Edgar Filing: SALISBURY BANCORP INC

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

☐

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 [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 ☐ ☐ Accelerated filer ☐ ☐ Non-accelerated filer ☐ ☐ Smaller reporting company X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

The number of shares of Common Stock outstanding as of August 13, 2013 is 1,710,121.

TABLE OF CONTENTS

		Page
	PART I FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012	3
	Consolidated Statements of Income for the three and six month periods
	ended June 30, 2013 and 2012	4
	Consolidated Statements of Comprehensive Income for the three and six month periods
	ended June 30, 2013 and 2012	5
	Consolidated Statements of Changes in Shareholders' Equity for the six month
	period ended June 30, 2013 and 2012	5
	Consolidated Statements of Cash Flows for the six month period ended
	June 30, 2013 and 2012	6
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition
	and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42
	PART II OTHER INFORMATION

Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share data)	June 30, 2013			December 31, 2012
ASSETS
Cash and due from banks	$	6,051		$	9,545
Interest bearing demand deposits with other banks		26,909			34,029
Total cash and cash equivalents		32,960			43,574
Interest-bearing time deposits		4,233			—
Securities
Available-for-sale at fair value		106,610			126,287
Federal Home Loan Bank of Boston stock at cost		5,340			5,747
Loans held-for-sale		864			1,879
Loans receivable, net (allowance for loan losses: $4,632 and $4,360)		416,729			388,758
Other real estate owned		435			244
Bank premises and equipment, net		11,288			11,520
Goodwill		9,829			9,829
Intangible assets (net of accumulated amortization: $1,856 and $1,745)		687			798
Accrued interest receivable		2,002			1,818
Cash surrender value of life insurance policies		7,416			7,295
Deferred taxes		285			—
Other assets		2,034			3,064
Total Assets	$	600,712		$	600,813
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	90,203		$	98,850
Demand (interest bearing)		73,606			65,991
Money market		134,052			128,501
Savings and other		104,331			103,985
Certificates of deposit		89,848			93,888
Total deposits		492,040			491,215
Repurchase agreements		2,980			1,784
Federal Home Loan Bank of Boston advances		31,187			31,980
Deferred taxes		—			590
Accrued interest and other liabilities		3,016			3,247
Total Liabilities		529,223			528,816
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: 1,710,121 and 1,689,691		171			169
Paid-in capital		13,668			13,158
Retained earnings		41,279			40,233
Unearned Compensation - restricted stock awards		(415	)		—
Accumulated other comprehensive income, net		786			2,437
Total Shareholders' Equity		71,489			71,997
Total Liabilities and Shareholders' Equity	$	600,712		$	600,813

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three months ended					Six months ended
Periods ended June 30, (in thousands except per share amounts) unaudited	2013		2012			2013		2012
Interest and dividend income
Interest and fees on loans	$	4,470	$	4,582		$	8,898	$	9,178
Interest on debt securities
Taxable		468		659			941		1,375
Tax exempt		478		510			966		1,044
Other interest and dividends		18		15			36		27
Total interest and dividend income		5,434		5,766			10,841		11,624
Interest expense
Deposits		488		623			978		1,290
Repurchase agreements		1		6			2		19
Federal Home Loan Bank of Boston advances		312		451			624		946
Total interest expense		801		1,080			1,604		2,255
Net interest and dividend income		4,633		4,686			9,237		9,369
Provision for loan losses		240		180			636		360
Net interest and dividend income after provision for loan losses		4,393		4,506			8,601		9,009
Non-interest income
Trust and wealth advisory		824		735			1,549		1,490
Service charges and fees		575		547			1,092		1,068
Gains on sales of mortgage loans, net		153		263			431		635
Mortgage servicing, net		8		(5	)		34		(89	)
Gains on securities, net		—		267			—		279
Other		90		83			169		166
Total non-interest income		1,650		1,890			3,275		3,549
Non-interest expense
Salaries		1,835		1,748			3,585		3,458
Employee benefits⁽¹⁾		763		957			1,448		1,647
Premises and equipment		583		591			1,166		1,196
Data processing		367		418			787		821
Professional fees		309		303			689		616
Collections and OREO⁽²⁾		75		356			230		467
FDIC insurance		114		119			239		247
Marketing and community support		105		87			228		175
Amortization of intangibles		56		56			111		111
Other		403		390			833		788
Total non-interest expense		4,610		5,025			9,316		9,526
Income before income taxes		1,433		1,371			2,560		3,032
Income tax provision		289		254			476		666
Net income	$	1,144	$	1,117		$	2,084	$	2,366
Net income available to common shareholders	$	1,092	$	1,069		$	1,985	$	2,234

Basic earnings per common share	$	0.65	$	0.63		$	1.17	$	1.32
Diluted earnings per common share	$	0.65	$	0.63		$	1.17	$	1.32
Common dividends per share		0.28		0.28			0.56		0.56

⁽¹⁾ Included pension plan curtailment expense of $341,000 for the three and six month periods ended June 30, 2012.

⁽²⁾ Included litigation expense of $294,000 and $340,000, respectively, for the three and six month periods ended June 30, 2012

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three months ended						Six months ended
Periods ended June 30, (in thousands)	2013			2012			2013			2012
Net income	$	1,144		$	1,117		$	2,084		$	2,366
Other comprehensive (loss) income
Net unrealized (losses) gains on securities available-for-sale		(2,146	)		495			(2,502	)		1,219
Reclassification of net realized gains in net income		—			267			—			279
Unrealized (losses) gains on securities available-for-sale		(2,144	)		762			(2,502	)		1,498
Income tax benefit (expense)		730			(259	)		851			(509	)
Unrealized (losses) gains on securities available-for-sale, net of tax		(1,416	)		503			(1,651	)		989
Change in unrecognized pension plan costs		—			(96	)		—			(59	)
Income tax expense		—			33			—			20
Pension plan income, net of tax		—			(63	)		—			(39	)
Other comprehensive (loss) income, net of tax		(1,416	)		440			(1,651	)		950
Comprehensive (loss) income	$	(272	)	$	1,557		$	433		$	3,316

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

	Common Stock													Unrecognized Compensation–			Accumulated other comp-
(dollars in thousands) unaudited	Shares			Amount		Preferred Stock		Paid-in capital			Retained earnings			Restricted Stock Awards			rehensive income (loss)			Total share- holders’ equity
Balances at December 31, 2011	1,688,731		$	169	$	16,000	$	13,134		$	38,264		$	—		$	(705	)	$	66,862
Net income for period	—			—		—		—			2,366			—			—			2,366
Other comprehensive income, net of tax	—			—		—		—			—			—			950			950
Common stock dividends paid	—			—		—		—			(946	)		—			—			(946	)
Preferred stock dividends declared	—			—		—		—			(130	)		—			—			(130	)
Issuance of common stock for director fees	960			—		—		24			—			—			—			24
Balances at June 30, 2012	1,689,691		$	169	$	16,000	$	13,158		$	39,554		$	—		$	245		$	69,126
Balances at December 31, 2012	1,689,691		$	169	$	16,000	$	13,158		$	40,233		$	—		$	2,437		$	71,997
Net income for year	—			—		—		—			2,084			—			—			2,084
Other comprehensive loss, net of tax	—			—		—		—			—			—			(1,651	)		(1,651	)
Common stock dividends declared	—			—		—		—			(957	)		—			—			(957	)
Preferred stock dividends declared	—			—		—		—			(81	)		—			—			(81	)
Issuance of restricted common stock	19,600			2		—		488			—			(490	)		—			—
Forfeiture of restricted common stock	(500	)		—				(12	)					12			—			—
Stock based compensation-restricted
stock awards	—			—		—		—			—			63			—			63
Issuance of common stock for director fees	1,330			—		—		34			—			—			—			34
Balances at June 30, 2013	1,710,121		$	171	$	16,000	$	13,668		$	41,279		$	(415	)	$	786		$	71,489

