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EX-32 - EXHIBIT 32 - SALISBURY BANCORP INCex32.htm
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EX-31.2 - EXHIBIT 31.2 - SALISBURY BANCORP INCex31_2.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 March 31, 2011

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

Commission file number 0-24751
SALISBURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Connecticut
06-1514263
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer 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_________ No_________

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No x
The number of shares of Common Stock outstanding as of May 16, 2011, is 1,687,661.



 
1

 

TABLE OF CONTENTS

   
Page
     
PART I  FINANCIAL INFORMATION
     
Item 1.
Financial Statements:
 
     
 
Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010
3
     
 
Consolidated Statements of Income for the three month periods
 
 
ended March 31, 2011 and March 31, 2010 (unaudited)
4
     
 
Consolidated Statements of Changes in Shareholders' Equity for the three month
 
 
periods ended March 31, 2011 and March 31, 2010 (unaudited)
5
     
 
Consolidated Statements of Cash Flows for the three month periods ended
 
 
March 31, 2011 and March 31, 2010 (unaudited)
6
     
 
Notes to Consolidated Financial Statements
7
     
Item 2.
Management's Discussion and Analysis of Financial Condition
 
 
and Results of Operations
20
     
Item 3.
Quantitative and Qualitative Disclosure of Market Risk
32
     
Item 4.
Controls and Procedures
33
     
PART II Other Information
     
Item 1.
Legal Proceedings
33
Item 1A.
Risk Factors
34
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
34
Item 3.
Defaults upon Senior Securities
34
Item 4.
Removed and Reserved
34
Item 5.
Other information
34
Item 6.
Exhibits
34
 

PART I - FINANCIAL INFORMATION
Salisbury Bancorp, Inc. and Subsidiary

 in thousands (except share data) unaudited
 
March 31,
2011
   
December 31,
2010
 
ASSETS
           
Cash and due from banks
  $ 5,349     $ 6,694  
Interest bearing demand deposits with other banks
    37,742       20,214  
Total cash and cash equivalents
    43,091       26,908  
Interest bearing time deposits with other banks
    5,000       5,000  
Securities
               
Available-for-sale at fair value
    125,223       147,422  
Held-to-maturity at amortized cost (fair value: $56 and $58)
    55       56  
Federal Home Loan Bank of Boston stock at cost
    6,032       6,032  
Loans held-for-sale
    187       1,184  
Loans receivable, net (allowance for loan losses: $3,978 and $3,920)
    361,238       352,449  
Investment in real estate
    75       75  
Other real estate owned
    866       610  
Bank premises and equipment, net
    12,303       12,190  
Goodwill
    9,829       9,829  
Intangible assets (net of accumulated amortization: $1,357 and $1,301)
    1,186       1,242  
Accrued interest receivable
    2,002       2,132  
Cash surrender value of life insurance policies
    3,893       3,854  
Deferred taxes
    2,260       2,540  
Other assets
    3,654       3,947  
Total Assets
  $ 576,894     $ 575,470  
LIABILITIES and SHAREHOLDERS' EQUITY
               
Deposits
               
Demand (non-interest bearing)
  $ 74,690     $ 71,565  
Demand (interest bearing)
    59,311       63,258  
Money market
    106,468       77,089  
Savings and other
    97,407       93,324  
Certificates of deposit
    114,503       125,053  
Total deposits
    452,379       430,289  
Repurchase agreements
    8,241       13,190  
Federal Home Loan Bank of Boston advances
    55,888       72,812  
Accrued interest and other liabilities
    4,438       4,163  
Total Liabilities
    520,946       520,454  
Commitments and contingencies
    -       -  
Shareholders' Equity
               
Preferred stock - $.01 per share par value
               
Authorized: 25,000; Shares issued: 8,816;
               
Liquidation preference: $1,000 per share
    8,743       8,738  
Common stock - $.10 per share par value
               
Authorized: 3,000,000;
               
Issued: 1,686,701 and 1,685,861
    168       168  
Common stock warrants outstanding
    112       112  
Paid-in capital
    13,200       13,200  
Retained earnings
    36,923       36,567  
Accumulated other comprehensive loss, net
    (3,198 )     (3,769 )
Total Shareholders' Equity
    55,948       55,016  
Total Liabilities and Shareholders' Equity
  $ 576,894     $ 575,470  

See accompanying notes to consolidated financial statements.


