SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2012

OR

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

 

FOR THE TRANSITION PERIOD FROM ________ TO ________

 

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Connecticut 06-1514263
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5 Bissell Street, Lakeville, CT 06039
(Address of principal executive offices) (Zip code)

(860) 435-9801

(Registrant's telephone number, including area code)

 

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

Yes ý 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 ý No o

 

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 ý

 

The number of shares of Common Stock outstanding as of May 10, 2012 is 1,688,731.

 

1
 

TABLE OF CONTENTS

 

    Page
     
  PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited):  
     
  Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 3
     
  Consolidated Statements of Income for the three month period ended March 31, 2012 and 2011 4
     
  Consolidated Statements of Comprehensive Income for the three month period ended March 31, 2012 and 2011 5
     
  Consolidated Statements of Changes in Shareholders' Equity for the three month period ended March 31, 2012 and 2011 5
     
  Consolidated Statements of Cash Flows for the three month period ended March 31, 2012 and 2011 6
     
  Notes to Consolidated Financial Statements 7
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures of Market Risk 35
     
Item 4. Controls and Procedures 37
     
  PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3. Defaults upon Senior Securities 38
Item 4. Mine Safety Disclosures 38
Item 5. Other Information 38
Item 6. Exhibits 38

 

 

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PART I - FINANCIAL INFORMATION

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share data)  March 31, 2012   December 31, 2011 
ASSETS          
Cash and due from banks  $4,783   $4,829 
Interest bearing demand deposits with other banks   33,540    32,057 
Total cash and cash equivalents   38,323    36,886 
Securities          
  Available-for-sale at fair value   145,919    155,794 
  Held-to-maturity at amortized cost (fair value: $ - and $52)   —    50 
  Federal Home Loan Bank of Boston stock at cost   5,747    6,032 
Loans held-for-sale   1,308    948 
Loans receivable, net (allowance for loan losses: $4,166 and $4,076)   371,709    370,766 
Other real estate owned   —    2,744 
Bank premises and equipment, net   11,861    12,023 
Goodwill   9,829    9,829 
Intangible assets (net of accumulated amortization: $1,579 and $1,523)   964    1,020 
Accrued interest receivable   2,789    2,126 
Cash surrender value of life insurance policies   7,104    7,037 
Deferred taxes   579    829 
Other assets   2,818    3,200 
       Total Assets  $598,950   $609,284 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
  Demand (non-interest bearing)  $88,588   $82,202 
  Demand (interest bearing)   64,563    66,332 
  Money market   119,944    124,566 
  Savings and other   98,232    94,503 
  Certificates of deposit   101,359    103,703 
       Total deposits   472,686    471,306 
Repurchase agreements   10,359    12,148 
Federal Home Loan Bank of Boston advances   43,207    54,615 
Accrued interest and other liabilities   4,631    4,353 
       Total Liabilities   530,883    542,422 
Commitments and contingencies   —    — 
Shareholders' Equity          
  Preferred stock - $.01 per share par value          
       Authorized: 25,000; Issued: 16,000 (Series B);          
       Liquidation preference: $1,000 per share   16,000    16,000 
  Common stock - $.10 per share par value          
       Authorized: 3,000,000;          
       Issued: 1,688,731 and 1,688,731   169    169 
  Paid-in capital   13,134    13,134 
  Retained earnings   38,958    38,264 
  Accumulated other comprehensive loss, net   (194)   (705)
       Total Shareholders' Equity   68,067    66,862 
       Total Liabilities and Shareholders' Equity  $598,950   $609,284 
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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

   Three months ended 
Periods ended March 31, (in thousands except per share amounts) unaudited  2012   2011 
Interest and dividend income          
Interest and fees on loans  $4,595   $4,664 
Interest on debt securities          
   Taxable   716    783 
   Tax exempt   534    554 
Other interest and dividends   13    38 
   Total interest and dividend income   5,858    6,039 
Interest expense          
Deposits   667    871 
Repurchase agreements   13    15 
Federal Home Loan Bank of Boston advances   495    646 
   Total interest expense   1,175    1,532 
Net interest and dividend income   4,683    4,507 
Provision for loan losses   180    330 
   Net interest and dividend income after provision for loan losses   4,503    4,177 
Non-interest income          
Trust and wealth advisory   755    667 
Service charges and fees   521    499 
Gains on sales of mortgage loans, net   372    133 
Mortgage servicing, net   (84)   32 
Gains on securities, net   12    11 
Other   83    59 
   Total non-interest income   1,659    1,401 
Non-interest expense          
Salaries   1,710    1,729 
Employee benefits   690    634 
Premises and equipment   605    583 
Data processing   402    377 
Professional fees   313    280 
Collections and OREO   111    126 
FDIC insurance   128    223 
Marketing and community support   87    68 
Amortization of intangibles   56    56 
Other   398    348 
   Total non-interest expense   4,500    4,424 
Income before income taxes   1,662    1,154 
Income tax provision   412    211 
Net income  $1,250   $943 
Net income available to common shareholders  $1,167   $828 
           