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Six months ended June 30, (in thousands) unaudited	2013			2012
Operating Activities
Net income	$	2,084		$	2,366
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation
Securities		262			323
Bank premises and equipment		428			447
Core deposit intangible		111			111
Mortgage servicing rights		197			163
Fair value adjustment on loans		16			17
Gains on calls of securities available-for-sale		—			(12	)
Gains on sales of securities available-for-sale		—			(267	)
Loss on sale/disposals of premises and equipment		—			1
Loss (gain) recognized on other real estate owned		9			(1	)
Provision for loan losses		636			360
Decrease (increase) in loans held-for-sale		1,015			(2,207	)
Increase in deferred loan origination fees and costs, net		(96	)		(31	)
Mortgage servicing rights originated		(230	)		(308	)
(Decrease) increase in mortgage servicing rights impairment reserve		(34	)		102
Increase in interest receivable		(184	)		(526	)
Deferred tax benefit		(25	)		(25	)
Decrease in prepaid expenses		724			279
Increase in cash surrender value of life insurance policies		(121	)		(135	)
Decrease in income tax receivable		338			534
Decrease (increase) in other assets		36			(22	)
Decrease in accrued expenses		168			446
Decrease in interest payable		(37	)		(56	)
(Decrease) increase in other liabilities		(362	)		50
Issuance of shares for director’s fee		34			24
Issuance of shares of restricted stock		63			—
Net cash provided by operating activities		5,032			1,633
Investing Activities
Redemption of Federal Home Loan Bank stock		407			285
Purchase of interest-bearing time deposit with other banks		(4,233	)		—
Proceeds from calls of securities available-for-sale		1,400			7,148
Proceeds from maturities of securities available-for-sale		15,514			11,672
Proceeds from sale of securities available-for-sale		—			2,767
Proceeds from maturities of securities held-to-maturity		—			50
Loan originations and principle collections, net		(30,090	)		(5,821	)
Recoveries of loans previously charged-off		10			29
Proceeds from sales of other real estate owned		1,353			1,745
Capital expenditures		(195	)		(150	)
Net cash (utilized) provided by investing activities		(15,834	)		17,725
Financing Activities
Increase in deposit transaction accounts, net		4,864			10,863
Decrease in time deposits, net		(4,040	)		(4,259	)
Increase (decrease) in securities sold under agreements to repurchase, net		1,195			(5,967	)
Principal payments on Federal Home Loan Bank of Boston advances		(793	)		(11,814	)
Common stock dividends paid		(957	)		(946	)
Preferred stock dividends paid		(81	)		(146	)
Net cash provided (utilized) by financing activities		188			(12,269	)
Net (decrease) increase in cash and cash equivalents		(10,614	)		7,089
Cash and cash equivalents, beginning of period		43,574			36,886
Cash and cash equivalents, end of period	$	32,960		$	43,975

Cash paid during period
Interest	$	1,641	$	2,311
Income taxes		163		1,175
Non-cash transfers
Transfer from loans to other real estate owned		1,553		—
Transfer from other real estate owned to loans		—		1,000

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, comprehensive income, shareholders’ equity and cash flows for the interim periods presented.

The financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and valuation of real estate, management obtains independent appraisals for significant properties.

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2012 Annual Report on Form 10-K for the period ended December 31, 2012.

The allowance for loan losses is a significant accounting policy and is presented in Note 3 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 July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815) – Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this ASU permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to Treasury Obligations of the U.S. government (UST) and the London Interbank Offered Rate (LIBOR). The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate under Topic 815. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this ASU is not expected to have an impact on Salisbury’s results of operations or financial position.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this ASU provide guidance for the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this ASU are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments apply to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance is not expected to have an impact on Salisbury’s results of operations or financial position.

In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.” The amendments in this ASU are being issued to clarify when an entity should apply the liquidation basis of accounting. The guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. Additionally, the amendments require disclosures about an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted. Salisbury anticipates that the adoption of this guidance will not have an impact on its consolidated financial statements.

In February 2013, the FASB issued ASU 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” The objective of the amendments in this ASU is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. generally accepted accounting principles (GAAP). Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013; and should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU scope that exist at the beginning of an entity’s fiscal year of adoption. Salisbury anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

In October 2012, the FASB issued ASU 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.” The amendments in this update clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. For public entities, the amendments in this update are effective for fiscal years, and interim periods within those years beginning on or after December 15, 2012. The adoption of ASU 2012-06 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 2011-12, “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 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
June 30, 2013
Available-for-sale
U.S. Treasury notes	$	2,496	$	187	$	—		$	2,683
U.S. Government Agency notes		2,511		154		—			2,665
Municipal bonds		44,066		1,082		(1,183	)		43,965
Mortgage backed securities
U.S. Government Agencies		39,528		622		(48	)		40,102
Collateralized mortgage obligations
U.S. Government Agencies		4,220		54		—			4,274
Non-agency		9,449		485		(21	)		9,913
SBA bonds		2,418		102		—			2,520
Preferred Stock		20		468		—			488
Total securities available-for-sale	$	104,708	$	3,154	$	(1,252	)	$	106,610
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	5,340	$	—	$	—		$	5,340

(in thousands)	Amortized cost (1)		Gross un- realized gains		Gross un-realized losses			Fair value
December 31, 2012
Available-for-sale
U.S. Treasury notes	$	2,496	$	237	$	—		$	2,733
U.S. Government Agency notes		7,515		211		—			7,726
Municipal bonds		45,395		2,138		(168	)		47,365
Mortgage backed securities
U.S. Government Agencies		47,465		1,284		(20	)		48,729
Collateralized mortgage obligations
U.S. Government Agencies		5,131		66		—			5,197
Non-agency		11,081		494		(68	)		11,507
SBA bonds		2,781		82		—			2,863
Preferred Stock		20		147		—			167
Total securities available-for-sale	$	121,884	$	4,659	$	(256	)	$	126,287
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	5,747	$	—	$	—		$	5,747

(1)

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

Salisbury did not sell any securities available-for-sale during the six month period ended June 30, 2013 and sold a $2,500,000 Treasury bond available-for-sale during the six month period ended June 30, 2012. The gain recognized on this sale was $267,000.

The following table summarizes, for all securities in an unrealized loss position, including debt securities for which a portion of other-than-temporary impairment has been recognized in other comprehensive income, the aggregate fair value and gross unrealized loss of securities that have been in a continuous unrealized loss position as of the date presented:

	Less than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
June 30, 2013
Available-for-sale
Municipal Bonds	$	11,454	$	688	$	2,039	$	495	$	13,493	$	1,183
Mortgage backed securities		4,769		47		42		1		4,811		48
Collateralized mortgage obligations
Non-agency		1,036		6		335		15		1,371		21
Total temporarily impaired securities		17,259		741		2,416		511		19,675		1,252
Other-than-temporarily impaired securities
Collateralized mortgage obligations
Non-agency		—		—		—		—		—		—
Total temporarily and other-than-temporarily impaired securities	$	17,259	$	741	$	2,416	$	511	$	19,675	$	1,252

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

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at June 30, 2013.

U.S Government Agency notes, U.S. Government Agency mortgage-backed securities and U.S. Government Agency CMOs: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury does not intend to sell these securities and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these securities to be OTTI at June 30, 2013.

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. It is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity. Management does not consider these securities to be OTTI at June 30, 2013.

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at June 30, 2013 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 June 30, 2013. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI for further deterioration in credit quality. Salisbury does not intend to sell these securities and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis.

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

Six months ended June 30 (in thousands)	2013		2012
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 was 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 repurchased 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 June 30, 2013. Further deterioration of the FHLBB’s capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

NOTE 3 - LOANS

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

(in thousands)	June 30, 2013			December 31, 2012
Residential 1-4 family	$	218,654		$	198,552
Residential 5+ multifamily		4,881			3,889
Construction of residential 1-4 family		732			2,379
Home equity credit		33,561			34,162
Residential real estate		257,828			238,982
Commercial		92,841			87,382
Construction of commercial		9,129			5,823
Commercial real estate		101,970			93,205
Farm land		4,233			4,320
Vacant land		9,215			9,926
Real estate secured		373,246			346,433
Commercial and industrial		39,035			38,094
Municipal		4,049			3,378
Consumer		3,902			4,181
Loans receivable, gross		420,232			392,086
Deferred loan origination fees and costs, net		1,129			1,032
Allowance for loan losses		(4,632	)		(4,360	)
Loans receivable, net	$	416,729		$	388,758
Loans held-for-sale
Residential 1-4 family	$	864		$	1,879

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.