Salisbury Bancorp, Inc. and Subsidiary

Three months ended March 31, (in thousands except per share amounts) unaudited
 
2011
   
2010
 
Interest and dividend income
           
Interest and fees on loans
  $ 4,664     $ 4,487  
Interest on debt securities
               
Taxable
    783       926  
Tax exempt
    554       560  
Other interest and dividends
    38       46  
Total interest and dividend income
    6,039       6,019  
Interest expense
               
Deposits
    871       1,198  
Repurchase agreements
    15       27  
Federal Home Loan Bank of Boston advances
    646       758  
Total interest expense
    1,532       1,983  
Net interest income
    4,507       4,036  
Provision for loan losses
    330       180  
Net interest and dividend income after provision for loan losses
    4,177       3,856  
Non-interest income
               
Trust and wealth advisory
    667       545  
Service charges and fees
    499       453  
Gains on securities
    11       -  
Gains on sales of mortgage loans, net
    133       42  
Mortgage servicing, net
    32       33  
Other
    59       56  
Total non-interest income
    1,401       1,129  
Non-interest expense
               
Salaries
    1,729       1,571  
Employee benefits
    634       630  
Premises and equipment
    583       515  
Data processing
    377       408  
Professional fees
    280       402  
FDIC insurance
    223       171  
Marketing and community support
    68       62  
Amortization of intangibles
    56       56  
Other
    474       497  
Total non-interest expense
    4,424       4,312  
Income before income taxes
    1,154       673  
Income tax provision
    211       79  
Net income
  $ 943     $ 594  
Net income available to common shareholders
  $ 828     $ 479  
                 
Basic and diluted earnings per share
  $ 0.49     $ 0.28  
Common dividends per share
    0.28       0.28  

See accompanying notes to consolidated financial statements.


Salisbury Bancorp, Inc. and Subsidiary
 
   
Common Stock
     Preferred           Paid-in      Retained     Accumulated
other comp-
   
Total
share-holders'
 
(dollars in thousands) unaudited
 
Shares
   
Amount
   
 Stock
   
Warrants
   
capital
   
earnings
   
rehensive loss
   
equity
 
Balances at December 31, 2009
    1,686,701     $ 168     $ 8,717     $ 112     $ 13,177     $ 35,259     $ (5,078 )   $ 52,355  
Net income for period
    -       -       -       -       -       594       -       594  
Other comprehensive income, net of tax
    -       -       -       -       -       -       656       656  
Total comprehensive income
                                                            1,250  
Amortization (accretion) of preferred stock
    -       -       5       -       -       (5 )     -       -  
Common stock dividends paid
    -       -       -       -       -       (472 )     -       (472 )
Preferred stock dividends paid
    -     -     -     -     -     (110 )   -     (110 )
Balances at March 31, 2010
    1,686,701       168       8,722       112       13,177       35,266       (4,422 )     53,023  
Balances at December 31, 2010
    1,687,661     168     8,738     112     13,200     36,567     (3,769 )   55,016  
Net income for period
    -       -       -       -       -       943       -       943  
Other comprehensive income, net of tax
    -       -       -       -       -       -       571       571  
Total comprehensive income
                                                            1,514  
Amortization (accretion) of preferred stock
    -       -       5       -       -       (5 )     -       -  
Common stock dividends paid
    -       -       -       -       -       (472 )     -       (472 )
Preferred stock dividends paid
    -       -       -       -       -       (110 )     -       (110 )
Balances March 31, 2011
    1,687,661     $ 168     $ 8,743     $ 112     $ 13,200     $ 36,923     $ (3,198 )   $ 55,948  

See accompanying notes to consolidated financial statements.
 
