Edgar Filing: SALISBURY BANCORP INC

form10q-111323_sal.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

(860) 435-9801

(Registrant's telephone number, including area code)

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

Yes x No o

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

Yes o No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company ý

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

Yes o No x

The number of shares of Common Stock outstanding as of November 15, 2010, is 1,687,661.

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		Page

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009	3

	Consolidated Statements of Income for the three and nine month periods	4
	ended September 30, 2010 and September 30, 2009 (unaudited)

	Consolidated Statements of Changes in Shareholders' Equity for the nine month	5
	periods ended September 30, 2010 and September 30, 2009 (unaudited)

	Consolidated Statements of Cash Flows for the nine month periods ended	6
	September 30, 2010 and September 30, 2009 (unaudited)

	Notes to Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition	18
	and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	32

PART II Other Information

Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults upon Senior Securities	33
Item 4.	Reserved	33
Item 5.	Other Information	33
Item 6.	Exhibits	33

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Item 1.

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts) September 30, 2010 unaudited and December 31, 2009 audited	September 30, 2010			December 31, 2009
ASSETS
Cash and due from banks	$	6,119		$	6,248
Interest bearing demand deposits with other banks		40,238			37,050
Total cash and cash equivalents		46,357			43,298
Interest bearing time deposits with other banks		5,000			5,000
Securities
Available-for-sale at fair value		150,351			145,031
Held-to-maturity at amortized cost (fair value: $60 and $62)		58			62
Federal Home Loan Bank of Boston stock at cost		6,032			6,032
Loans held-for-sale		2,183			665
Loans receivable, net (allowance for loan losses: $3,847 and $3,473)		340,387			327,257
Investment in real estate		75			75
Other real estate owned		-			275
Bank premises and equipment, net		11,896			10,434
Goodwill		9,829			9,829
Intangible assets (net of accumulated amortization: $1,246 and $1,079)		1,298			1,464
Accrued interest receivable		1,989			2,177
Cash surrender value of life insurance policies		3,812			3,685
Deferred taxes		1,067			3,285
Other assets		3,419			3,778
Total Assets	$	583,753		$	562,347
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	73,318		$	70,026
Demand (interest bearing)		64,082			43,845
Money market		72,557			64,477
Savings and other		91,586			86,316
Certificates of deposit		129,978			153,539
Total deposits		431,521			418,203
Repurchase agreements		16,333			11,415
Federal Home Loan Bank of Boston advances		74,532			76,364
Accrued interest and other liabilities		3,937			4,010
Total Liabilities		526,323			509,992
Commitments and contingencies		-			-
Shareholders' Equity
Preferred stock - $.01 per share par value
Authorized: 25,000; Shares issued: 8,816;
Liquidation preference: $1,000 per share		8,733			8,717
Common stock - $.10 per share par value
Authorized: 3,000,000
Issued: 1,687,661 and 1,686,701		168			168
Common stock warrants outstanding		112			112
Paid-in capital		13,200			13,177
Retained earnings		35,915			35,259
Accumulated other comprehensive loss, net		(698	)		(5,078	)
Total Shareholders' Equity		57,430			52,355
Total Liabilities and Shareholders' Equity	$	583,753		$	562,347