Basic and diluted earnings per common share  $0.69   $0.49 
Common dividends per share   0.28    0.28 

 

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

   Three months ended 
Periods ended March 31, (in thousands)  2012   2011 
Net income  $1,250   $943 
Other comprehensive income          
  Net unrealized gains on securities available-for-sale   725    837 
  Reclassification of net realized gains in net income   12    11 
  Unrealized gains on securities available-for-sale   737    848 
  Income tax expense   (250)   (288)
       Unrealized gains on securities available-for-sale, net of tax   487    560 
  Pension plan income   36    17 
  Income tax expense   (12)   (6)
       Pension plan income, net of tax   24    11 
Other comprehensive income, net of tax   511    571 
Comprehensive income  $1,761   $1,514 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

   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, 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 
Balances at December 31, 2011   1,688,731   $169   $16,000   $—   $13,134   $38,264   $(705)  $66,862 
Net income for year   —    —    —    —    —    1,250    —    1,250 
Other comprehensive income, net of tax   —    —    —    —    —    —    511    511 
   Total comprehensive income                                      1,761 
Common stock dividends declared   —    —    —    —    —    (473)   —    (473)
Preferred stock dividends declared   —    —    —    —    —    (83)   —    (83)
Balances at March 31, 2012   1,688,731   $169   $16,000   $—   $13,134   $38,958   $(194)  $68,067 

 

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three months ended March 31, (in thousands) unaudited  2012   2011 
Operating Activities        
Net income  $1,250   $943 
Adjustments to reconcile net income to net cash provided by operating activities:          
   (Accretion), amortization and depreciation          
       Securities   181    62 
       Bank premises and equipment   225    206 
       Core deposit intangible   56    56 
       Mortgage servicing rights   77    58 
       Fair value adjustment on loans   8    11 
Gains on calls of securities available-for-sale   (12)   (11)
Write down of other real estate owned   —    57 
Losses on sale/disposals of premises and equipment   (1)   — 
Loss recognized on other real estate owned   (1)   — 
   Provision for loan losses   180    330 
   (Increase) decrease in loans held-for-sale   (360)   998 
   Decrease (increase) in deferred loan origination fees and costs, net   6    (57)
   Mortgage servicing rights originated   (180)   (77)
   Increase (decrease) in mortgage servicing rights impairment reserve   92    (2)
   (Increase) decrease in interest receivable   (663)   130 
   Deferred tax benefit   (13)   (14)
   (Increase) decrease in prepaid expenses   (1)   73 
   Increase in cash surrender value of life insurance policies   (67)   (39)
   Decrease in income tax receivable   389    224 
   Decrease in other assets   6    25 
   Decrease in accrued expenses   300    537 
   Decrease in interest payable   (30)   (101)
   Increase (decrease) in other liabilities   16    (143)
       Net cash provided by operating activities   1,458    3,266 
Investing Activities          
Redemption of Federal Home Loan Bank stock   285    — 
Proceeds from calls of securities available-for-sale   3,820    22,997 
Proceeds from maturities of securities available-for-sale   6,623    — 
Proceeds from maturities of securities held-to-maturity   50    1 
Loan originations and principle collections, net   (147)   (9,394)
Recoveries of loans previously charged-off   10    7 
Proceeds from sale of other real estate owned   1,744    — 
Capital expenditures   (54)   (327)
        Net cash provided by investing activities   12,331    13,284 
Financing Activities          
Increase in deposit transaction accounts, net   3,725    32,640 
Decrease in time deposits, net   (2,345)   (10,550)
Decrease in securities sold under agreements to repurchase, net   (1,789)   (4,949)
Principal payments on Federal Home Loan Bank of Boston advances   (11,408)   (16,925)
Common stock dividends paid   (473)   (473)
Preferred stock dividends paid   (62)   (110)
       Net cash provided by financing activities   (12,352)   (367)
Net increase in cash and cash equivalents   1,437    16,183 
Cash and cash equivalents, beginning of period   36,886    26,908 
Cash and cash equivalents, end of period  $38,323   $43,091 
Cash paid during period          
   Interest  $1,205   $633 
   Income taxes   788    449 
Non-cash transfers          
Transfer from loans to other real estate owned   —    314 
From other real estate owned to loans   1,000    — 
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Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - BASIS OF PRESENTATION

The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Salisbury and the statements of income, 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 March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2011 Annual Report on Form 10-K for the period ended December 31, 2011.