Salisbury Bancorp, Inc. and Subsidiary

Three months ended March 31, (in thousands) unaudited
 
2011
   
2010
 
Operating Activities
           
Net income
  $ 943     $ 594  
Adjustments to reconcile net income to net cash provided by operating activities:
               
(Accretion), amortization and depreciation
               
Securities
    62       174  
Bank premises and equipment
    206       193  
Core deposit intangible
    56       56  
Mortgage servicing rights
    58       31  
Fair value adjustment on loans
    11       11  
Sales and calls of securities available-for-sale
    (11 )     -  
Write down of other real estate owned
    57       -  
Provision for loan losses
    330       180  
Decrease (increase) in loans held-for-sale
    998       (513 )
Increase in deferred loan origination fees and costs, net
    (57 )     (41 )
Mortgage servicing rights originated
    (77 )     (28 )
Decrease in mortgage servicing rights impairment reserve
    (2 )     (2 )
Decrease in interest receivable
    130       85  
Deferred tax benefit
    (14 )     (8 )
Decrease in prepaid expenses
    73       68  
Increase in cash surrender value of life insurance policies
    (39 )     (42 )
Decrease in income tax receivable
    224       69  
Decrease (increase) in other assets
    25       (25 )
Increase in accrued expenses
    537       431  
Decrease in interest payable
    (101 )     (40 )
Decrease in other liabilities
    (143 )     (111 )
Net cash provided by operating activities
    3,266       1,082  
Investing Activities
               
Purchases of securities available-for-sale
    -       (33,985 )
Proceeds from calls of securities available-for-sale
    22,997       1,550  
Proceeds from maturities of securities available-for-sale
    -       12,089  
Proceeds from maturities of securities held-to-maturity
    1       1  
Loan originations and principle collections, net
    (9,394 )     (2,499 )
Recoveries of loans previously charged-off
    7       6  
Capital expenditures
    (327 )     (1,068 )
Net cash provided (utilized) by investing activities
    13,284       (23,906 )
Three months ended March 31, (in thousands) unaudited
 
2011
   
2010
 
Financing Activities
           
Increase in deposit transaction accounts, net
    32,640       11,352  
Decrease in time deposits, net
    (10,550 )     (7,065 )
Decrease in securities sold under agreements to repurchase, net
    (4,949 )     (3,442 )
Principal payments on Federal Home Loan Bank of Boston advances
    (16,925 )     (1,008 )
Common stock dividends paid
    (473 )     (472 )
Preferred stock dividends paid
    (110 )     (110 )
Net cash utilized by financing activities
    (367 )     (745 )
Net increase (decrease) in cash and cash equivalents
    16,183       (23,569 )
Cash and cash equivalents, beginning of period
    26,908       43,298  
Cash and cash equivalents, end of period
  $ 43,091     $ 19,729  
Cash paid during period
               
Interest
  $ 633     $ 2,023  
Income taxes
    449       139  
Non-cash transfers
               
Transfer from loans to other real estate owned
    314       -  

See accompanying notes to consolidated financial statements.


(unaudited)

 
NOTE 1 - BASIS OF PRESENTATION
 
The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Salisbury and the statements of income, shareholders’ equity and cash flows for the interim periods presented.
 
The financial statements have been prepared in accordance with generally accepted accounting principles.  In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.  In connection with the determination of the allowance for loan losses and valuation of real estate, management obtains independent appraisals for significant properties.
 
Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2010 Annual Report on Form 10-K for the period ended December 31, 2010.
 
The allowance for loan losses is a significant accounting policy and is presented in the Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis, which provide information on how significant assets are valued in the financial statements and how those values are determined.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.
 