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

	Three months ended					Nine months ended
Periods ended September 30, (in thousands except per share amounts) unaudited	2010			2009		2010			2009
Interest income
Interest and fees on loans	$	4,693		$	4,643	$	13,780		$	13,606
Interest on debt securities
Taxable		913			1,369		2,872			3,965
Tax exempt		558			635		1,678			1,912
Other interest		42			56		126			67
Total interest income		6,206			6,703		18,456			19,550
Interest expense
Deposits		1,061			1,433		3,385			4,428
Repurchase agreements		25			33		71			100
Federal Home Loan Bank of Boston advances		765			791		2,283			2,322
Total interest expense		1,851			2,257		5,739			6,850
Net interest income		4,355			4,446		12,717			12,700
Provision for loan losses		180			180		620			925
Net interest income after provision for loan losses		4,175			4,266		12,097			11,775
Non-interest income
Trust and wealth advisory		471			463		1,507			1,433
Service charges and fees		581			492		1,576			1,343
Gains (losses) on securities, net		16			-		16			436
Gains on sales of mortgage loans, net		297			83		498			387
Mortgage servicing, net		(52	)		3		(28	)		76
Other		63			189		208			380
Total non-interest income, excluding other-than-temporary impairment losses		1,376			1,230		3,777			4,055
Other-than-temporary impairment losses on securities		-			-		-			(2,302	)
Portion of loss recognized in other comprehensive income (before tax)		-			-		-			1,174
Net other-than-temporary impairment losses recognized in earnings		-			-		-			(1,128	)
Total non-interest income		1,376			1,230		3,777			2,927
Non-interest expense
Salaries		1,803			1,840		5,085			5,048
Employee benefits		522			908		1,737			2,040
Premises and equipment		560			510		1,570			1,467
Data processing		308			327		1,080			1,040
Professional fees		403			376		1,260			1,108
FDIC insurance		195			208		549			741
Marketing and community support		79			71		200			236
Amortization of intangibles		56			41		167			123
Other		442			493		1,319			1,364
Total non-interest expense		4,368			4,774		12,967			13,167
Income before income taxes		1,183			722		2,907			1,535
Income tax provision (benefit)		236			2		487			(83	)
Net income attributable to Salisbury Bancorp, Inc.		947			720		2,420			1,618
Preferred stock dividends and accretion of preferred stock discount		115			115		347			250
Net income available to common shareholders	$	832		$	605	$	2,073		$	1,368

Basic and diluted earnings per share	$	0.49		$	0.36	$	1.23		$	0.81
Common dividends per share		0.28			0.28		0.84			0.84

See accompanying notes to consolidated financial statements.

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

	Common Stock
(dollars in thousands)	Shares		Amount		Preferred Stock		Warrants		Paid-in capital		Retained earnings			Accumulated other comp- rehensive loss			Total share-holders' equity
Balances at December 31, 2009		1,686,701	$	168	$	8,717	$	112	$	13,177	$	35,259		$	(5,078	)	$	52,355
Net income for year		-		-		-		-		-		2,420			-			2,420
Other comprehensive income, net of tax		-		-		-		-		-		-			4,380			4,380
Total comprehensive income																		6,800
Issuance of preferred stock and warrants		-		-		-		-		-		-			-			-
Accretion of preferred stock discount		-		-		16		-		-		(16	)		-			-
Common stock dividends declared		-		-		-		-		-		(1,417	)		-			(1,417	)
Preferred stock dividends paid		-		-		-		-		-		(331	)		-			(331	)
Issuance of common stock for
directors fees		960		-		-		-		23		-			-			23
Balances at September 30, 2010		1,687,661	$	168	$	8,733	$	112	$	13,200	$	35,915		$	(698	)	$	57,430

Balances at December 31, 2008		1,685,861	$	168	$	-	$	-	$	13,158	$	34,518		$	(8,905	)	$	38,939
Net income for year		-		-		-		-		-		1,618			-			1,618
Other comprehensive income, net of tax		-		-		-		-		-		-			4,216			4,216
Total comprehensive income																		5,834
Issuance of preferred stock and warrants		-		-		8,704		112		-		-			-			8,816
Accretion of preferred stock discount		-		-		8		-		-		(8	)		-			-
Common stock dividends declared		-		-		-		-		-		(944	)		-			(944	)
Preferred stock dividends paid		-		-		-		-		-		(186	)		-			(186	)
Issuance of common stock for
directors fees		840		-		-		-		19		-			-			19
Balances at September 30, 2009		1,686,701	$	168	$	8,712	$	112	$	13,177	$	34,998		$	(4,689	)	$	52,478

See accompanying notes to consolidated financial statements.