Loan Credit Quality

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

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
June 30, 2013
Residential 1-4 family	$	200,213	$	11,757	$	6,587	$	97	$	—	$	218,654
Residential 5+ multifamily		2,691		1,215		975		—		—		4,881
Construction of residential 1-4 family		732		—		—		—		—		732
Home equity credit		31,209		1,152		1,200		—		—		33,561
Residential real estate		234,845		14,124		8,762		97		—		257,828
Commercial		66,523		17,378		8,940		—		—		92,841
Construction of commercial		8,366		153		610		—		—		9,129
Commercial real estate		74,889		17,531		9,550		—		—		101,970
Farm land		1,626		1,450		1,157		—		—		4,233
Vacant land		5,753		297		3,165		—		—		9,215
Real estate secured		317,113		33,402		22,634		97		—		373,246
Commercial and industrial		29,245		8,585		1,205		—		—		39,035
Municipal		4,049		—		—		—		—		4,049
Consumer		3,746		134		22		—		—		3,902
Loans receivable, gross	$	354,153	$	42,121	$	23,861	$	97	$	—	$	420,232
(in thousands)		Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2012
Residential 1-4 family	$	180,442	$	12,473	$	5,538	$	99	$	—	$	198,552
Residential 5+ multifamily		2,872		773		244		—		—		3,889
Construction of residential 1-4 family		1,570		—		809		—		—		2,379
Home equity credit		30,981		1,848		1,333		—		—		34,162
Residential real estate		215,865		15,094		7,924		99		—		238,982
Commercial		64,817		13,299		9,266		—		—		87,382
Construction of commercial		5,055		297		471		—		—		5,823
Commercial real estate		69,872		13,596		9,737		—		—		93,205
Farm land		2,799		341		1,180		—		—		4,320
Vacant land		4,885		863		4,178		—		—		9,926
Real estate secured		293,421		29,894		23,019		99		—		346,433
Commercial and industrial		28,453		8,300		1,341		—		—		38,094
Municipal		3,378		—		—		—		—		3,378
Consumer		3,994		159		28		—		—		4,181
Loans receivable, gross	$	329,246	$	38,353	$	24,388	$	99	$	—	$	392,086

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
June 30, 2013
Residential 1-4 family	$	210,299	$	4,959	$	1,808	$	1,036	$	290	$	262	$	3,396	$	—	$	3,587
Residential 5+ multifamily		4,881		—		—		—		—		—		—		—		—
Construction of residential 1-4 family		732		—		—		—		—		—		—		—		—
Home equity credit		32,599		571		119		160		112		—		390		—		137
Residential real estate		248,511		5,530		1,927		1,196		402		262		3,786		—		3,724
Commercial		88,441		2,194		469		654		310		773		2,206		310		1,883
Construction of commercial		8,969		—		—		141		19		—		160		—		19
Commercial real estate		97,410		2,194		469		795		329		773		2,366		310		1,902
Farm land		3,818		—		30		385		—		—		415		—		—
Vacant land		5,957		10		101		27		47		3,073		3,248		—		3,120
Real estate secured		355,696		7,734		2,527		2,403		778		4,108		9,815		310		8,746
Commercial and industrial		38,421		474		116		3		22		—		141		—		148
Municipal		4,050		—		—		—		—		—		—		—		—
Consumer		3,680		143		65		13		—		—		78		—		—
Loans receivable, gross	$	401,847	$	8,351	$	2,708	$	2,419	$	799	$	4,108	$	10,034	$	310	$	8,894
December 31, 2012
Residential 1-4 family	$	190,488	$	2,545	$	3,578	$	639	$	1,185	$	117	$	5,519	$	—	$	3,024
Residential 5+ multifamily		3,889		—		—		—		—		—		—		—		—
Construction of residential 1-4 family		2,379		—		—		—		—		—		—		—		—
Home equity credit		32,540		890		113		396		—		223		732		—		442
Residential real estate		229,296		3,435		3,691		1,035		1,185		340		6,251		—		3,466
Commercial		83,477		864		1,104		566		58		1,313		3,041		—		2,214
Construction of commercial		5,659		—		164		—		—		—		164		—		21
Commercial real estate		89,136		864		1,268		566		58		1,313		3,205		—		2,235
Farm land		3,898		422		—		—		—		—		—		—		—
Vacant land		5,932		—		—		48		740		3,206		3,994		—		3,994
Real estate secured		328,262		4,721		4,959		1,649		1,983		4,859		13,450		—		9,695
Commercial and industrial		37,618		351		26		99		—		—		125		—		164
Municipal		3,378		—		—		—		—		—		—		—		—
Consumer		4,034		108		25		14		—		—		39		—		—
Loans receivable, gross	$	373,292	$	5,180	$	5,010	$	1,762	$	1,983	$	4,859	$	13,614	$	—	$	9,859

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

	Three months ended June 30, 2013						Six months ended June 30, 2013
(in thousands)	Quantity		Pre-modification balance		Post-modification balance		Quantity		Pre-modification balance		Post-modification balance
Residential real estate		2	$	836	$	836		3	$	1,906	$	1,906
Commercial real estate		—		—		—		—		—		—
Commercial and industrial		1		91		91		1		91		91
Troubled debt restructurings		3	$	927	$	927		4	$	1,997	$	1,997
Rate reduction		—	$	—	$	—		2	$	1,070	$	1,070
Rate reduction and debt consolidation		1		91		91		1		91		91
Rate reduction and interest only pursuant to sale		1		758		758		1		758		758
Rate reduction and term extension		1		78		78		1		78		78
Troubled debt restructurings		3	$	927	$	927		5	$	1,997	$	1,997

Three loans were restructured during the quarter ended June 30, 2013 and were current at June 30, 2013.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Three months ended June 30												Six months ended June 30
(in thousands)	Beginning balance		Provision			Charge-offs			Reco-veries		Ending balance		Beginning balance		Provision			Charge-offs			Reco-veries			Ending balance
2013 Periods
Residential	$	1,938	$	9		$	(55	)	$	—	$	1,892	$	1,934	$	32		$	(74	)	$	—		$	1,892
Commercial		1,237		236			(75	)		5		1,403		1,059		413			(75	)		6			1,403
Land		528		(231	)		(160	)		—		137		301		34			(198	)		—			137
Real estate		3,703		14			(290	)		5		3,432		3,294		479			(347	)		6			3,432
Commercial & industrial		455		86			—			—		541		499		46			(4	)		—			541
Municipal		40		1			—			—		41		36		5			—			—			41
Consumer		67		12			(11	)		2		70		92		(3	)		(24	)		5			70
Unallocated		421		127			—			—		548		440		109			—			(1	)		548
Totals	$	4,686	$	240		$	(301	)	$	7	$	4,632	$	4,361	$	636		$	(375	)	$	10		$	4,632
2012 Periods
Residential	$	1,500	$	95		$	(118	)	$	—	$	1,477	$	1,479	$	134		$	(136	)	$	—		$	1,477
Commercial		1,061		214			—			1		1,276		1,139		135			—			2			1,276
Land		339		(120	)		—			—		219		409		(148	)		(42	)		—			219
Real estate		2,900		189			(118	)		1		2,972		3,027		121			(178	)		2			2,972
Commercial & industrial		778		38			—			5		821		704		138			(29	)		8			821
Municipal		28		(1	)		—			—		27		24		3			—			—			27
Consumer		132		(41	)		(39	)		13		65		79		17			(49	)		18			65
Unallocated		328		(5	)		—			—		323		242		81			—			—			323
Totals	$	4,166	$	180		$	(157	)	$	19	$	4,208	$	4,076	$	360		$	(256	)	$	28		$	4,208

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

(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
June 30, 2013
Residential 1-4 family	$	212,106	$	842	$	6,548	$	611	$	218,654	$	1,453
Residential 5+ multifamily		3,916		20		965		50		4,881		70
Construction of residential 1-4 family		732		3		—		—		732		3
Home equity credit		33,192		366		369		—		33,561		366
Residential real estate		249,946		1,231		7,882		661		257,828		1,892
Commercial		87,462		989		5,379		296		92,841		1,285
Construction of commercial		9,110		98		19		20		9,129		118
Commercial real estate		96,572		1,087		5,398		316		101,970		1,403
Farm land		4,233		67		—		—		4,233		67
Vacant land		6,095		66		3,120		4		9,215		70
Real estate secured		356,846		2,451		16,400		981		373,246		3,432
Commercial and industrial		37,995		456		1,040		85		39,035		541
Municipal		4,049		40		—		—		4,049		40
Consumer		3,835		37		67		33		3,902		70
Unallocated allowance		—		—		—		—		—		549
Totals	$	402,725	$	2,984	$	17,507	$	1,099	$	420,232	$	4,632
(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2012
Residential 1-4 family	$	191,886	$	743	$	6,666	$	652	$	198,552	$	1,395
Residential 5+ multifamily		2,913		22		976		50		3,889		72
Construction of residential 1-4 family		2,379		10		—		—		2,379		10
Home equity credit		33,697		365		465		92		34,162		457
Residential real estate		230,875		1,140		8,107		794		238,982		1,934

Commercial		81,635		931		5,747		64		87,382		995
Construction of commercial		5,802		64		21		—		5,823		64
Commercial real estate		87,437		995		5,768		64		93,205		1,059
Farm land		4,320		66		—		—		4,320		66
Vacant land		5,795		70		4,131		164		9,926		234
Real estate secured		328,427		2,271		18,006		1,022		346,433		3,293
Commercial and industrial		37,073		467		1,021		32		38,094		499
Municipal		3,378		36		—		—		3,378		36
Consumer		4,061		39		120		53		4,181		92
Unallocated allowance		—		—		—		440		—		440
Totals	$	372,939	$	2,813	$	19,147	$	1,547	$	392,086	$	4,360