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 December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-12 did not have a material impact on Salisbury’s consolidated financial position, results of operations or cash flows.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This ASU is to enhance current disclosures. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendments in this ASU are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of ASU 2011-11 is not expected to have a material impact on Salisbury’s consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other”, an update to ASC 350, “Intangibles – Goodwill and Other.” ASU 2011-08 simplifies how entities, both public and nonpublic, test goodwill for impairment. The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. For public and nonpublic entities, the amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of ASU 2011-08 is not expected to have a material impact on Salisbury’s consolidated financial position, results of operations or cash flows.

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 did not have a material impact on Salisbury’s consolidated financial position, results of operations or cash flows.

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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 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 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 2011-02, “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 2011 annual 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.

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, 2012                    
Available-for-sale                    
U.S. Treasury notes  $5,000   $450   $—   $5,450 
U.S. Government Agency notes   14,530    300    —    14,830 
Municipal bonds   47,103    1,421    (826)   47,698 
Mortgage backed securities                    
   U.S. Government Agencies   52,954    1,076    (1)   54,029 
Collateralized mortgage obligations                    
   U.S. Government Agencies   6,590    50    —    6,640 
   Non-agency   13,526    370    (236)   13,660 
SBA bonds   3,409    85    —    3,494 
Preferred Stock   20    98    —    118 
   Total securities available-for-sale  $143,132   $3,850   $(1,063)  $145,919 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $5,747   $—   $—   $5,747 
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(in thousands)  Amortized
cost (1)		   Gross un-
realized gains		   Gross un-
realized losses		   Fair value 
December 31, 2011                    
Available-for-sale                    
U.S. Treasury notes  $5,000   $528   $—   $5,528 
U.S. Government Agency notes   14,544    380    —    14,924 
Municipal bonds   50,881    1,067    (1,152)   50,796 
Mortgage backed securities                    
   U.S. Government Agencies   57,193    1,126    (19)   58,300 
Collateralized mortgage obligations                    
   U.S. Government Agencies   7,077    76    —    7,153 
   Non-agency   14,300    355    (488)   14,167 
SBA bonds   3,629    77    —    3,706 
Corporate bonds   1,100    4    —    1,104 
Preferred Stock   20    96    —    116 
   Total securities available-for-sale  $153,744   $3,709   $(1,659)  $155,794 
Held-to-maturity                    
Mortgage backed security  $50   $2   $—   $52 
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, 2012 and 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, 2012                              
Available-for-sale                              
Municipal Bonds  $3,785   $38   $5,382   $788   $9,167   $826 
Mortgage backed securities   4,289    —    55    1    4,344    1 
Collateralized mortgage obligations                              
   Non-agency   1,598    21    1,080    53    2,678    74 
Total temporarily impaired securities   9,672    59    6,517    842    16,189    901 
Other-than-temporarily impaired securities                              
   Collateralized mortgage obligations                              
       Non-agency   2,131    87    1,526    75    3,657    162 
   Total temporarily and other-than-temporarily impaired securities  $11,803   $146   $8,043   $917   $19,846   $1,063 

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, 2012.

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, 2012.

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Municipal bonds: Contractual cash flows are performing as expected. Salisbury purchased substantially all of these securities during 2006-to-2008 as bank qualified, insured, AAA rated general obligation or revenue bonds. Salisbury’s portfolio is mostly comprised of tax-exempt general obligation bonds or public-purpose revenue bonds for schools, municipal offices, sewer infrastructure and fire houses, for small towns and municipalities across the United States. In the wake of the financial crisis, most monoline bond insurers had their ratings downgraded or withdrawn because of excessive exposure to insurance for collateralized debt obligations. Where appropriate, Salisbury performs credit underwriting reviews of issuers, including some that have had their ratings withdrawn and are insured by insurers that have had their ratings withdrawn, to assess default risk. For all completed reviews pass credit risk ratings have been assigned. Management expects to recover the entire amortized cost basis of these securities. 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, 2012.

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at March 31, 2012 to assess whether any of the securities were OTTI. Salisbury uses first 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 March 31, 2012. 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)  2012   2011 
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. In 2011, the FHLBB resumed modest quarterly cash dividends to its members and in early 2012 the FHLBB repurchase its excess stock pool. 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, 2012. 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, 2012   December 31, 2011 
   Residential 1-4 family  $187,985   $187,676 
   Residential 5+ multifamily   3,155    3,187 
   Construction of residential 1-4 family   5,235    5,305 
   Home equity credit   34,523    34,621 
Residential real estate   230,898    230,789 
   Commercial   81,604    81,958 
   Construction of commercial   7,517    7,069 
Commercial real estate   89,121    89,027 
Farm land   3,860    4,925 
Vacant land   12,737    12,828 
Real estate secured   336,616    337,569 
Commercial and industrial   31,081    29,358 
Municipal   2,729    2,415 
Consumer   4,451    4,496 
Loans receivable, gross   374,877    373,838 
Deferred loan origination fees and costs, net   998    1,004 
Allowance for loan losses   (4,166)   (4,076)
Loans receivable, net  $371,709   $370,766 
Loans held-for-sale          
   Residential 1-4 family  $1,308   $948 

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.