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30, (in thousands) unaudited	2010			2009
Operating Activities
Net income	$	2,420		$	1,618
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion), amortization and depreciation
Securities		408			392
Bank premises and equipment		632			535
Core deposit intangible		167			123
Mortgage servicing rights		118			127
Fair value adjustment on loans		33			36
Fair value adjustment on deposits and borrowings		-			(54	)
(Gains) and losses
Sales and calls of securities available-for-sale, net		(16	)		(436	)
Write down of available-for-sale securities		-			1,128
Provision for loan losses		620			925
(Increase) decrease in loans held-for-sale		(1,518	)		1,141
Increase in deferred loan origination fees and costs, net		(157	)		(112	)
Mortgage servicing rights originated		(226	)		(291	)
Increase (decrease) in mortgage servicing rights impairment reserve		51			(90	)
Increase in unearned income on loans		-			6
Decrease in interest receivable		188			207
Deferred tax (benefit) expense		(23	)		(21	)
Decrease (increase) in prepaid expenses		529			(345	)
(Increase) decrease in cash surrender value of life insurance policies		(127	)		189
Increase in income tax receivable		(291	)		(477	)
Decrease (increase) in other assets		103			(19	)
Increase in accrued expenses		202			115
(Decrease) increase in interest payable		(73	)		72
(Decrease) increase in other liabilities		(169	)		11
Issuance of shares for directors’ fee		23			19
Net cash provided by operating activities		2,894			4,799
Investing Activities
Purchase of interest-bearing time deposits with other banks		-			(5,000	)
Purchase of Federal Home Loan Bank stock		-			(570	)
Purchases of securities available-for-sale		(42,987	)		(98,738	)
Proceeds from sales of securities available-for-sale		-			44,124
Proceeds from calls of securities available-for-sale		20,734			27,991
Proceeds from maturities of securities available-for-sale		23,115			-
Proceeds from maturities of securities held-to-maturity		4			4
Loan originations and principle collections, net		(13,373	)		(15,105	)
Purchases of loans		-			(76	)
Recoveries of loans previously charged-off		21			25
Proceeds from sale of other real estate owned		-			205
Capital expenditures		(2,005	)		(2,270	)
Net cash utilized by investing activities	$	(14,491	)	$	(49,410	)

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine months ended September 30, (in thousands) unaudited	2010			2009
Financing Activities
Increase in deposit transaction accounts, net	$	36,879		$	34,284
(Decrease) increase in time deposits, net		(23,561	)		35,590
Decrease in securities sold under agreements to repurchase, net		4,918			4,259
Federal Home Loan Bank of Boston advances		-			12,000
Principle payments on Federal Home Loan Bank of Boston advances		(1,832	)		(2,215	)
Decrease in short term Federal Home Loan Bank of Boston advances, net		-			(20,878	)
Proceeds from issuance of preferred and common stock		-			8,824
Common stock dividends paid		(1,417	)		(1,416	)
Preferred stock dividends paid		(331	)		(194	)
Net cash provided by financing activities		14,656			70,254
Net increase in cash and cash equivalents		3,059			25,643
Cash and cash equivalents, beginning of period		43,298			9,659
Cash and cash equivalents, end of period	$	46,357		$	35,302
Cash paid during period
Interest	$	5,815		$	4,555
Income taxes		173			183

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 - BASIS OF PRESENTATION

The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Salisbury and the statements of income, shareholder’s 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 nine month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2009 Annual Report on Form 10-K for the period ended December 31, 2009.

The allowance for loan losses is a significant accounting policy and is presented in the Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis, which provide information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

Impact of New Accounting Pronouncements Issued

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets,” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” These standards are effective for the first interim reporting period of 2010. SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a qualifying special-purpose entity (“QSPE”) and changes some of the requirements for derecognizing financial assets. SFAS No. 167 amends the consolidation guidance in ASC 810-10. Specifically, the amendments will (a) eliminate the exemption for QSPEs from the new guidance, (b) shift the determination of which enterprise should consolidate a variable interest entity (“VIE”) to a current control approach, such that an entity that has both the power to make decisions and right to receive benefits or absorb losses that could potentially be significant, will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE. These standards did not impact Salisbury’s financial statements.

In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives.” The ASU clarifies that certain embedded derivatives, such as those contained in certain securitizations, CDOs and structured notes, should be considered embedded credit derivatives subject to potential bifurcation and separate fair value accounting. The ASU allows any beneficial interest issued by a securitization vehicle to be accounted for under the fair value option at transition. At transition, a company may elect to reclassify various debt securities (on an instrument-by-instrument basis) from held-to-maturity (HTM) or available-for-sale (AFS) to trading. The new rules are effective July 1, 2010. This standard did not impact Salisbury’s financial statements.