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

(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
June 30, 2013
Performing loans	$	393,819	$	2,719	$	227	$	33	$	394,046	$	2,752
Potential problem loans		8,907		265		1,428		101		10,335		366
Impaired loans		—		—		15,851		965		15,851		965
Unallocated allowance		—		—		—		549		—		549
Totals	$	402,726	$	2,984	$	17,506	$	1,648	$	420,232	$	4,632
December 31, 2012
Performing loans	$	364,594	$	2,567	$	121	$	52	$	364,715	$	2,619
Potential problem loans		8,345		246		2,464		131		10,809		377
Impaired loans		—		—		16,562		924		16,562		924
Unallocated allowance		—		—		—		440		—		440
Totals	$	372,939	$	2,813	$	19,147	$	1,547	$	392,086	$	4,360

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


	Impaired loans with specific allowance								Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Book		Note		Average		Specific allowance		Income recognized		Book		Note		Average		Income recognized
June 30, 2013
Residential 1-4 family	$	4,282	$	4,448	$	4,008	$	585	$	43	$	2,709	$	2,143	$	2,909	$	15
Home equity credit		—		—		127		—		—		185		138		189		1
Residential real estate		4,282		4,448		4,135		585		43		2,894		2,281		3,098		16
Commercial		2,481		2,498		1,641		316		64		2,155		3,086		2,592		20
Vacant land		206		221		2,820		4		—		2,914		640		3,962		—
Real estate secured		6,969		7,167		8,596		905		107		7,963		6,007		9,652		36
Commercial and industrial		303		334		327		60		6		616		599		1,018		18
Consumer		—		—		—		—		—		—		—		—		—
Totals	$	7,272	$	7,501	$	8,923	$	965	$	113	$	8,579	$	6,606	$	10,670	$	54

	Impaired loans with specific allowance								Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Book		Note		Average		Specific allowance		Income recognized		Book		Note		Average		Income recognized
December 31, 2012
Residential 1-4 family	$	3,857	$	3,925	$	2,404	$	578	$	77	$	2,263	$	2,460	$	1,601	$	34
Home equity credit		351		351		146		92		—		91		93		203		—
Residential real estate		4,208		4,276		2,550		670		77		2,354		2,553		1,804		34
Commercial		1,629		1,784		1,925		64		60		3,381		3,576		3,122		82
Vacant land		3,186		3,387		1,455		158		—		808		1,467		2,358		4
Real estate secured		9,023		9,447		5,930		892		137		6,543		7,596		7,284		120
Commercial and industrial		335		368		833		32		13		661		1,063		854		31
Consumer		—		—		—		—		—		—		—		—		—
Totals	$	9,358	$	9,815	$	6,763	$	924	$	150	$	7,204	$	8,659	$	8,138	$	151

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:

June 30, (in thousands)	2013	2012
Residential mortgage loans serviced for others	$ 149,388	$ 132,770
Fair value of mortgage servicing rights	1,661	887

Changes in mortgage servicing rights are as follows:

	Three months		Six months
Periods ended June 30, (in thousands)	2013	2012	2013	2012
Loan Servicing Rights
Balance, beginning of period	$ 1,124	$ 875	$ 1,076	$ 772
Originated	78	128	230	308
Amortization (1)	(93)	(86)	(197)	(164)
Balance, end of period	1,109	917	1,109	916
Valuation Allowance
Balance, beginning of period	(5)	(114)	(38)	(22)
Decrease (increase) in impairment reserve (1)	1	(10)	34	(101)
Balance, end of period	(4)	(124)	(4)	(123)
Loan servicing rights, net	$ 1,105	$ 793	$ 1,105	$ 793

(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)	June 30, 2013	December 31, 2012
Securities available-for-sale (at fair value)	$ 52,131	$ 54,497
Loans receivable	120,388	106,457
Total pledged assets	$ 172,519	$ 160,954

At June 30, 2013, securities were pledged as follows: $42.1 million to secure public deposits, $9.9 million to secure repurchase agreements and $0.1 million to secure FHLBB advances. Loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 6 – EARNINGS PER SHARE

The Company defines unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities that are included in computing Earnings Per Share (“EPS”) using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Earnings per common share are calculated by dividing earnings allocated to common stockholders by the weighted-average number of common shares outstanding during the period. Basic EPS excludes dilution and is computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

The following table sets forth the computation of earnings per share (basic and diluted) for the periods indicated:

	Three months						Six months
Periods ended June 30, (in thousands)	2013			2012			2013			2012
Net income	$	1,144		$	1,117		$	2,084		$	2,366
Less: Preferred stock dividends declared		(40	)		(48	)		(81	)		(132	)
Less: Undistributed earnings allocated to participating securities		(12	)		—			(18	)		—
Net income allocated to common stock	$	1,092		$	1,069		$	1,985		$	2,234
Common shares issued		1,710			1,690			1,705			1,690
Less: Unvested restricted stock awards		(19	)					(15	)		—
Common shares outstanding used to calculate basic earnings per common share		1,691			1,690			1,690			1,690
Add: Diluted effect of unvested restricted stock awards		—			—			—			—
Common shares outstanding used to calculate diluted earnings per common share		1,691			—			1,690			—
Earnings per common share (basic and diluted)	$	0.65		$	0.63		$	1.17		$	1.32

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 June 30, 2013, 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
June 30, 2013
Total Capital (to risk-weighted assets)
Salisbury	$ 65,062	16.48%	$ 31,576	8.0%	n/a	-
Bank	54,697	13.72	31,888	8.0	$39,860	10.0%
Tier 1 Capital (to risk-weighted assets)
Salisbury	60,187	15.25	15,788	4.0	n/a	-
Bank	49,823	12.50	15,944	4.0	23,916	6.0
Tier 1 Capital (to average assets)
Salisbury	60,187	10.23	23,532	4.0	n/a	-
Bank	49,823	8.48	23,493	4.0	29,366	5.0
December 31, 2012
Total Capital (to risk-weighted assets)
Salisbury	$ 63,391	16.63%	$ 30,494	8.0%	n/a	-
Bank	53,132	13.77	30,866	8.0	$38,582	10.0%
Tier 1 Capital (to risk-weighted assets)
Salisbury	58,933	15.46	15,247	4.0	n/a	-
Bank	48,674	12.62	15,432	4.0	23,149	6.0
Tier 1 Capital (to average assets)
Salisbury	58,933	9.87	23,876	4.0	n/a	-
Bank	48,674	8.15	23,876	4.0	29,845	5.0

In December 2010, the Basel Committee, a group of bank regulatory supervisors from around the world, released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III.” Basel III, when fully implemented by the U.S. bank regulatory agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.

Given that the Basel III rules are subject to implementation and change and the scope and content of capital regulations that U.S. federal banking agencies may adopt under the Dodd-Frank Act is uncertain, we cannot be certain of the impact new capital regulations will have on our capital ratios.

DIVIDENDS

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 periods ended June 30, 2013 and March 31, 2013, was 1.0000%. 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. On June 28, 2013, Salisbury declared a Series B Preferred Stock dividend of $40,000, payable on July 1, 2013. 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.

Grants of Restricted Stock and Options

On February 8, 2013, Salisbury granted a total of 19,600 shares of restricted stock pursuant to its 2011 Long Term Incentive Plan, which was approved by shareholders at the 2011 Annual Meeting, to 22 employees, including 5,000 shares to one Named Executive Officer, Richard J. Cantele, Jr., President and Chief Executive Officer.

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						Six months
Periods ended June 30, (in thousands)	2013			2012			2013			2012
Service cost	$	—		$	87		$	—		$	202
Interest cost on benefit obligation		66			86			132			179
Expected return on plan assets		(67	)		(112	)		(135	)		(227	)
Amortization of net loss		1			25			3			61
Settlements and curtailments		—			341			—			341
Net periodic benefit cost	$	—		$	427		$	—		$	556

Salisbury’s 401(k) Plan expense was $173,000 and $70,000, respectively, for the three month periods ended June 30, 2013 and 2012. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $12,000 and $11,000 for the three month periods ended June 30, 2013 and 2012 respectively.

NOTE 9 –ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income are as follows:

June 30, (in thousands)	2013	2012

Unrealized gains on securities available-for-sale, net of tax	$ 1,255	$ 2,342
Unrecognized pension plan expense, net of tax	(469)	(2,097)
Accumulated other comprehensive income, net	$ 786	$ 245

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.

ASC 820-10, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value under GAAP. This guidance provided 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. However, Salisbury did not elect fair value treatment for any financial assets or liabilities upon adoption of such ASC.