Impact of New Accounting Pronouncements Issued
 
In April 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011.  Additional disclosures are also required under this ASU.  Salisbury is currently evaluating the impact of this ASU.  The ASU is expected to cause more loan modifications to be classified as TDRs and Salisbury is evaluating its modification programs and practices in light of the new ASU.
 
In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.”  The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements.  The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011.  Early adoption is not permitted.
 
In December 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-28, “Intangibles - Goodwill and Other.”  This ASU addresses when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For public entities, the amendments in this ASU are effective for fiscal years and interim periods beginning after December 15, 2010.
 
In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.”  This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations.  This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.
 
 
In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  This ASU is created to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables.  This ASU is intended to provide additional information to assist financial statement users in assessing the entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses.  The amendments in this ASU are effective as of the end of a reporting period for interim and annual reporting periods ending on or after December 15, 2010.  The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.
 
In April 2010, the FASB issued ASU 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset.”  As a result of this ASU, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity continues to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change.  The amendments in this ASU are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010, with the amendments to be applied prospectively.  This ASU did not have a significant impact on Salisbury’s financial position or results of operations.
 
In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements.”  The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 of the fair value hierarchy and describing the reasons for the transfers.  The disclosures are effective for reporting periods beginning after December 15, 2009.  Salisbury adopted ASU 2010-06 as of January 1, 2010.  The required disclosures are included in Note 10, “Fair Value Measurements,” to the consolidated Financial Statements. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in the Level 3 of the fair value measurement hierarchy are effective for interim and annual reporting periods beginning after December 15, 2010.
 
In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives.”  The ASU clarifies that certain embedded derivatives, such as those contained in certain securitizations, CDOs and structured notes, should be considered embedded credit derivatives subject to potential bifurcation and separate fair value accounting. The ASU allows any beneficial interest issued by a securitization vehicle to be accounted for under the fair value option at transition. The requirements are effective July 1, 2010.  This standard did not have a significant impact on Salisbury’s financial position or results of operations.
 
NOTE 2 - SECURITIES
 
The composition of securities is as follows:
 
(in thousands)
 
Amortized
cost (1)
   
Gross un-
realized gains
   
Gross un-realized losses
   
Fair value
 
March 31, 2011
                       
Available-for-sale
                       
U.S. Treasury notes
  $ 5,000     $ 186     $ -     $ 5,186  
U.S. Government Agency notes
    22,587       306       (79 )     22,814  
Municipal bonds
    51,359       236       (4,903 )     46,692  
Mortgage backed securities
                               
U.S. Government Agencies
    17,665       567       (26 )     18,206  
Collateralized mortgage obligations
                               
U.S. Government Agencies
    8,602       9       (42 )     8,569  
Non-agency
    17,609       708       (293 )     18,024  
SBA bonds
    4,353       73       -       4,426  
Corporate bonds
    1,092       38       -       1,130  
Preferred Stock
    20       156       -       176  
Total securities available-for-sale
  $ 128,287     $ 2,279     $ (5,343 )   $ 125,223  
Held-to-maturity
                               
Mortgage backed security
  $ 55     $ 1     $ -     $ 56  
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.
 
 
(in thousands)
 
Amortized
cost (1)
   
Gross un-
realized gains
   
Gross un-realized losses
   
Fair value
 
December 31, 2010
                       
Available-for-sale
                       
U.S. Treasury notes
  $ 4,999     $ 197     $ -     $ 5,196  
U.S. Government Agency notes
    41,590       380       (92 )     41,878  
Municipal bonds
    51,330       139       (5,371 )     46,098  
Mortgage backed securities
                               
U.S. Government Agencies
    19,190       566       (20 )     19,736  
Collateralized mortgage obligations
                               
U.S. Government Agencies
    9,283       29       (1 )     9,311  
Non-agency
    19,002       714       (599 )     19,117  
SBA bonds
    4,831       70       -       4,901  
Corporate bonds
    1,089       41       -       1,130  
Preferred Stock
    20       35       -       55  
Total securities available-for-sale
  $ 151,334     $ 2,171     $ (6,083 )   $ 147,422  
Held-to-maturity
                               
Mortgage backed security
  $ 56     $ 2     $ -     $ 58  
Non-marketable securities
                               
Federal Home Loan Bank of Boston stock
  $ 6,032     $ -     $ -     $ 6,032  
 
(1)  
Net of other-than-temporary impairment write-down recognized in earnings.
 