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements.” The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 of the fair value hierarchy and describing the reasons for the transfers. The disclosures are effective for reporting periods beginning after December 15, 2009. Salisbury adopted ASU 2010-06 as of January 1, 2010. The required disclosures are included in Note 10. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in the Level 3 of the fair value measurement hierarchy will be required for fiscal years beginning after December 15, 2010.

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

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

Acquisition

Salisbury assumed approximately $11 million in deposits and acquired approximately $2.5 million in loans and the branch office located at 10 Granite Ave., Canaan, Connecticut from Webster Bank, National Association, as of the close of business on December 4, 2009. Salisbury recorded a core deposit intangible of $463,000 for deposits assumed.

NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)	Amortized cost (1)		Gross un- realized gains		Gross un- realized losses			Fair value
September 30, 2010
Available-for-sale
U.S. Treasury notes	$	5,000	$	393	$	-		$	5,393
U.S. Government Agency notes		40,604		662		-			41,266
Municipal bonds		51,302		599		(1,797	)		50,104
Mortgage backed securities
U.S. Government Agencies		20,751		597		(1	)		21,347
Collateralized mortgage obligations
U.S. Government Agencies		4,842		38		-			4,880
Non-agency		20,590		779		(629	)		20,740
SBA bonds		5,375		74		-			5,449
Corporate bonds		1,087		49		-			1,136
Preferred Stock		20		16		-			36
Total securities available-for-sale	$	149,571	$	3,207	$	(2,427	)	$	150,351
Held-to-maturity
Mortgage backed security	$	58	$	2	$	-		$	60
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	6,032	$	-	$	-		$	6,032
December 31, 2009
Available-for-sale
U.S. Treasury bills	$	1,999	$	1	$	-		$	2,000
U.S. Government Agency notes		24,833		125		(126	)		24,832
Municipal bonds		51,775		113		(4,735	)		47,153
Mortgage backed securities
U.S. Government Agencies		33,535		535		(143	)		33,927
Collateralized mortgage obligations
U.S. Government Agencies		5,696		-		(58	)		5,638
Non-agency		25,317		433		(2,121	)		23,629
SBA bonds		6,581		59		-			6,640
Corporate bonds		1,079		49		-			1,128
Preferred Stock		20		64		-			84
Total securities available-for-sale	$	150,835	$	1,379	$	(7,183	)	$	145,031
Held-to-maturity
Mortgage backed security	$	62	$	-	$	-		$	62
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	6,032	$	-	$	-		$	6,032

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

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Sales of securities available-for-sale and gains realized are as follows:

	Three months				Nine months
Period ended September 30, (in thousands)	2010		2009		2010		2009
Proceeds	$	-	$	-	$	-	$	22,233
Gains realized		-		-		-		416
Losses realized		-		-		-		8
Net gains realized		-		-		-		408
Income tax provision		-		-		-		139

Included in non-agency Collateralized Mortgage Obligations (“CMOs”) are seven securities issued by Wells Fargo with an aggregate amortized cost basis and fair value of $7,031,000 and $7,220,000, respectively, that exceeded 10% of shareholders’ equity as of September 30, 2010.

The following table summarizes, for all securities in an unrealized loss position, including debt securities for which a portion of other-than-temporary impairment (“OTTI”) 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				Totals
(in thousands)	Fair Value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
September 30, 2010
Available-for-sale
U.S. Government Agency notes	$	-	$	-	$	-	$	-	$	-	$	-
Municipal Bonds		-		-		16,798		1,797		16,798		1,797
Mortgage backed securities		470		1		-		-		470		1
Collateralized mortgage obligations
U.S. Government Agencies		-		-		-		-		-		-
Non-agency		36		27		8,026		602		8,062		629
Total temporarily impaired securities		506		28		24,824		2,399		25,330		2,427
Other-than-temporarily impaired securities
Collateralized mortgage obligations
Non-agency		-		-		-		-		-		-
Total temporarily impaired and other-than-
temporarily impaired securities	$	506	$	28	$	24,824	$	2,399	$	25,330	$	2,427

Salisbury evaluates its individual available-for-sale investment securities for OTTI on at least a quarterly basis. 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 believes that principal and interest on U.S Treasury securities, mortgage-backed securities or securities backed by a U.S. government sponsored entity and the Small Business Administration and bank qualified insured municipal securities are deemed recoverable.