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 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.

Assets measured at fair value are as follows:

	Fair Value Measurements Using						Assets at
(in thousands)		Level 1		Level 2		Level 3		fair value
June 30, 2013
Assets measured at fair value on a recurring basis
U.S. Treasury notes	$	—	$	2,683	$	—	$	2,683
U.S. Government agency notes		—		2,665		—		2,665
Municipal bonds		—		43,965		—		43,965
Mortgage-backed securities:
U.S. Government agencies		—		40,102		—		40,102
Collateralized mortgage obligations:
U.S. Government agencies		—		4,274		—		4,274
Non-agency		—		9,913		—		9,913
SBA bonds		—		2,520		—		2,520
Preferred stocks		488		—		—		488
Securities available-for-sale	$	488	$	106,122	$	—	$	106,610
Assets measured at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	6,306	$	6,306
Other real estate owned		—		—		435		435
December 31, 2012
Assets measured at fair value on a recurring basis
U.S. Treasury notes	$	—	$	2,733	$	—	$	2,733
U.S. Government agency notes		—		7,726		—		7,726
Municipal bonds		—		47,365		—		47,365
Mortgage-backed securities:
U.S. Government agencies		—		48,729		—		48,729
Collateralized mortgage obligations:
U.S. Government agencies		—		5,197		—		5,197
Non-agency		—		11,507		—		11,507
SBA bonds		—		2,863		—		2,863
Preferred stocks		167		—		—		167
Securities available-for-sale	$	167	$	126,120	$	—	$	126,287
Assets measured at fair value on a non-recurring basis
Collateral dependent impaired loans		—		—		8,434		8,434
Other real estate owned		—		—		244		244

Carrying values and estimated fair values of financial instruments are as follows:

		Carrying		Estimated	Fair value measurements using
(in thousands)		value		fair value		Level 1		Level 2		Level 3
June 30, 2013
Financial Assets
Cash and due from banks	$	32,960	$	32,960	$	32,960	$	—	$	—
Interest-bearing time deposits		4,233		4,233		—		—		4,233
Securities available-for-sale		106,610		106,610		488		106,122
Federal Home Loan Bank stock		5,340		5,340		—		5,340		—
Loans held-for-sale		864		870		—		—		870
Loans receivable net		416,729		409,411		—		—		409,411
Accrued interest receivable		2,002		2,002		—		—		2,002
Financial Liabilities
Demand (non-interest-bearing)	$	90,203	$	90,203	$	—	$	—	$	90,203
Demand (interest-bearing)		73,606		73,606		—		—		73,606
Money market		134,052		134,052		—		—		134,052
Savings and other		104,331		104,331		—		—		104,331
Certificates of deposit		89,848		90,679		—		—		90,679
Deposits		492,040		492,871		—		—		492,871
FHLBB advances		31,187		34,135		—		—		34,135
Repurchase agreements		2,980		2,980		—		—		2,980
Accrued interest payable		159		159		—		—		159
December 31, 2012
Financial Assets
Cash and due from banks	$	43,574	$	43,574	$	43,574	$	—	$	—
Securities available-for-sale		126,287		126,287		167		126,120		—
Federal Home Loan Bank stock		5,747		5,747		—		5,747		—
Loans held-for-sale		1,879		1,893		—		—		1,893
Loans receivable net		388,758		389,292		—		—		389,292
Accrued interest receivable		1,818		1,818		—		—		1,818
Financial Liabilities
Demand (non-interest-bearing)	$	98,850	$	98,850	$	—	$	—	$	98,850
Demand (interest-bearing)		65,991		65,991		—		—		65,991
Money market		128,501		128,501		—		—		128,501
Savings and other		103,985		103,985		—		—		103,985
Certificates of deposit		93,888		94,894		—		—		94,894
Deposits		491,215		492,221		—		—		492,221
FHLBB advances		31,980		35,363		—		—		35,363
Repurchase agreements		1,784		1,784		—		—		1,784
Accrued interest payable		196		196		—		—		196

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

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, 2012.

BUSINESS

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

Critical Accounting Policies and Estimates

Salisbury’s consolidated financial statements follow GAAP as applied to the banking industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.

Salisbury’s significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements in Salisbury's 2012 Annual Report on Form 10-K for the year ended December 31, 2012 and, along with this Management’s Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating Salisbury’s reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

The allowance for loan losses represents management’s estimate of credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. Note 1 of Notes to Consolidated Financial Statements in Salisbury's 2012 Annual Report on Form 10-K for the period ended December 31, 2012 describes the methodology used to determine the allowance for loan losses. In addition, a discussion of the factors driving changes in the amount of the allowance for loan losses are included in the “Provision and Allowance for Loan Losses” section of Management’s Discussion and Analysis of this Quarterly Report.

Management evaluates goodwill and identifiable intangible assets for impairment annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates, which are used to determine the carrying value of goodwill and identifiable intangible assets or which otherwise adversely affect their value or estimated lives, could have a material adverse impact on the results of operations.

Management evaluates securities for other-than-temporary impairment giving consideration to the extent to which the fair value has been less than cost, estimates of future cash flows, delinquencies and default severity, and the intent and ability of Salisbury to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The consideration of the above factors is subjective and involves estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

The determination of the obligation and expense for pension and other postretirement benefits is dependent on certain assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and health care costs.

Actual results could differ from the assumptions and market driven rates may fluctuate. Significant differences in actual experience or significant changes in the assumptions may materially affect the future pension and other postretirement obligations and expense.

RESULTS OF OPERATIONS

For the three month periods ended June 30, 2013 and 2012

Overview

Net income available to common shareholders was $1,092,000, or $0.65 per common share, for the quarter ended June 30, 2013 (second quarter 2013), versus $890,000, or $0.53 per common share, for the quarter ended March 31, 2013 (first quarter 2013), and $1,069,000, or $0.63 per common share, for the quarter ended June 30, 2012 (second quarter 2012).

Earnings per common share of $0.65 increased $0.12, or 22.6%, as compared to $0.53 for the first quarter 2013, and increased $0.02, or 3.2%, as compared to second quarter 2012.

Tax equivalent net interest income increased $39,000, or 0.8%, versus first quarter 2013, and decreased $40,000, or 0.8%, versus second quarter 2012.

Provision for loan losses for the second quarter was $240,000 versus $396,000 for the first quarter 2013 and $180,000 for second quarter 2012. Net loan charge-offs were $294,000, versus $70,000 for first quarter 2013 and $138,000 for second quarter 2012.

Non-interest income increased $25,000, or 1.6%, versus first quarter 2013 and decreased $240,000, or 12.7%, versus second quarter 2012, which included $267,000 in gains on sale of securities.

Non-interest expense decreased $95,000, or 2.0%, versus first quarter 2013 and $415,000, or 8.3%, versus second quarter 2012. Second quarter 2012 included non-recurring expenses totaling $591,000 which consisted of $341,000 in pension plan curtailment expense and $250,000 in litigation expense.

Preferred stock dividends remained unchanged from the first quarter at $40,000 for second quarter 2013 and declined by $8,000 as compared with the second quarter 2012 dividend of $48,000.

Non-performing assets increased $0.3 million, or 4.0%, to $9.6 million, or 1.6% of total assets, at June 30, 2013 versus March 31, 2013 and increased $1.2 million versus June 30, 2012. Accruing loans receivable 30-to-89 days past due decreased $0.5 million to $4.3 million, or 1.02% of gross loans receivable at June 30, 2013, versus March 31, 2013 and increased $1.8 million versus June 30, 2012.

Net Interest Income

Tax equivalent net interest income for second quarter 2013 increased $39,000, or 0.8%, versus first quarter 2013, and decreased $40,000, or 0.8%, versus second quarter 2012. Average total interest bearing deposits increased $4.9 million as compared with first quarter 2013 and increased $10.8 million, or 2.8%, as compared with second quarter 2012. Average earning assets increased $4.7 million as compared with first quarter 2013 and increased $1.5 million, or 0.2%, as compared with second quarter 2012. The net interest margin on a tax equivalent basis remained unchanged from first quarter 2013 at 3.54% and increased 1 basis point versus second quarter 2012 from 3.53%.

The following table sets forth the components of Salisbury's fully tax-equivalent (“FTE”) net interest income and yields on average interest-earning assets and interest-bearing funds.

