4,535			4,314			13,390			12,871
Income before income taxes		1,243			1,183			3,462			2,907
Income tax provision		204			236			598			487
Net income	$	1,039		$	947		$	2,864		$	2,420
Net income available to common shareholders	$	865		$	832		$	2,459		$	2,073

Basic and diluted earnings per share	$	0.51		$	0.49		$	1.46		$	1.23
Common dividends per share		0.28			0.28			0.84			0.84

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

	Common Stock														Accumulated other comp-			Total
(dollars in thousands) unaudited	Shares		Amount		Preferred Stock			Warrants		Paid-in capital		Retained earnings			rehensive income (loss)			share- holders' 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		-		-		-			-		-		2,420			-			2,420
Other comprehensive income, net of tax		-		-		-			-		-		-			4,380			4,380
Total comprehensive income																			6,800
Amortization (accretion) of preferred stock		-		-		16			-		-		(16	)		-			-
Common stock dividends paid		-		-		-			-		-		(1,417	)		-			(1,417	)
Preferred stock dividends paid		-		-		-			-		-		(331	)		-			(331	)
Issuance of common stock for director fees		960		-		-			-		23		-			-			23
Balances at September 30, 2010		1,687,661	$	168	$	8,733		$	112	$	13,200	$	35,915		$	(698	)	$	57,430

Balances at December 31, 2010		1,687,661	$	168	$	8,738		$	112	$	13,200	$	36,567		$	(3,769	)	$	55,016
Net income for period		-		-		-			-		-		2,864			-			2,864
Other comprehensive income, net of tax		-		-		-			-		-		-			4,095			4,095
Total comprehensive income																			6,959
Amortization (accretion) of preferred stock		-		-		78			-		-		(78	)		-			-
Issuance of Series B preferred stock		-		-		16,000			-		-		-			-			16,000
Redemption of Series A preferred stock		-		-		(8,816	)		-		-		-			-			(8,816	)
Common stock dividends paid		-		-		-			-		-		(1,418	)		-			(1,418	)
Preferred stock dividends paid		-		-		-			-		-		(382	)		-			(382	)
Issuance of common stock for director fees		1,070		1		-			-		27		-			-			28
Balances September 30, 2011		1,688,731	$	169	$	16,000		$	112	$	13,227	$	37,553		$	326		$	67,387

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30, (in thousands) unaudited	2011			2010
Operating Activities
Net income	$	2,864		$	2,420
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion), amortization and depreciation
Securities		222			408
Bank premises and equipment		631			632
Core deposit intangible		167			167
Mortgage servicing rights		165			118
Fair value adjustment on loans		33			33
Gain of calls of securities available-for-sale		(11	)		(16	)
Write down of other real estate owned		231			-
Provision for loan losses		860			620
Decrease (increase) in loans held-for-sale		127			(1,518	)
Increase in deferred loan origination fees and costs, net		(122	)		(157	)
Mortgage servicing rights originated		(180	)		(226	)
Increase in mortgage servicing rights impairment reserve		80			51
Decrease in interest receivable		90			188
Deferred tax benefit		(41	)		(23	)
Decrease in prepaid expenses		371			529
Increase in cash surrender value of life insurance policies		(120	)		(127	)
Decrease (increase) in income tax receivable		728			(291	)
Decrease in other assets		9			103
(Decrease) increase in accrued expenses		(235	)		202
Decrease in interest payable		(152	)		(73	)
Decrease in other liabilities		(607	)		(169	)
Issuance of shares for directors’ fee		28			23
Net cash provided by operating activities		5,138			2,894
Investing Activities
Proceeds from maturities of interest-bearing time deposits		5,000			-
Purchases of securities available-for-sale		(35,729	)		(42,987	)
Proceeds from calls of securities available-for-sale		27,560			20,734
Proceeds from maturities of securities available-for-sale		10,457			23,115
Proceeds from maturities of securities held-to-maturity		4			4
Loan originations and principle collections, net		(11,569	)		(13,373	)
Recoveries of loans previously charged-off		55			21
Proceeds from sale of other real estate owned		655			-
Capital expenditures		(504	)		(2,005	)
Net cash (utilized) by investing activities		(4,071	)		(14,491	)
Financing Activities
Increase in deposit transaction accounts, net		68,081			36,879
Decrease in time deposits, net		(19,779	)		(23,561	)
Increase in securities sold under agreements to repurchase, net		1,596			4,918
Principal payments on Federal Home Loan Bank of Boston advances		(17,779	)		(1,832	)
Redemption of Series A preferred stock		(8,816	)		-
Proceeds from issuance of Series B preferred stock		16,000			-
Common stock dividends paid		(1,418	)		(1,417	)
Preferred stock dividends paid		(343	)		(331	)
Net cash provided by financing activities		37,542			14,656
Net increase in cash and cash equivalents		38,609			3,059
Cash and cash equivalents, beginning of period		26,908			43,298
Cash and cash equivalents, end of period	$	65,517		$	46,357
Cash paid during period
Interest	$	4,419		$	5,815
Income taxes		(89	)		173
Non-cash transfers
Transfer from loans to other real estate owned		314			-

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 September 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. The adoption of ASU 2011-05 is not expected to have a material impact on Salisbury’s consolidated financial position, results of operations or cash flows.