Salisbury adopted ASC 320-10-65, “Investments-Debt and Equity Securities/Transition and Open Effective Date Information”, (previously FSP FAS No. 115-2 and FAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments), effective April 1, 2009. ASC 320-10-65 requires an assessment of OTTI whenever the fair value of a security is less than its amortized cost basis at the balance sheet date. Amortized cost basis includes adjustments made to the cost of a security for accretion, amortization, collection of cash and previous OTTI recognized into earnings.

Salisbury performed a detailed cash flow analysis of its non-agency CMOs at September 30, 2010 to assess whether any of the

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securities were OTTI. Salisbury uses a third party provider to generate 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.

During 2009, Salisbury determined that five non-agency CMO securities reflected OTTI and recognized credit losses of $1,128,000. Salisbury judged all other CMO securities not to be OTTI as of September 30, 2010. It is possible that future loss assumptions could change and cause future OTTI credit losses in these securities.

Salisbury does not intend to sell the securities, which it has judged to be OTTI, and it is not more likely than not that it will be required to sell these securities before its anticipated recovery of each security’s remaining amortized cost basis. For the remainder of Salisbury’s securities portfolio that have experienced decreases in the fair value, the decline is considered to be temporary as Salisbury expects to recover the entire amortized cost basis on the securities and neither intends to sell these securities nor is it more likely than not that it will be required to sell these securities.

Securities for which an OTTI has been recognized are as follows:

(in thousands)	September 30, 2010		December 31, 2009
Non-Agency CMOs
Total OTTI losses (unrealized and realized)	$	-	$	2,302
Less: unrealized OTTI recognized in other comprehensive loss		-		1,174
Net impairment losses recognized in earnings	$	-	$	1,128

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

Nine months ended September 30 (in thousands)	2010		2009
Balance, beginning of period	$	1,128	$	-
Amounts related to the credit component on debt securities in which OTTI was not previously recognized		-		1,128
Balance, end of period	$	1,128	$	1,128

NOTE 3 - LOANS

The composition of the loan portfolio is as follows:

(in thousands)	September 30, 2010			December 31, 2009
Loans receivable, net
Real estate mortgages:
Residential	$	166,251		$	163,863
Commercial		81,379			70,066
Construction, land & land development		30,519			31,011
Home equity credit		33,443			33,099
Total mortgage loans		311,592			298,039
Commercial and industrial		26,655			26,400
Consumer		5,024			5,436
Other		220			269
Total loans, gross		343,491			330,144
Deferred loan origination fees and costs, net		743			586
Allowance for loan losses		(3,847	)		(3,473	)
Total loans, net	$	340,387		$	327,257
Loans held-for-sale
Residential mortgages	$	2,183		$	665

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Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Three months						Nine months
Periods ended September 30, (in thousands)	2010			2009			2010			2009
Balance, beginning of period	$	3,768		$	3,309		$	3,473		$	2,724
Provision for losses		180			180			620			925
Charge-offs		(109	)		(69	)		(268	)		(245	)
Recoveries		8			9			22			25
Balance, end of period	$	3,847		$	3,429		$	3,847		$	3,429

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.

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:

(in thousands)	September 30, 2010		December 31, 2009
Residential mortgage loans serviced for others	$	78,119	$	72,962
Fair value of mortgage servicing rights		517		473

Changes in mortgage servicing rights are as follows:

	Three months						Nine months
Periods ended September 30, (in thousands)	2010			2009			2010			2009
Loan Servicing Rights
Balance, beginning of period	$	465		$	375		$	427		$	227
Originated		115			56			226			291
Amortization (1)		(45	)		(39	)		(118	)		(126	)
Balance, end of period		535			392			535			392
Valuation Allowance
Balance, beginning of period		(24	)		(29	)		(30	)		(118	)
Decrease (increase) in impairment reserve (1)		(57	)		0			(51	)		89
Balance, end of period		(81	)		(29	)		(81	)		(29	)
Loan servicing rights, net	$	454		$	363		$	454		$	363