Three months ended June 30,	Average Balance		Income / Expense		Average Yield / Rate
(dollars in thousands)	2013	2012	2013	2012	2013	2012
Loans (a)	$413,979	$382,602	$ 4,535	$ 4,583	4.38%	4.79%
Securities (c)(d)	108,977	139,621	1,184	1,398	4.35	4.00
FHLBB stock	5,340	5,747	5	8	0.42	0.54
Short term funds (b)	30,960	29,830	19	15	0.24	0.20
Total earning assets	559,256	557,800	5,743	6,004	4.11	4.31
Other assets	39,556	39,130
Total assets	$598,812	$596,930
Interest-bearing demand deposits	$ 70,627	$ 64,702	70	93	0.40	0.58
Money market accounts	131,274	125,142	90	105	0.27	0.34
Savings and other	106,512	98,170	54	71	0.20	0.29
Certificates of deposit	90,520	100,091	274	354	1.21	1.42
Total interest-bearing deposits	398,933	388,105	488	623	0.49	0.65
Repurchase agreements	2,486	5,911	1	6	0.19	0.38
FHLBB advances	31,319	42,938	312	452	3.94	4.16
Total interest-bearing liabilities	432,738	436,954	801	1,081	0.74	0.99
Demand deposits	90,114	86,676
Other liabilities	3,227	4,237
Shareholders’ equity	72,733	69,063
Total liabilities & shareholders’ equity	$598,812	$596,930
Net interest income			$ 4,942	$ 4,923
Spread on interest-bearing funds					3.37	3.32
Net interest margin (e)					3.54	3.53

(a)

Includes non-accrual loans.

(b)

Includes interest-bearing deposits in other banks and federal funds sold.

(c)

Average balances of securities are based on historical cost.

(d)

Includes tax exempt income benefit of $309,000 and $236,000, respectively for 2013 and 2012 on tax-exempt securities whose income and yields are calculated on a tax-equivalent basis.

(e)

Net interest income divided by average interest-earning assets.

The following table sets forth the changes in FTE interest due to volume and rate.

Three months ended June 30, (in thousands)	2013 versus 2012
Change in interest due to	Volume	Rate	Net
Interest-earning assets
Loans	$ 360	$ (408)	$ (48)
Securities	(320)	106	(214)
FHLBB stock	-	(3)	(3)
Short term funds	1	3	4
Total	41	(302)	(261)
Interest-bearing liabilities
Deposits	(14)	(121)	(135)
Repurchase agreements	(2)	(3)	(5)
FHLBB advances	(119)	(21)	(140)
Total	(135)	(145)	(280)
Net change in net interest income	$ 176	$ (157)	$ 19

Interest Income

Tax equivalent interest income decreased $261,000, or 4.3%, to $5.7 million for second quarter 2013 as compared with second quarter 2012.

Loan income decreased $48,000, or 1.0%, primarily due to a 41 basis points decline in the average loan yield offset in part by a $31.4 million, or 8.2%, increase in average loans.

Tax equivalent securities income decreased $214,000, or 15.3%, for second quarter 2013 as compared with second quarter 2012, primarily due to a $30.6 million, or 21.9%, decrease in average volume calls and sales of agency bonds and prepayments of mortgage backed securities.

Interest Expense

Interest expense decreased $280,000, or 25.9%, to $0.8 million for second quarter 2013 as compared with second quarter 2012.

Interest on deposit accounts and retail repurchase agreements decreased $140,000, or 22.3%, as a result of lower average rates, down 16 basis points on deposits and 19 basis points on repurchase agreements. Decreased rates were offset in part by a $10.8 million, or 2.8%, increase in the average balance of deposits. The lower average rate resulted from the effect of lower market interest rates on rates paid and changes in product mix. The higher average volume resulted from deposit growth.

Interest expense on FHLBB borrowings decreased $140,000 as a result of lower average borrowings, down $11.7 million, and by the average borrowing rate decrease of 22 basis points as compared with second quarter 2012. The decline in advances resulted from scheduled maturities that were not replaced with new advances.

Provision and Allowance for Loan Losses

The provision for loan losses was $240,000 for second quarter 2013 and $396,000 for first quarter 2013. Net loan charge-offs were $294,000 and $70,000, for the respective quarters. The following table sets forth changes in the allowance for loan losses and other selected statistics:

	Three months				Six months
Periods ended June 30, (dollars in thousands)	2013		2012		2013		2012
Balance, beginning of period	$	4,687	$	4,166	$	4,360	$	4,076
Provision for loan losses		240		180		636		360
Charge-offs

Real estate mortgages		(291	)		(118	)		(347	)		(178	)
Commercial & industrial		—			—			(4	)		(29	)
Consumer		(11	)		(39	)		(24	)		(49	)
Total charge-offs		(302	)		(157	)		(375	)		(256	)
Recoveries
Real estate mortgages		5			1			6			2
Commercial & industrial		—			5			—			8
Consumer		2			13			5			18
Total recoveries		7			19			11			28
Net charge-offs		(295	)		(138	)		(364	)		(228	)
Balance, end of period	$	4,632		$	4,208		$	4,632		$	4,208
Loans receivable, gross							$	420,232		$	380,384
Non-performing loans								9,204			8,409
Accruing loans past due 30-89 days								4,271			2,459
Ratio of allowance for loan losses:
to loans receivable, gross								1.10	%		1.11	%
to non-performing loans								50.32			50.04
Ratio of non-performing loans to loans receivable, gross								2.19			2.21
Ratio of accruing loans past due 30-89 days to loans receivable, gross								1.02			0.65

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, remained stable at 1.10% at June 30, 2013 versus 1.14% at March 31, 2013 and 1.11% at June 30, 2012.

During the first six months of 2013, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) increased $0.8 million to $9.2 million, or 2.19% of gross loans receivable, from 2.51% at December 31, 2012 and 2.21% at June 30, 2012 while accruing loans past due 30-89 days increased $1.8 million to $4.3 million, or 1.02% of gross loans receivable from 1.44% at December 31, 2012 and 0.65% at June 30, 2012. See “Financial Condition – Loan Credit Quality” for further discussion and analysis.

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

June 30, 2013 (in thousands)	Collectively evaluated		Individually evaluated		Total portfolio
June 30, 2013 (in thousands)	Loans	Allowance	Loans	Allowance	Loans	Allowance
Performing loans	$ 393,819	$ 2,719	$ 227	$ 33	$394,046	$ 2,752
Potential problem loans	8,907	265	1,428	101	10,335	366
Impaired loans	-	-	15,851	965	15,851	965
Unallocated allowance	-	-	-	549	-	549
Totals	$402,726	$ 2,984	$ 17,506	$ 1,648	$420,232	$ 4,632
December 31, 2012 (in thousands)	Collectively evaluated		Individually evaluated		Total portfolio
December 31, 2012 (in thousands)	Loans	Allowance	Loans	Allowance	Loans	Allowance
Performing loans	$364,592	$ 2,567	$ 121	$ 52	$364,713	$ 2,619
Potential problem loans	8,345	246	2,465	131	10,810	377
Impaired loans	-	-	16,563	924	16,563	924
Unallocated allowance	-	-	-	440	-	440
Totals	$372,937	$ 2,813	$ 19,149	$ 1,547	$392,086	$ 4,360

The allowance for loan losses represents management’s estimate of the probable credit losses inherent in the loan portfolio as of the reporting date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by loan charge-offs. Loan charge-offs are recognized when management determines a loan or portion of a loan to be uncollectible. The allowance for loan losses is computed by segregating the portfolio into three components: (1) loans collectively evaluated for impairment: general loss allocation factors for non-impaired loans are segmented into pools of loans based on similar risk characteristics such as loan product, collateral type and loan-to-value, loan risk rating, historical loss experience, delinquency factors and other similar economic indicators, (2) loans individually evaluated for impairment: individual loss allocations for loans deemed to be impaired based on discounted cash flows or collateral value, and (3) unallocated: general loss allocations for other environmental factors.

Impaired loans and certain potential problem loans, where warranted, are individually evaluated for impairment. Impairment is measured for each individual loan, or for a borrower’s aggregate loan exposure, using either the fair value of the collateral if the loan is collateral dependent or the present value of expected future cash flows discounted at the loan’s effective interest rate. An allowance is established when the collateral value or discounted cash flows of the loan is lower than the carrying value of that loan.

The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and applying management’s general loss allocation factors. The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment. There were no significant changes in Salisbury’s policies or methodology pertaining to the general component of the allowance for loan losses during the quarter ended June 30, 2013.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. It reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

Determining the adequacy of the allowance at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of the loan portfolio is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise and require increased provisions. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at June 30, 2013.

Management’s loan risk rating assignments, loss percentages and specific reserves are subjected annually to an independent credit review by an external firm. In addition, the bank is examined annually on a rotational process by one of its two primary regulatory agencies, the FDIC and State of Connecticut Department of Banking (“CTDOB”). As an integral part of their examination process, the FDIC and CTDOB review the Bank's credit risk ratings and allowance for loan losses.

Non-interest income

The following table details the principal categories of non-interest income.