Credit Quality

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

(in thousands)  Pass   Special mention   Substandard   Doubtful   Loss   Total 
March 31, 2012                              
   Residential 1-4 family  $170,462   $13,646   $3,877   $—   $—   $187,985 
   Residential 5+ multifamily   2,724    431    —    —    —    3,155 
   Construction of residential 1-4 family   4,034    415    786    —    —    5,235 
   Home equity credit   31,332    1,524    1,667    —    —    34,523 
Residential real estate   208,552    16,016    6,330    —    —    230,898 
   Commercial   62,620    8,156    10,828    —    —    81,604 
   Construction of commercial   6,744    302    471    —    —    7,517 
Commercial real estate   69,364    8,458    11,299    —    —    89,121 
Farm land   2,300    347    1,213    —    —    3,860 
Vacant land   8,001    878    3,858    —    —    12,737 
Real estate secured   288,217    25,699    22,700    —    —    336,616 
Commercial and industrial   22,331    6,539    2,211    —    —    31,081 
Municipal   2,729    —    —    —    —    2,729 
Consumer   4,243    153    55    —    —    4,451 
Loans receivable, gross  $317,520   $32,391   $24,966   $—   $—   $374,877 
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(in thousands)  Pass   Special mention   Substandard   Doubtful   Loss   Total 
December 31, 2011                              
   Residential 1-4 family  $168,326   $15,517   $3,833   $—   $—   $187,676 
   Residential 5+ multifamily   2,752    435    —    —    —    3,187 
   Construction of residential 1-4 family   4,116    415    774    —    —    5,305 
   Home equity credit   31,843    1,451    1,327    —    —    34,621 
Residential real estate   207,037    17,818    5,934    —    —    230,789 
   Commercial   64,458    6,187    11,313    —    —    81,958 
   Construction of commercial   6,296    302    471    —    —    7,069 
Commercial real estate   70,754    6,489    11,784    —    —    89,027 
Farm land   2,327    1,768    830    —    —    4,925 
Vacant land   8,039    883    3,906    —    —    12,828 
Real estate secured   288,157    26,958    22,454    —    —    337,569 
Commercial and industrial   21,104    6,847    1,407    —    —    29,358 
Municipal   2,415    —    —    —    —    2,415 
Consumer   4,254    178    64    —    —    4,496 
Loans receivable, gross  $315,930   $33,983   $23,925   $—   $—   $373,838 

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

(in thousands)  Pass   Special mention   Substandard   Doubtful   Loss   Total 
March 31, 2012                              
Performing loans  $316,514   $30,624   $—   $—   $—   $347,138 
Potential problem loans   —    —    14,836    —    —    14,836 
Troubled debt restructurings: accruing   1,006    1,767    2,523    —    —    5,296 
Troubled debt restructurings: non-accrual   —    —    1,680    —    —    1,680 
Other non-accrual loans   —    —    5,927    —    —    5,927 
Impaired loans   1,006    1,767    10,130    —    —    12,903 
Loans receivable, gross  $317,520   $32,391   $24,966   $—   $—   $374,877 
December 31, 2011                              
Performing loans  $314,551   $32,570   $—   $—   $—   $347,121 
Potential problem loans   —    —    14,039    —    —    14,039 
Troubled debt restructurings: accruing   1,379    1,413    1,810    —    —    4,602 
Troubled debt restructurings: non-accrual   —    —    1,753    —    —    1,753 
Other non-accrual loans   —    —    6,323    —    —    6,323 
Impaired loans   1,379    1,413    9,886    —    —    12,678 
Loans receivable, gross  $315,930   $33,983   $23,925   $—   $—   $373,838 

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)  March 31, 2012   December 31, 2011 
Troubled debt restructurings: accruing  $5,296   $4,602 
Troubled debt restructurings: non-accrual   1,680    1,753 
All other non-accrual loans   5,927    6,323 
Impaired loans  $12,903   $12,678 
Commitments to lend additional amounts to impaired borrowers  $—   $— 
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The composition of loans receivable delinquency status by credit risk rating is as follows:

(in thousands)  Pass   Special mention   Substandard   Doubtful   Loss   Total 
March 31, 2012                              
Current  $311,798   $30,106   $11,412   $—   $—   $353,316 
Past due 001-029   4,899    1,168    4,408    —    —    10,475 
Past due 030-059   765    500    2,253    —    —    3,518 
Past due 060-089   58    617    266    —    —    941 
Past due 090-179   —    —    174    —    —    174 
Past due 180+   —    —    6,453    —    —    6,453 
Loans receivable, gross  $317,520   $32,391   $24,966   $—   $—   $374,877 
December 31, 2011                              
Current  $311,741   $31,407   $12,618   $—   $—   $355,766 
Past due 001-029   3,696    1,195    3,517    —    —    8,408 
Past due 030-059   435    1,024    674    —    —    2,133 
Past due 060-089   58    357    46    —    —    461 
Past due 090-179   —    —    1,095    —    —    1,095 
Past due 180+   —    —    5,975    —    —    5,975 
Loans receivable, gross  $315,930   $33,983   $23,925   $—   $—   $373,838 

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

       Past due     
(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		 
March 31, 2012                                             
   Residential 1-4 family  $181,806   $4,108   $969   $312   $152   $638   $2,071   $—   $1,300 
   Residential 5+ multifamily   2,999    —    —    156    —    —    156    —    — 
   Residential 1-4 family construction   5,090    145    —    —    —    —    —    —    — 
   Home equity credit   32,806    1,038    345    217    —    117    679    —    140 
Residential real estate   222,701    5,291    1,314    685    152    755    2,906    —    1,440 
   Commercial   73,969    4,333    1,632    58    —    1,612    3,302    —    1,755 
   Construction of commercial   7,351    —    —    145    —    21    166    —    21 
Commercial real estate   81,320    4,333    1,632    203    —    1,633    3,468    —    1,776 
Farm land   3,438    44    378    —    —    —    378    —    — 
Vacant land   9,002    72    —    50    —    3,613    3,663    —    3,613 
Real estate secured   316,461    9,740    3,324    938    152    6,001    10,415    —    6,829 
Commercial and industrial   29,776    672    159    —    22    452    633    —    778 
Municipal   2,729    —    —    —    —    —    —    —    — 
Consumer   4,350    63    35    3    —    —    38    —    — 
Loans receivable, gross  $353,316   $10,475   $3,518   $941   $174   $6,453   $11,086   $—   $7,607 
December 31, 2011                                             
   Residential 1-4 family  $182,263   $3,772   $811   $121   $—   $709   $1,641   $—   $1,240 
   Residential 5+ multifamily   2,918    —    112    157    —    —    269    —    — 
   Residential 1-4 family construction   5,305    —    —    —    —    —    —    —    — 
   Home equity credit   34,124    298    50    —    83    66    199         173 
Residential real estate   224,610    4,070    973    278    83    775    2,109    —    1,413 
   Commercial   75,486    3,887    483    180    930    992    2,585    —    2,317 
   Construction of commercial   6,796    108    145    —    20    —    165    —    20 
Commercial real estate   82,282    3,995    628    180    950    992    2,750    —    2,337 
Farm land   4,499    46    380    —    —    —    380    —    — 
Vacant land   9,047    73    50    —    —    3,658    3,708    —    3,658 
Real estate secured   320,438    8,184    2,031    458    1,033    5,425    8,947    —    7,408 
Commercial and industrial   28,542    152    51    1    62    550    664    —    668 
Municipal   2,415    —    —    —    —    —    —    —    — 
Consumer   4,371    72    51    2    —    —    53    —    — 
Loans receivable, gross  $355,766   $8,408   $2,133   $461   $1,095   $5,975   $9,664   $—   $8,076 

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Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

   March 31, 2012   March 31, 2011 
Three months ended
(in thousands)		  Quantity   Pre-modification
balance		   Post-modification
balance		   Quantity   Pre-modification
balance		   Post-modification
balance		 
   Residential real estate   1   $326   $326    —   $—   $— 
   Commercial and industrial   5    779    779    —    —    — 
Troubled debt restructurings   6   $1,105   $1,105    —   $—   $— 
   Rate reduction and term extension   2   $373   $373    —   $—   $— 
   Debt consolidation and term extension   3    706    706    —    —    — 
   Seasonal interest only concession   1    26    26    —    —    — 
Troubled debt restructurings   6   $1,105   $1,105    —   $—   $— 

Six loans were restructured during the quarter ended March 31, 2012 and all were current at March 31, 2012.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

   March 31, 2012   March 31, 2011 
Three months ended
(in thousands)		  Beginning
balance		   Provision   Charge-
offs		   Reco-
veries		   Ending
balance		   Beginning
balance		   Provision   Charge-
offs		   Reco-
veries		   Ending
balance		 
   Residential  $1,479   $39   $(18)  $—   $1,500   $1,504   $60   $(101)  $—   $1,463 
   Commercial   1,139    (79)   —    1    1,061    1,132    291    (80)   —    1,343 
   Land   410    (29)   (42)   —    339    392    (18)   (79)   —    295 
Real estate   3,028    (69)   (60)   1    2,900    3,028    333    (260)   —    3,101 
Commercial & industrial   704    100    (29)   3    778    541    (9)   —    —    532 
Municipal   24    4    —    —    28    51    4    —    —    55 
Consumer   79    59    (10)   5    133    164    16    (19)   7    168 
Unallocated   241    86    —    —    327    136    (14)   —    —    122 
Totals  $4,076   $180   $(99)  $9   $4,166   $3,920   $330   $(279)  $7   $3,978 