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

NOTE 4 - IMPAIRED LOANS

Impaired loans are loans for which it is probable that Salisbury will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogenous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. The components of impaired loans are as follows:

(in thousands)	September 30, 2010		December 31, 2009
Non-accrual loans, excluding troubled debt restructured loans	$	5,077	$	5,098
Non-accrual troubled debt restructured loans		5,745		2,341
Accruing troubled debt restructured loans		4,448		4,566
Total impaired loans	$	15,270	$	12,005
Requiring valuation allowance	$	4,613	$	3,388
Not requiring valuation allowance		10,657		8,617
Total impaired loans	$	15,270	$	12,005
Valuation allowance	$	515	$	388
Commitments to lend additional amounts to impaired borrowers		-		-

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NOTE 5 - PLEDGED ASSETS

The following securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase, FHLBB advances and credit facilities available.

(in thousands)	September 30, 2010		December 31, 2009
Securities available-for-sale (at fair value)	$	62,695	$	63,097
Loans receivable		105,332		104,960
Total pledged assets	$	168,027	$	168,057

At September 30, 2010, securities were pledged as follows: $45.5 million to secure public deposits and Treasury Tax and Loan deposits, $13.7 million to secure repurchase agreements and $3.5 million to secure FHLBB advances. Loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 6 – EARNINGS PER SHARE

The calculation of earnings per share is as follows:

	Three months				Nine months
Periods ended September 30, (in thousands, except per share amounts)	2010		2009		2010		2009
Net income	$	947	$	720	$	2,420	$	1,618
Preferred stock net accretion		5		5		16		8
Preferred stock dividends paid and accrued		110		110		331		242
Net income available to common shareholders	$	832	$	605	$	2,073	$	1,368
Weighted average common stock outstanding - basic		1,686		1,686		1,686		1,686
Weighted average common and common equivalent stock outstanding- diluted		1,686		1,686		1,686		1,686
Earnings per common and common equivalent share
Basic	$	0.49	$	0.36	$	1.23	$	0.81
Diluted		0.49		0.36		1.23		0.81

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 September 30, 2010, that Salisbury and the Bank meet all of their capital adequacy requirements.

Salisbury and the Bank were classified, as of their most recent notification, as "well capitalized". Their 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:

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	Actual					For Capital Adequacy Purposes					To be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2010
Total Capital (to risk-weighted assets)
Salisbury	$	50,887		13.87	%	$	29,345		8.0	%		n/a		-
Bank		41,300		11.29			29,258		8.0		$	36,572		10.0	%
Tier 1 Capital (to risk-weighted assets)
Salisbury		47,001		12.81			14,672		4.0			n/a		-
Bank		37,415		10.23			14,629		4.0			21,943		6.0
Tier 1 Capital (to average assets)
Salisbury		47,001		8.32			22,599		4.0			n/a		-
Bank		37,415		6.62			22,599		4.0			28,249		5.0
September 30, 2009
Total Capital (to risk-weighted assets)
Salisbury		49,840		13.22			30,150		8.0			n/a		-
Bank		40,165		10.68			30,092		8.0			37,615		10.0
Tier 1 Capital (to risk-weighted assets)
Salisbury		46,319		12.29			15,075		4.0			n/a		-
Bank		36,645		9.74			15,046		4.0			22,569		6.0
Tier 1 Capital (to average assets)
Salisbury		46,319		8.57			21,631		4.0			n/a		-
Bank		36,645		6.78			21,631		4.0			27,039		5.0

Restrictions on Cash Dividends to Common Shareholders

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

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

Further restrictions on cash dividends are imposed on Salisbury because of Salisbury’s issuance of Preferred Stock on March 13, 2009 in the United States Treasury’s Troubled Asset Relief Program’s Capital Purchase Program (the “CPP”). These preclude the payment of any common stock cash dividends if Salisbury is not paying the preferred stock dividend. Additionally, the common stock dividend may not be increased without prior approval from the Treasury for the first three years Salisbury is a CPP participant unless all CPP preferred shares are redeemed or transferred to third parties.