Three months ended June 30, (dollars in thousands)	2013		2012			2013 vs. 2012
Trust and wealth advisory fees	$	824	$	735		$	89		12.11	%
Service charges and fees		575		547			28		5.12
Gains on sales of mortgage loans, net		153		263			(110	)	(41.83	)
Mortgage servicing, net		8		(5	)		13		260.00
Gains on securities, net		—		267			(267	)	(100.00	)
Other		90		83			7		8.43
Total non-interest income	$	1,650	$	1,890		$	(240	)	(12.70	)%

Non-interest income increased $25,000, or 1.5%, versus first quarter 2013 and decreased $240,000, or 12.7%, versus second quarter 2012. Trust and Wealth Advisory revenues increased $99,000 versus first quarter 2013 and increased $89,000 versus second quarter 2012. The year-over-year revenue increase results from growth in managed assets and higher fees collected in second quarter 2013. Service charges and fees increased $59,000 versus first quarter 2013 and $28,000 versus second quarter 2012. Income from sales and servicing of mortgage loans in the second quarter decreased by $144,000 as compared to the first quarter 2013 and decreased $97,000 as compared to the second quarter 2012 due to interest rate driven fluctuations in the volume of fixed rate residential mortgage loan sales and mortgage servicing valuations. Mortgage loan sales totaled $5.1 million for second quarter 2013, $8.7 million for first quarter 2013 and $12.2 million for second quarter 2012. Second quarter 2013, first quarter 2013 and second quarter 2012 included mortgage servicing valuation benefit (impairment) charges of $1,000, $33,000 and ($10,000), respectively. Non-interest income for the second quarter 2012 included securities gain of $267,000 as a result of the sale of $2.5 million of US Treasury bonds which partially offset non-recurring pension curtailment and litigation expenses. Other income includes income from bank owned life insurance and rental income.

Non-interest expense

The following table details the principal categories of non-interest expense.

Three months ended June 30, (dollars in thousands)	2013		2012		2013 vs. 2012
Salaries	$	1,835	$	1,748	$	87		4.98	%
Employee benefits		763		957		(194	)	(20.27	)
Premises and equipment		583		591		(8	)	(1.35	)
Data processing		367		418		(51	)	(12.20	)
Professional fees		309		303		6		1.98
Collections and OREO		75		356		(281	)	(78.93	)
FDIC insurance		114		119		(5	)	(4.20	)
Marketing and community support		105		87		18		20.69
Amortization of intangible assets		56		56		—		—
Other		403		390		13		3.33
Non-interest expense	$	4,610	$	5,025	$	(415	)	(8.26	)%

Non-interest expense for second quarter 2013 decreased $95,000 versus first quarter 2013 and $415,000 versus second quarter 2012. Compensation and employee benefits increased $163,000 versus first quarter 2013, and decreased $107,000 versus second quarter 2012. Second quarter 2012 included pension plan curtailment expense of $341,000 from retiree lump-sum withdrawals. The current quarter includes benefit accrual adjustments and one-time expenses related to staffing changes. Premises and equipment remained unchanged versus first quarter 2013 and decreased $8,000 versus second quarter 2012. Data processing decreased $52,000 versus first quarter 2013 and $51,000 versus second quarter 2012. Professional fees decreased $71,000 versus first quarter 2013, and increased $6,000 versus second quarter 2012. First quarter 2013 included legal expenses and an executive search. Collections and OREO decreased $82,000 versus first quarter 2013, and decreased $281,000 versus second quarter 2012 due primarily to decreased litigation and OREO expense. Salisbury had $435,000 in foreclosed property at June 30, 2013. FDIC insurance decreased $11,000 versus first quarter 2013 and decreased $5,000 versus second quarter 2012. Remaining operating expenses decreased $42,000 versus first quarter 2013 and increased $31,000 versus second quarter 2012 due primarily to reductions in other administrative and operational expenses.

Income taxes

The effective income tax rates for second quarter 2013, first quarter 2013 and second quarter 2012 were 20%, 17% and 19%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury’s effective tax rate is generally less than the 34% federal statutory rate due to holdings of tax-exempt municipal bonds, some tax-exempt loans and bank owned life insurance.

Salisbury did not incur Connecticut income tax in 2012 or 2011, other than minimum state income tax, as a result of its utilization of Connecticut tax legislation that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company (“PIC”). In accordance with this legislation, in 2004 the Bank formed a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change in the State of Connecticut corporate tax law.

For the six month periods ended June 30, 2013 and 2012

Overview

Net income available to common shareholders was $1,985,000, or $1.17 per common share, for the six month period ended June 30, 2013 (six month period 2013), compared with $2,234,000, or $1.32 per common share, for the six month period ended June 30, 2012 (six month period 2012).

Earnings per common share decreased $0.15, or 11.4%, to $1.17 versus six month period 2012.

Tax equivalent net interest income decreased $9,000, or 0.1%, to $9.8 million, versus six month period 2012.

Provision for loan losses was $636,000, versus $360,000 for six month period 2012. Net loan charge-offs were $365,000, versus $228,000 for six month period 2012.

Non-interest income decreased $274,000, or 7.7%, versus six month period 2012. Six month period 2012 included a $267,000 securities gain.

Non-interest expense decreased $210,000, or 2.2%, versus six month period 2012. Six month period 2012 included a pension plan curtailment expense of $341,000 and litigation expenses of $340,000, of which $250,000 was non-recurring.

Net Interest Income

Tax equivalent net interest income for six month period 2013 decreased $9,000, or 0.1%, versus six month period 2012. The net interest margin increased 1 basis point to 3.54% from 3.53%.

The following table sets forth the components of Salisbury's fully tax-equivalent (“FTE”) net interest income and yields on average interest-earning assets and interest-bearing funds.

Six months ended June 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)	2013		2012		2013		2012		2013			2012
Loans (a)	$	408,537	$	380,152	$	9,019	$	9,178		4.42	%		4.83	%
Securities (c)(d)		113,667		144,660		2,383		2,887		4.19			3.99
FHLBB stock		5,495		5,855		11		15		0.40			0.52
Short term funds (b)		29,213		28,472		36		28		0.25			0.19
Total earning assets		556,912		559,139		11,449		12,108		4.12			4.33
Other assets		39,936		40,480
Total assets	$	596,848	$	599,619
Interest-bearing demand deposits	$	68,669	$	66,182		139		198		0.41			0.60
Money market accounts		129,990		123,505		177		219		0.27			0.36
Savings and other		106,224		97,469		106		152		0.20			0.31
Certificates of deposit		91,602		101,254		556		721		1.22			1.43
Total interest-bearing deposits		396,485		388,410		978		1,290		0.50			0.67
Repurchase agreements		2,173		8,515		2		18		0.21			0.43
FHLBB advances		31,512		44,951		624		946		3.94			4.16
Total interest-bearing liabilities		430,170		441,876		1,604		2,254		0.75			1.02
Demand deposits		90,794		85,001
Other liabilities		3,273		4,326
Shareholders’ equity		72,611		68,416
Total liabilities & shareholders’ equity	$	596,848	$	599,619
Net interest income					$	9,845	$	9,854
Spread on interest-bearing funds										3.37			3.31
Net interest margin (e)										3.54			3.53

(a)

Includes non-accrual loans.

(b)

Includes interest-bearing deposits in other banks and federal funds sold.

(c)

Average balances of securities are based on historical cost.

(d)

Includes tax exempt income benefit of $607,000 and $484,000, respectively for 2013 and 2012 on tax-exempt securities whose income and yields are calculated on a tax-equivalent basis.

(e)

Net interest income divided by average interest-earning assets.

The following table sets forth the changes in FTE interest due to volume and rate.

Six months ended June 30, (in thousands)	2013 versus 2012
Change in interest due to		Volume			Rate			Net
Interest-earning assets
Loans	$	656		$	(815	)	$	(159	)
Securities		(634	)		130			(504	)
FHLBB stock		(1	)		(3	)		(4	)
Short term funds		1			7			8
Total		22			(681	)		(659	)
Interest-bearing liabilities
Deposits		(37	)		(275	)		(312	)
Repurchase agreements		(10	)		(6	)		(16	)
FHLBB advances		(274	)		(48	)		(322	)
Total		(321	)		(329	)		(650	)
Net change in net interest income	$	343		$	(352	)	$	(9	)

Interest Income

Tax equivalent interest income increased $9,000, or 0.1%, to $9.8 million for six month period 2013 versus six month period 2012.