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

   Collectively evaluated   Individually evaluated   Total portfolio 
(in thousands)  Loans   Allowance   Loans   Allowance   Loans   Allowance 
March 31, 2012                              
   Residential 1-4 family  $183,741   $738   $4,244   $295   $187,985   $1,033 
   Residential 5+ multifamily   2,410    17    745    —    3,155    17 
   Construction of residential 1-4 family   5,235    21    —    —    5,235    21 
   Home equity credit   34,383    429    140    —    34,523    429 
Residential real estate   225,769    1,205    5,129    295    230,898    1,500 
   Commercial   75,146    858    6,458    102    81,604    960 
   Construction of commercial   7,496    81    21    21    7,517    102 
Commercial real estate   82,642    939    6,479    123    89,121    1,062 
Farm land   3,040    25    820    150    3,860    175 
Vacant land   8,977    104    3,760    60    12,737    164 
Real estate secured   320,428    2,273    16,188    628    336,616    2,901 
Commercial and industrial   29,083    384    1,998    394    31,081    778 
Municipal   2,729    28    —    —    2,729    28 
Consumer   4,241    42    210    91    4,451    133 
Unallocated allowance   —    —    —    —    —    326 
Totals  $356,481   $2,727   $18,396   $1,113   $374,877   $4,166 

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   Collectively evaluated   Individually evaluated   Total portfolio 
(in thousands)  Loans   Allowance   Loans   Allowance   Loans   Allowance 
December 31, 2011                              
   Residential 1-4 family  $182,695   $762   $4,981   $297   $187,676   $1,059 
   Residential 5+ multifamily   2,437    17    750    4    3,187    21 
   Construction of residential 1-4 family   4,606    17    699    —    5,305    17 
   Home equity credit   34,333    382    288    —    34,621    382 
Residential real estate   224,071    1,178    6,718    301    230,789    1,479 
   Commercial   74,419    840    7,539    202    81,958    1,042 
   Construction of commercial   7,049    77    20    20    7,069    97 
Commercial real estate   81,468    917    7,559    222    89,027    1,139 
Farm land   4,095    35    830    150    4,925    185 
Vacant land   9,021    104    3,807    120    12,828    224 
Real estate secured   318,655    2,234    18,914    793    337,569    3,027 
Commercial and industrial   28,091    368    1,267    336    29,358    704 
Municipal   2,415    24    —    —    2,415    24 
Consumer   4,431    44    65    35    4,496    79 
Unallocated allowance   —    —    —    —    —    242 
Totals  $353,592   $2,670   $20,246   $1,164   $373,838   $4,076 

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

   Collectively evaluated   Individually evaluated   Total portfolio 
(in thousands)  Loans   Allowance   Loans   Allowance   Loans   Allowance 
March 31, 2012                              
Performing loans  $346,929   $2,419   $210   $91   $347,139   $2,510 
Potential problem loans   9,552    308    5,284    242    14,836    550 
Impaired loans   —    —    12,902    780    12,902    780 
Unallocated allowance   —    —    —    —    —    326 
Totals  $356,481   $2,727   $18,396   $1,113   $374,877   $4,166 
December 31, 2011                              
Performing loans  $346,303   $2,436   $819   $35   $347,122   $2,471 
Potential problem loans   7,289    234    6,750    255    14,039    489 
Impaired loans   —    —    12,677    874    12,677    874 
Unallocated allowance   —    —    —    —    —    242 
Totals  $353,592   $2,670   $20,246   $1,164   $373,838   $4,076 

Certain data with respect to impaired loans individually evaluated is as follows:

   Impaired loans with specific allowance   Impaired loans with no specific allowance 
   Loan balance   Specific   Income   Loan balance   Income 
(in thousands)  Book   Note   Average   allowance   recognized   Book   Note   Average   recognized 
March 31, 2012                                             
   Residential 1-4 family  $1,950   $2,086   $2,369   $253   $45   $1,502   $1,524   $1,152   $7 
   Home equity credit   —    —    —    —    —    140    162    164    3 
Residential real estate   1,950    2,086    2,369    253    45    1,642    1,686    1,316    10 
Commercial   1,750    1,891    1,918    123    14    1,979    2,404    2,047    31 
Vacant land   134    154    479    10    2    3,479    4,245    3,167    — 
Real estate secured   3,834    4,131    4,766    386    61    7,100    8,335    6,530    41 
Commercial and industrial   747    828    724    394    —    1,222    1,894    687    28 
Consumer   —    —    —    —    —    —    143    —    — 
Totals  $4,581   $4,959   $5,490   $780   $61   $8,322   $10,372   $7,217   $69 