Salisbury did not sell any securities available-for-sale during the three month periods ended March 31, 2011 and 2010.
 
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 $6,020,000 and $6,342,000, respectively, that exceeded 10% of shareholders’ equity as of March 31, 2011.
 
The following table summarizes, for all securities in an unrealized loss position, including debt securities for which a portion of other-than-temporary impairment has been recognized in other comprehensive income, the aggregate fair value and gross unrealized loss of securities that have been in a continuous unrealized loss position as of the date presented:
 
   
Less than 12 Months
   
12 Months or Longer
   
Total
 
(in thousands)
 
Fair
value
   
Unrealized 
losses
   
Fair
value
   
Unrealized 
losses
   
Fair
value
   
Unrealized
losses
 
March 31, 2011
                                   
Available-for-sale
                                   
U.S. Government Agency notes
  $ 9,921     $ 79     $ -     $ -     $ 9,921     $ 79  
Municipal Bonds
    26,099       1,535       14,351       3,368       40,450       4,903  
Mortgage backed securities
    1,171       26       -       -       1,171       26  
Collateralized mortgage obligations
                                               
U.S. Government Agencies
    4,180       42       -       -       4,180       42  
Non-agency
    -       -       2,171       185       2,171       185  
Total temporarily impaired securities
    41,371       1,682       16,522       3,553       57,893       5,235  
Other-than-temporarily impaired securities
                                               
Collateralized mortgage obligations
                                               
Non-agency
    1,030       80       784       28       1,814       108  
Total temporarily impaired and other-than-
                                               
temporarily impaired securities
  $ 42,401     $ 1,762     $ 17,306     $ 3,581     $ 59,707     $ 5,343  
 
 
Salisbury evaluates securities for Other Than Temporary Impairment (“OTTI”) where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI.
 
The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at March 31, 2011.
 
U.S Government Agency notes, U.S. Government Agency mortgage-backed securities and U.S. Government Agency CMOs: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.  Furthermore, Salisbury does not intend to sell these securities and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, management does not consider these securities to be OTTI at March 31, 2011.
 
Municipal bonds: Contractual cash flows are performing as expected. The decline in fair values at March 31, 2011 as compared with December 31, 2010, is primarily due to an increase in interest rates and risk premium spreads for municipal bonds in 2011 compared to 2010. Late in 2010 and continuing into 2011 the municipal bond market experienced significant price declines as uncertainty about the health of local and state government finances caused investors to exit the market. Salisbury purchased substantially all of these securities during 2006-to-2008 as bank qualified, insured, AAA rated general obligation or revenue bonds. Salisbury’s portfolio is mostly comprised of tax-exempt general obligation bonds or public-purpose revenue bonds for schools, municipal offices, sewer infrastructure and fire houses, for small towns and municipalities across the United States. In the wake of the financial crisis, most monoline bond insurers had their ratings downgraded or withdrawn because of excessive exposure to insurance for collateralized debt obligations. Salisbury has performed credit underwriting reviews of certain issuers, including those that have had their ratings withdrawn and those that are insured by insurers that have had their ratings withdrawn, to assess their default risk. For all completed reviews pass credit risk ratings have been assigned. Management believes that unrealized losses on its municipal bonds are a function of interest rate movements and changes in investor spreads for credit sensitive securities. Management expects to recover the entire amortized cost basis of these securities.  Salisbury does not intend to sell these securities and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity.  Management does not consider these securities to be OTTI at March 31, 2011.
 
Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at March 31, 2011 to assess whether any of the securities were OTTI. Salisbury uses third party provided cash flow forecasts of each security based on a variety of market driven assumptions and securitization terms, including prepayment speed, default or delinquency rate, and default severity for losses including interest, legal fees, property repairs, expenses and realtor fees, that, together with the loan amount are subtracted from collateral sales proceeds to determine severity. In 2009 Salisbury determined that five non-agency CMO securities reflected OTTI and recognized losses for deterioration in credit quality of $1,128,000. Salisbury judged these five securities not to have additional OTTI and all other CMO securities not to be OTTI as of March 31, 2011. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI for further deterioration in credit quality. Salisbury does not intend to sell these securities and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis.
 
The following table presents activity related to credit losses recognized into earnings on the non-agency CMOs held by Salisbury for which a portion of an OTTI charge was recognized in accumulated other comprehensive income:
 
Three months ended March 31 (in thousands)
 
2011
   
2010
 
Balance, beginning of period
  $ 1,128     $ 1,128  
Credit component on debt securities in which OTTI was not previously recognized
    -       -  
Balance, end of period
  $ 1,128     $ 1,128  
 
Federal Home Loan Bank of Boston (“FHLBB”): The Bank is a member of the FHLBB. The FHLBB is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. In 2008, the FHLBB announced to its members that it is focusing on preserving capital in response to ongoing market volatility including the extension of a moratorium on excess stock repurchases and in 2009 announced the suspension of its quarterly dividends. On February 22, 2011, the FHLBB declared a modest cash dividend payable to its members on March 2, 2011. The FHLBB also announced that it expects to continue to declare modest cash dividends through 2011. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank’s FHLBB stock as of March 31, 2011. Further deterioration of the FHLBB’s capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.
 
 
NOTE 3 - LOANS
 
The composition of loans receivable and loans held-for-sale is as follows:
 
(in thousands)
 
March 31,
2011
   
December 31,
2010
 
Residential 1-4 family
  $ 183,194     $ 176,892  
Residential 5+ multifamily
    3,271       2,889  
Construction of residential 1-4 family
    4,564       5,988  
Home equity credit
    34,608       34,164  
Residential real estate
    225,637       219,933  
Commercial
    74,519       75,495  
Construction of commercial
    7,777       7,312  
Commercial real estate
    82,296       82,807  
Farm land
    5,221       5,690  
Vacant land
    12,757       12,979  
Real estate secured
    325,911       321,409  
Commercial and industrial
    29,289       25,123  
Municipal
    4,563       4,338  
Consumer
    4,574       4,677  
Loans receivable, gross
    364,337       355,547  
Deferred loan origination fees and costs, net
    879       822  
Allowance for loan losses
    (3,978 )     (3,920 )
Loans receivable, net
  $ 361,238     $ 352,449  
Loans held-for-sale
               
Residential 1-4 family
  $ 187     $ 1,184  
 
The composition of loans receivable by delinquency status is as follows:
 
          Past due        
    Current     1-29     30-59     60-89      90-179     180 days     30 days     Accruing 90     Non-accural  
         
 days
   
 days
   
days
   
 days
   
 and over
   
and over
   
 days and over
       
Residential 1-4 family
  $ 175,498     $ 3,018     $ 1,663     $ 822     $ 1,152     $ 1,041     $ 4,678     $ 100     $ 2,524  
Residential 5+ multifamily
    3,111       -       160       -       -       -       160       -       -  
Residential 1-4 family construction
    4,564       -       -       -       -       -       -       -       -  
Home equity credit
    33,582       199       788       14       -       25       827       -       359  
Residential real estate
    216,755       3,217       2,611       836       1,152       1,066       5,665       100       2,883  
Commercial
    71,057       1,737       834       541       351       -       1,726       -       3,061  
Construction of commercial
    7,756       -       21       -       -       -       21       -       -  
Commercial real estate
    78,813       1,737       855       541       351       -       1,747       -       3,061  
Farm land
    4,523       383       -       315       -       -       315       -       -  
Vacant land
    8,637       564       159       -       -       3,397       3,556       -       3,933  
Real estate secured
    308,728       5,901       3,625       1,692       1,503       4,463       11,283       100       9,877  
Commercial and industrial
    28,441       140       45       492       171       -       708       50       848  
Municipal
    4,563       -       -       -       -       -       -       -       -  
Consumer
    4,383       132       50       9       -       -       59       -       -  
Loans receivable, gross
  $ 346,115     $ 6,173     $ 3,720     $ 2,193     $ 1,674     $ 4,463     $ 12,050     $ 150     $ 10,725  