Preferred Stock

In March 2009, Salisbury issued to the U.S. Treasury Department (“Treasury”) $8,816,000 of Preferred Stock under the CPP of the Emergency Economic Stabilization Act of 2008.

The Preferred Stock qualifies as Tier 1 capital for regulatory purposes and ranks senior to the Common Stock. The Preferred Stock pays a cumulative dividend of 5 percent per annum for the first five years it is outstanding and thereafter at a rate of 9 percent per annum. The Preferred Stock is non-voting, other than voting rights on matters that could adversely affect the Preferred Stock. The Preferred Stock is redeemable at one hundred percent of the issue price plus any accrued and unpaid dividends.

As part of the CPP, Salisbury issued to the Treasury a 10-year Warrant to purchase 57,671 shares of Common Stock at an exercise price of $22.93 per share. If the Warrant were fully exercised, Salisbury estimates that the ownership

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percentage of the current shareholders would be diluted by approximately 3.3% percent.

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						Nine months
Periods ended September 30, (in thousands)	2010			2009			2010			2009
Service cost	$	87		$	69		$	261		$	284
Interest cost on benefit obligation		90			79			271			280
Expected return on plan assets		(99	)		(85	)		(298	)		(265	)
Curtailments and settlements		-			437			-			437
Amortization of net loss		17			21			51			86
Net periodic benefit cost	$	95		$	521		$	285		$	822

Salisbury’s 401(k) Plan contribution expense was $41,000 and $30,000, respectively, for the three month periods ended September 30, 2010 and 2009. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $12,000 and $11,000, respectively, for the three month periods ended September 30, 2010 and 2009.

NOTE 9 - COMPREHENSIVE INCOME

Comprehensive income includes net income and any changes in equity from non-owner sources that are not recorded in the income statement (such as changes in net unrealized gains (losses) on securities). The purpose of reporting comprehensive income is to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners.

The components of comprehensive income are as follows:

	Three months						Nine months
Periods ended September 30, (in thousands)	2010			2009			2010			2009
Net income	$	947		$	720		$	2,420		$	1,618
Other comprehensive income
Net unrealized gains (losses) on securities available-for-sale		3,291			6,527			6,600			5,575
Reclassification of net realized (gains) losses in net income		(16	)		-			(16	)		692
Unrealized gains (losses) on securities available-for-sale		3,275			6,527			6,584			6,267
Income tax (expense) benefit		(587	)		(2,195	)		(2,238	)		(2,108	)
Unrealized gains (losses) on securities available-for-sale, net of tax		2,688			4,332			4,346			4,159
Pension plan income		17			31			52			90
Income tax expense		(6	)		(17	)		(18	)		(33	)
Pension plan income, net of tax		11			14			34			57
Other comprehensive income, net of tax		2,699			4,346			4,380			4,216
Comprehensive income	$	3,646		$	5,066		$	6,800		$	5,834

The components of accumulated other comprehensive loss is as follows:

(in thousands)	September 30, 2010			December 31, 2009
Unrealized gains (losses) on securities available-for-sale, net of tax	$	515		$	(3,831	)
Unrecognized pension plan expense, net of tax		(1,213	)		(1,247	)
Accumulated other comprehensive loss, net	$	(698	)	$	(5,078	)

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, Salisbury may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

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Salisbury 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.

Level 1 - 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 - Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 - 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 description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of Salisbury’s financial assets and financial liabilities carried at fair value effective January 1, 2008. Salisbury did not have any significant transfers of assets or liabilities to or from Levels 1 and 2 of the fair value hierarchy during the three and nine months ended September 30, 2010.

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.

Salisbury’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

Salisbury’s investments in debt securities and mortgage-backed securities available-for-sale are generally classified within level 2 of the fair value hierarchy. For these securities, Salisbury obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

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 third-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.

Salisbury’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using level 2 inputs based upon appraisals of similar properties obtained from a third party. For level 3 inputs, fair values are based upon management’s estimates.

			Fair Value Measurements at Reporting Date Using
(in thousands)	September 30, 2010		Quoted prices in Active markets for Identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
Items Measured at Fair Value
Recurring basis
Securities available-for-sale	$	150,351	$	36	$	150,315	$	-
Non-recurring basis
Impaired loans		4,682		-