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. The adoption of ASU 2011-04 is not expected to have a material impact on Salisbury’s consolidated financial position, results of operations or cash flows.

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 were applied retrospectively to the beginning of the annual 2011 period. The adoption of ASU 2011-02 did not have a material impact on Salisbury’s consolidated financial position, results of operations or cash flows.

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. The adoption of ASU 2011-03 is not expected to have a material impact on Salisbury’s consolidated financial position, results of operations or cash flows.

NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)	Amortized cost (1)		Gross un- realized gains		Gross un- realized losses			Fair value
September 30, 2011
Available-for-sale
U.S. Treasury notes	$	5,000	$	562	$	-		$	5,562
U.S. Government Agency notes		14,559		478		-			15,037
Municipal bonds		50,857		1,019		(1,280	)		50,596
Mortgage backed securities
U.S. Government Agencies		50,098		1,266		(7	)		51,357
Collateralized mortgage obligations
U.S. Government Agencies		7,562		60		-			7,622
Non-agency		15,785		337		(440	)		15,682
SBA bonds		3,857		89		-			3,946
Corporate bonds		1,097		15		-			1,112
Preferred Stock		20		144		-			164
Total securities available-for-sale	$	148,835	$	3,970	$	(1,727	)	$	151,078
Held-to-maturity
Mortgage backed security	$	52	$	2	$	-		$	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 nine month periods ended September 30, 2011 and 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
(in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
September 30, 2011
Available-for-sale
U.S. Government Agency notes	$	-	$	-	$	-	$	-	$	-	$	-
Municipal Bonds		1,557		41		9,814		1,239		11,371		1,280
Mortgage backed securities		36		1		5,196		6		5,232		7
Collateralized mortgage obligations
U.S. Government Agencies		-		-		-		-		-		-
Non-agency		1,752		78		1,904		190		3,656		268
Total temporarily impaired securities		3,345		120		16,914		1,435		20,259		1,555
Other-than-temporarily impaired securities
Collateralized mortgage obligations
Non-agency		3,586		110		713		62		4,299		172
Total temporarily impaired and other-than-
temporarily impaired securities	$	6,931	$	230	$	17,627	$	1,497	$	24,558	$	1,727

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 September 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 September 30, 2011.

Municipal bonds: Contractual cash flows are performing as expected. Salisbury purchased substantially all of these securities during 2006-to-2008 as bank qualified, insured, AAA rated general obligation or revenue bonds. Salisbury’s portfolio is mostly comprised of tax-exempt general obligation bonds or public-purpose revenue bonds for schools, municipal offices, sewer infrastructure and fire houses, for small towns and municipalities across the United States. In the wake of the financial crisis, most monoline bond insurers had their ratings downgraded or withdrawn because of excessive exposure to insurance for collateralized debt obligations. Salisbury performed credit underwriting reviews of certain issuers, including some that have had their ratings withdrawn and 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 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 September 30, 2011.

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at September 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 the four remaining securities not to have additional OTTI and all other CMO securities not to be OTTI as of September 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:

Nine months ended September 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 September 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)	September 30, 2011			December 31, 2010
Residential 1-4 family	$	180,215		$	173,931
Residential 5+ multifamily		2,798			2,889
Construction of residential 1-4 family		8,065			8,949
Home equity credit		34,632			34,164
Residential real estate		225,710			219,933
Commercial		81,458			75,495
Construction of commercial		5,802			7,312
Commercial real estate		87,260			82,807
Farm land		5,719			5,690
Vacant land		12,685			12,979
Real estate secured		331,374			321,409
Commercial and industrial		27,460			25,123
Municipal		2,549			4,338
Consumer		4,578			4,677
Loans receivable, gross		365,961			355,547
Deferred loan origination fees and costs, net		945			822
Allowance for loan losses		(4,027	)		(3,920	)
Loans receivable, net	$	362,879		$	352,449
Loans held-for-sale
Residential 1-4 family	$	1,057		$	1,184

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate secured loans located principally in northwestern Connecticut and adjacent 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 credit risk rating is as follows:

September 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Residential 1-4 family	$	161,987	$	12,556	$	5,672	$	-	$	-	$	180,215
Residential 5+ multifamily		2,272		526		-		-		-		2,798
Construction of residential 1-4 family		3,932		415		3,718		-		-		8,065
Home equity credit		31,850		1,502		1,280		-		-		34,632
Residential real estate		200,041		14,999		10,670		-		-		225,710
Commercial		63,923		5,252		12,283		-		-		81,458
Construction of commercial		5,136		195		471		-		-		5,802
Commercial real estate		69,059		5,447		12,754		-		-		87,260
Farm land		3,105		1,774		840		-		-		5,719
Vacant land		7,686		888		4,111		-		-		12,685
Real estate secured		279,891		23,108		28,375		-		-		331,374
Commercial and industrial		19,551		6,320		1,589		-		-		27,460
Municipal		2,549		-		-		-		-		2,549
Consumer		4,314		199		65		-		-		4,578
Loans receivable, gross	$	306,305	$	29,627	$	30,029	$	-	$	-	$	365,961