Loan income decreased $159,000, or 1.7%, primarily due to a 41 basis points decline in the average loan yield offset in part by a $28.4 million, or 7.5%, increase in average loans. Tax equivalent securities income decreased $504,000, or 17.5%, primarily due to a $31.0 million, or 21.4%, decrease in average volume, offset in part by a 20 basis points increase in the average yield. Changes in securities yields resulted from the effect of changes in market interest rates on securities purchases, calls of agency bonds and prepayments of mortgage backed securities. Income from short term funds increased $8,000 as a result of a 6 basis points increase in the average yield and by a $0.7 million increase in the average balance.

Interest Expense

Interest expense decreased $650,000, or 28.8%, to $1.6 million for six month period 2013 versus six month period 2012.

Interest on deposit accounts and retail repurchase agreements decreased $328,000, or 25.1%, as a result of lower average rates, down 17 and 22 basis points respectively, along with an average balance decrease of $6.3 million in repurchase agreements. Decreased rates were offset in part by an $8.1 million, or 2.1%, increase in the average balance of deposits. The lower average rate resulted from the effect of lower market interest rates on rates paid and changes in product mix. The higher average volume resulted from deposit growth.

Interest expense on FHLBB borrowings decreased $322,000 as a result of lower average borrowings, down $13.4 million, and a lower average borrowing rate, down 22 basis points, due to scheduled maturities that were not replaced with new advances.

Provision and Allowance for Loan Losses

The provision for loan losses was $636,000 for six month period 2013 and $360,000 for six month period 2012. Net loan charge-offs were $365,000 and $228,000, for the respective periods.

Reserve coverage at June 30, 2013, as measured by the ratio of allowance for loan losses to gross loans, remained substantially unchanged at 1.10%, as compared with 1.11% a year ago at June 30, 2012. During the first six months of 2013, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) increased $0.8 million to $9.2 million. Such amount represents 2.19% of gross loans receivable, a decrease from 2.21% at June 30, 2012. At June 30, 2013 accruing loans past due 30-89 days increased $1.8 million to $4.3 million, or 1.02% of gross loans receivable from 0.65% at June 30, 2012. See “Financial Condition – Loan Credit Quality” for further discussion and analysis.

Non-interest income

The following table details the principal categories of non-interest income.

Six months ended June 30, (dollars in thousands)	2013		2012			2013 vs. 2012
Trust and wealth advisory fees	$	1,549	$	1,490		$	59		3.96	%
Service charges and fees		1,092		1,068			24		2.25
Gains on sales of mortgage loans, net		431		635			(204	)	(32.13	)
Mortgage servicing, net		34		(89	)		123		138.20
Gains on securities, net		—		279			(279	)	(100.00	)
Other		169		166			3		1.81
Total non-interest income	$	3,275	$	3,549		$	(274	)	(7.72	)%

Non-interest income for the six month period 2013 decreased $274,000 versus six month period 2012. Trust and Wealth Advisory revenues increased $59,000 from growth in managed assets, offset slightly by lower estate and tax preparation fees collected in 2013. Service charges and fees increased $24,000 due primarily to higher interchange fees resulting from increased volume. Income from sales and servicing of mortgage loans decreased $204,000 due to interest rate driven fluctuations in the volume of fixed rate residential mortgage loan sales and mortgage servicing valuations. Mortgage loans sales totaled $13.8 million for six month period 2013 and $28.5 million for six month period 2012. Six month period 2013 and 2012 included mortgage servicing valuation benefit (impairment) charges of $34,000 and ($102,000), respectively. Six month period 2013 no gains on securities were realized, while six month period 2012 gains on securities resulted from the sale of $2.5 million of US Treasury bonds. Other income includes bank owned life insurance income and rental income.

Non-interest expense

The following table details the principal categories of non-interest expense.

Six months ended June 30, (dollars in thousands)	2013		2012		2013 vs. 2012
Salaries	$	3,585	$	3,458	$	127		3.67	%
Employee benefits		1,448		1,647		(199	)	(12.08	)
Premises and equipment		1,166		1,196		(30	)	(2.51	)
Data processing		787		821		(34	)	(4.14	)
Professional fees		689		616		73		11.85
Collections and OREO		230		467		(237	)	(50.75	)
FDIC insurance		239		247		(8	)	(3.24	)
Marketing and community contributions		228		175		53		30.29
Amortization of intangible assets		111		111		—		—
Other		833		788		45		5.71
Non-interest expense	$	9,316	$	9,526	$	(210	)	(2.20	)%

Non-interest expense for six month period 2013 decreased $210,000 versus six month period 2012. Salaries increased $127,000 due to changes in staffing levels and mix and annual salary increases. Employee benefits decreased $199,000 due primarily to lower pension plan expenses in 2013. A hard freeze was put on the defined benefit pension plan as of December 31, 2012 thereby reducing 2013 expenses and a curtailment expense of $341,000 from retiree lump-sum withdrawals was realized in 2012, These lower pension expenses were offset in part by new deferred compensation plans implemented to replace the pension plan. Premises and equipment decreased $30,000 due primarily to upgraded equipment and software purchased in 2012. The decrease was offset slightly by higher building maintenance and repairs, snow removal and utilities in 2013.

Data processing decreased $34,000 due primarily to lower tax preparation fees assessed in the Trust area. Professional fees increased $73,000 due primarily to higher investment management fees associated with the growth in trust and wealth advisory assets under management and increased legal fees associated with new compensation plans. Collections and OREO expense decreased $237,000 due primarily to lower litigation expenses, down $258,000, and delinquent real estate taxes, down $40,000, offset in part by higher appraisal and inspection expenses, up $46,000. Salisbury had one foreclosed property at June 30, 2013. FDIC insurance decreased $8,000. Marketing and contributions increased $53,000 due primarily to timing of general marketing campaigns and increased contributions to community organizations. Other operating expenses increased $45,000 due to higher other administrative and operational expenses.

Income taxes

The effective income tax rates for six month period 2013 and six month period 2012 were 18.59% and 21.97%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury’s effective tax rate is generally less than the 34% federal statutory rate due to holdings of tax-exempt municipal bonds, some tax-exempt loans and bank owned life insurance.

FINANCIAL CONDITION

Overview

Total assets were $600.7 million at June 30, 2013, down $0.1 million from December 31, 2012. Loans receivable, net, were $416.7 million at June 30, 2013, up $28.0 million, or 7.2%, from December 31, 2012. Non-performing assets were $9.6 million at June 30, 2013, down $0.5 million from $10.1 million at December 31, 2012. Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, was 1.10%, 1.11% and 1.11%, at June 30, 2013, December 31, 2012 and June 30, 2012, respectively. Deposits were $492.0 million, up $0.8 million from $491.2 million at December 31, 2012.

At June 30, 2013, book value and tangible book value per common share were $32.45 and $26.30, respectively. Salisbury’s Tier 1 leverage and total risk-based capital ratios were 10.23% and 16.48%, respectively, and above the “well capitalized” limits as defined by the FRB.

Securities and Short Term Funds

During second quarter 2013, securities decreased $12.1 million to $106.6 million, and FHLBB advances decreased $0.4 million, while cash and cash-equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) increased $1.6 million to $33.0 million as Salisbury slightly increased its liquidity position in light of upcoming borrowing maturities and growth in volatile deposits.

Salisbury evaluates securities for 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.

Salisbury does not intend to sell any of its securities and it is not more likely than not that Salisbury will be required to sell any of its securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider any of its securities, other than four non-agency CMO securities reflecting OTTI, to be OTTI at June 30, 2013.

In 2009 Salisbury determined that five non-agency CMO securities reflected OTTI and recognized losses for deterioration in credit quality of $1.1 million. Salisbury judged the four remaining securities not to have additional OTTI and all other CMO securities not to be OTTI as of June 30, 2013. 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.

Accumulated other comprehensive income at June 30, 2013 included net unrealized holding gains, net of tax, of $1.3 million, a decrease of $1.6 million over December 2012, partially offset by unrecognized pension plan expense, net of tax, of $0.5 million and $0.5 million respectively.

Loans

Net loans receivable increased $27.9 million during first half 2013 to $416.7 million at June 30, 2013, compared with $388.8 million at December 31, 2012.

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

(in thousands)	June 30, 2013			December 31, 2012
Residential 1-4 family	$	218,654		$	198,552
Residential 5+ multifamily		4,881			3,889
Construction of residential 1-4 family		732			2,379
Home equity credit		33,561			34,162
Residential real estate		257,828			238,982
Commercial		92,841			87,382
Construction of commercial		9,129			5,823
Commercial real estate		101,970			93,205
Farm land		4,233			4,320
Vacant land		9,215			9,926
Real estate secured		373,246			346,433
Commercial and industrial		39,035			38,094
Municipal		4,049			3,378
Consumer		3,902			4,181
Loans receivable, gross		420,232			392,086
Deferred loan origination fees and costs, net		1,129			1,032
Allowance for loan losses		(4,632	)