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   Impaired loans with specific allowance   Impaired loans with no specific allowance 
   Loan balance   Specific   Income   Loan balance   Income 
(in thousands)  Book   Note   Average   allowance   recognized   Book   Note   Average   recognized 
December 31, 2011                                             
   Residential 1-4 family  $3,012   $3,160   $1,822   $266   $38   $390   $426   $3,875   $— 
   Home equity credit   —    —    —    —    —    173    177    227    — 
Residential real estate   3,012    3,160    1,822    266    38    563    603    4,102    — 
Commercial   2,151    2,405    2,550    203    77    2,157    2,612    2,175    37 
Vacant land   594    774    639    70    —    3,063    3,627    3,243    — 
Real estate secured   5,757    6,339    5,011    539    115    5,783    6,842    9,520    37 
Commercial and industrial   560    639    364    335    —    577    1,221    876    16 
Consumer   —    —    —    —    —    —    142    14    — 
Totals  $6,317   $6,978   $5,375   $874   $115   $6,360   $8,205   $10,410   $53 

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)  2012   2011 
Residential mortgage loans serviced for others  $125,086   $101,636 
Fair value of mortgage servicing rights   754    948 

Changes in mortgage servicing rights are as follows:

   Three months 
Periods ended March 31, (in thousands)  2012   2011 
Loan Servicing Rights          
Balance, beginning of period  $772   $683 
Originated   177    77 
Amortization (1)   (77)   (59)
Balance, end of period   872    701 
Valuation Allowance          
Balance, beginning of period   (22)   (10)
(Increase) decrease in impairment reserve (1)   (92)   2 
Balance, end of period   (114)   (8)
Loan servicing rights, net  $758   $693 
(1)Amortization expense and changes in the impairment reserve are recorded in loan servicing fee income.

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, 2012   December 31, 2011 
Securities available-for-sale (at fair value)  $66,986   $68,839 
Loans receivable   112,589    132,720 
Total pledged assets  $179,575   $201,559 

At March 31, 2012, securities were pledged as follows: $46.3 million to secure public deposits, $18.3 million to secure repurchase agreements and $2.4 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:

Periods ended March 31, (in thousands, except per share amounts)  2012   2011 
Net income  $1,250   $943 
Preferred stock net accretion   —   (5)
Preferred stock dividends declared   (83)   (110)
Net income available to common shareholders  $1,167   $828 
Weighted average common stock outstanding - basic   1,689    1,688 
Weighted average common and common equivalent stock outstanding - diluted   1,689    1,688 
Earnings per common and common equivalent share          
   Basic  $0.69   $0.49 
   Diluted   0.69    0.49 

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, 2012, 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, 2012                              
Total Capital (to risk-weighted assets)                              
   Salisbury  $61,730    16.34%  $30,223    8.0%   n/a    — 
   Bank   51,661    13.49    30,652    8.0   $38,303    10.0%
Tier 1 Capital (to risk-weighted assets)                              
   Salisbury   57,468    15.21    15,111    4.0    n/a    — 
   Bank   47,420    12.38    15,321    4.0    22,982    6.0 
Tier 1 Capital (to average assets)                              
   Salisbury   57,468    9.72    23,661    4.0    n/a    — 
   Bank   47,420    8.02    23,636    4.0    29,546    5.0 
December 31, 2011                              
Total Capital (to risk-weighted assets)                              
   Salisbury  $60,869    15.97%  $30,490    8.0%   n/a    — 
   Bank   50,729    13.16    30,840    8.0   $38,550    10.0%
Tier 1 Capital (to risk-weighted assets)                              
   Salisbury   56,718    14.88    15,245    4.0    n/a    — 
   Bank   46,578    12.08    15,420    4.0    23,130    6.0 
Tier 1 Capital (to average assets)                              
   Salisbury   56,718    9.45    24,014    4.0    n/a    — 
   Bank   46,578    7.77    23,969    4.0    29,961    5.0 
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Restrictions on Cash Dividends to Common Shareholders

Salisbury's ability to pay cash dividends is substantially dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.

Federal Reserve Board (“FRB”) Supervisory Letter SR 09-4, February 24, 2009, revised March 27, 2009, notes that, as a general matter, the Board of Directors of a Bank Holding Company (“BHC”) should inform the FRB and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the FRB reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital structure.

Preferred Stock

In August 2011, Salisbury issued to the U.S. Secretary of the Treasury (the “Treasury”) $16,000,000 of its Series B Preferred Stock under the Small Business Lending Fund (the “SBLF”) program. The SBLF program is a $30 billion fund established under the Small Business Jobs Act of 2010 to encourage lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. The Preferred Stock qualifies as Tier 1 capital for regulatory purposes and ranks senior to the Common Stock.