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

September 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Performing loans	$	306,039	$	29,460	$	-	$	-	$	-	$	335,499
Potential problem loans		-		-		14,499		-		-		14,499
Troubled debt restructurings – accruing		266		167		1,619		-		-		2,052
Troubled debt restructurings - non-accrual		-		-		7,360		-		-		7,360
Other non-accrual loans		-		-		6,551		-		-		6,551
Impaired loans		266		167		15,530		-		-		15,963
Loans receivable, gross	$	306,305	$	29,627	$	30,029	$	-	$	-	$	365,961

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)	September 30, 2011		December 31, 2010
Troubled debt restructurings – accruing	$	2,052	$	5,330
Troubled debt restructurings - non-accrual		7,360		4,254
All other non-accrual loans		6,551		5,791
Impaired loans	$	15,963	$	15,375
Commitments to lend additional amounts to impaired borrowers	$	-	$	-

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

September 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Current	$	303,894	$	26,668	$	17,490	$	-	$	-	$	348,052
Past due 001-029		1,606		2,386		4,769		-		-		8,761
Past due 030-059		306		364		1,323		-		-		1,993
Past due 060-089		499		209		141		-		-		849
Past due 090-179		-		-		729		-		-		729
Past due 180+		-		-		5,577		-		-		5,577
Loans receivable, gross	$	306,305	$	29,627	$	30,029	$	-	$	-	$	365,961

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

			Past due
September 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	$	174,697	$	4,210	$	382	$	122	$	96	$	709	$	1,309	$	-	$	5,752
Residential 5+ multifamily		2,640		-		158		-		-		-		158		-		-
Residential 1-4 family construction		7,366		-		699		-		-		-		699		-		-
Home equity credit		33,533		768		147		93		52		39		331		-		248
Residential real estate		218,236		4,978		1,386		215		148		748		2,497		-		6,000
Commercial		76,590		2,735		507		623		120		883		2,133		-		3,084
Construction of commercial		5,801		-		-		-		-		-		-		-		-
Commercial real estate		82,391		2,735		507		623		120		883		2,133		-		3,084
Farm land		5,276		443		-		-		-		-		-		-		-
Vacant land		8,600		227		-		-		461		3,397		3,858		-		3,858
Real estate secured		314,503		8,383		1,893		838		729		5,028		8,488		-		12,942
Commercial and industrial		26,626		220		65		-		-		549		614		-		969
Municipal		2,549		-		-		-		-		-		-		-		-
Consumer		4,374		158		35		11		-		-		46		-		-
Loans receivable, gross	$	348,052	$	8,761	$	1,993	$	849	$	729	$	5,577	$	9,148	$	-	$	13,911

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

	Three month period						Nine month period
Periods ended September 30, 2011 (in thousands)	Quantity		Pre- modification balance		Post- modification balance		Quantity		Pre- modification balance		Post- modification balance
Residential real estate		-	$	-	$	-		2	$	1,233	$	1,260
Commercial real estate		-		-		-		1		20		55
Commercial and industrial		-		-		-		2		262		273
Troubled debt restructurings		-	$	-	$	-		5	$	1,515	$	1,588

There were no troubled debt restructurings during third quarter 2011 and five during year-to-date 2011. There were no defaults during third quarter 2011 or year-to-date 2011 of loans restructured within the past twelve months.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Three months ended September 30												Nine months ended September 30
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision			Charge -offs			Reco- veries		Ending balance
2011 Periods
Residential	$	1,583	$	73		$	(50	)	$	-	$	1,606	$	1,504	$	269		$	(170	)	$	3	$	1,606
Commercial		1,239		(145	)		(30	)		1		1,065		1,132		138			(206	)		1		1,065
Land		271		179			(75	)		-		375		392		137			(154	)		-		375
Real estate		3,093		107			(155	)		1		3,046		3,028		544			(530	)		4		3,046
Commercial & industrial		521		(92	)		-			29		458		541		(22	)		(89	)		29		459
Municipal		28		(3	)		-			-		25		51		(26	)		-			-		25
Consumer		90		8			(10	)		3		91		164		94			(189	)		22		91
Unallocated		247		160			-			-		407		136		270			-			0		406
Totals	$	3,979	$	180		$	(165	)	$	33	$	4,027	$	3,920	$	860		$	(808	)	$	55	$	4,027
2010 Periods
Totals	$	3,768	$	180		$	(109	)	$	8	$	3,847	$	3,473