The Series B Preferred Stock pays noncumulative dividends. The dividend rate on the Series B Preferred Stock for the initial quarterly dividend period ending September 30, 2011 and each of the next nine quarterly dividend periods the Series B Preferred Stock is outstanding is determined each quarter based on the increase in the Bank’s Qualified Small Business Lending. The dividend rate for the quarterly dividend period ended March 31, 2012 and December 31, 2011, were 2.10375% and 1.55925%, respectively. For the tenth quarterly dividend period through four and one-half years after its issuance, the dividend rate on the Series B Preferred Stock will be fixed at the rate in effect at the end of the ninth quarterly dividend period and after four and one-half years from its issuance the dividend rate will be fixed at 9 percent per annum. March 30, 2012, Salisbury declared a Series B Preferred Stock dividend of $83,000, payable on April 2, 2012. The Series B Preferred Stock is non-voting, other than voting rights on matters that could adversely affect the Series B Preferred Stock. The Series B Preferred Stock is redeemable at any time at one hundred percent of the issue price plus any accrued and unpaid dividends.

Simultaneously with the receipt of the SBLF capital, Salisbury repurchased for $8,816,000 all of its Series A Preferred Stock sold to the Treasury in 2009 under the Capital Purchase Program (“CPP”), a part of the Troubled Asset Relief Program of the Emergency Economic Stabilization Act of 2008, and made a payment for accrued dividends. The transaction resulted in net capital proceeds to Salisbury of $7,184,000, of which Salisbury invested $6,465,600, or 90%, in the Bank as Tier 1 Capital.

As part of the CPP, Salisbury had issued to the Treasury a 10-year Warrant to purchase 57,671 shares of Common Stock at an exercise price of $22.93 per share. The Warrant was repurchased for $205,000 on November 2, 2011 and simultaneously cancelled.

NOTE 8 – PENSION AND OTHER BENEFITS

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

   Three months 
Periods ended March 31, (in thousands)  2012   2011 
Service cost  $115   $95 
Interest cost on benefit obligation   93    93 
Expected return on plan assets   (115)   (106)
Amortization of prior service cost   —    — 
Amortization of net loss   36    17 
Net periodic benefit cost  $129   $99 

Salisbury’s 401(k) Plan contribution expense was $70,000 and $43,000, respectively, for the three month periods ended March 31, 2012 and 2011. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $11,000 and $12,000, respectively, for the three month periods ended March 31, 2012 and 2011.

NOTE 9 –COMPREHENSIVE INCOME

The components of accumulated other comprehensive losses are as follows:

March 31, (in thousands)  2012   2011 
Unrealized losses on securities available-for-sale, net of tax  $1,839   $(2,022)
Unrecognized pension plan expense, net of tax   (2,033)   (1,176)
Accumulated other comprehensive loss, net  $(194)  $(3,198)

NOTE 10 – FAIR VALUE OF ASSETS AND LIABILITIES

Salisbury uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, other assets are recorded at fair value on a nonrecurring basis, such as loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

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Salisbury adopted ASC 820-10, “Fair Value Measurements and Disclosures,” which provides a framework for measuring fair value under generally accepted accounting principles, in 2008. This guidance permitted Salisbury the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Salisbury did not elect fair value treatment for any financial assets or liabilities upon adoption.

In accordance with ASC 820-10, Salisbury groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury’s market assumptions. These two types of inputs have created the following fair value hierarchy

•Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
•Level 2. Significant other observable inputs. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from first party pricing services for identical or comparable assets or liabilities.
•Level 3. Significant unobservable inputs. Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following is a description of valuation methodologies for assets recorded at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

•Securities available-for-sale. Securities available-for-sale are recorded at fair value on a recurring basis. Level 1 securities include exchange-traded equity securities. Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of the U.S. Treasury and U.S. government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, municipal bonds, SBA bonds, corporate bonds and certain preferred equities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending first-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.
•Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3.
•Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.
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 Assets measured at fair value are as follows:

   Fair Value Measurements Using   Assets at 
(in thousands)  Level 1   Level 2   Level 3   fair value 
March 31, 2012                    
Assets at fair value on a recurring basis                    
   U.S. Treasury notes  $—   $5,450   $—   $5,450 
   U.S. Government agency notes   —    14,830    —    14,830 
   Municipal bonds   —    47,698    —    47,698 
   Mortgage-backed securities:                    
       U.S. Government agencies   —    54,029    —    54,029 
   Collateralized mortgage obligations:                    
       U.S. Government agencies   —    6,640    —    6,640 
       Non-agency   —    13,660    —    13,660