 
Allowance for Loan Losses
 
Changes in the allowance for loan losses are as follows:
 
   
March 31, 2011
 
Three months ended
(in thousands)
 
Beginning balance
   
Provision
   
Charge-offs
   
Reco-veries
   
Ending balance
 
Residential
  $ 1,504     $ 60     $ (101 )   $ -     $ 1,463  
Commercial
    1,132       291       (80 )     -       1,343  
Land
    392       (18 )     (79 )     -       295  
Real estate
    3,028       333       (260 )     -       3,101  
Commercial & industrial
    541       (9 )     -       -       532  
Municipal
    51       4       -       -       55  
Consumer
    164       16       (19 )     7       168  
Unallocated
    136       (14 )     -       -       122  
Total
  $ 3,920     $ 330     $ (279 )   $ 7     $ 3,978  
 
The composition of loans receivable and the allowance for loan losses at March 31, 2011 is as follows:
 
   
Collectively evaluated
   
Individually evaluated
   
Total portfolio
 
March 31, 2011
(in thousands)
 
Loan
balance
   
Allowance
   
Loan
balance
   
Allowance
   
Loan
Balance
   
Allowance
 
Residential 1-4 family
  $ 176,460     $ 768     $ 6,734     $ 283     $ 183,194     $ 1,051  
Residential 5+ multifamily
    3,271       27       -       -       3,271       27  
Construction of residential 1-4 family
    4,564       18       -       -       4,564       18  
Home equity credit
    34,249       367       359       -       34,608       367  
Residential real estate
    218,544       1,180       7,093       283       225,637       1,463  
Commercial
    66,873       865       7,646       425       74,519       1,290  
Construction of commercial
    7,777       53       -       -       7,777       53  
Commercial real estate
    74,650       918       7,646       425       82,296       1,343  
Farm land
    5,221       54       -       -       5,221       54  
Vacant land
    8,665       97       4,092       144       12,757       241  
Real estate secured
    307,080       2,249       18,831       852       325,911       3,101  
Commercial and industrial
    28,167       395       1,122       137       29,289       532  
Municipal
    4,563       55       -       -       4,563       55  
Consumer
    4,574       168       -       -       4,574       165  
Unallocated allowance
    -       122       -       -       -       122  
Totals
  $ 344,384     $ 2,989     $ 19,953     $ 989     $ 364,337     $ 3,978  
 
Credit Quality Information
 
The composition of loans receivable by risk rating grade is as follows:
 
March 31, 2011 (in thousands)
 
Pass
   
Special mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
Residential 1-4 family
  $ 161,295     $ 13,306     $ 8,593     $ -     $ -     $ 183,194  
Residential 5+ multifamily
    2,189       994       88       -       -       3,271  
Construction of residential 1-4 family
    3,450       1,114       -       -       -       4,564  
Home equity credit
    31,723       1,696       1,189       -       -       34,608  
Residential real estate
    198,657       17,110       9,870       -       -       225,637  
Commercial
    52,414       9,926       12,179       -       -       74,519  
Construction of commercial
    6,814       492       471       -       -       7,777  
Commercial real estate
    59,228       10,418       12,650       -       -       82,296  
Farm land
    3,164       884       1,173       -       -       5,221  
Vacant land
    8,315       262       4,180       -       -       12,757  
Real estate secured
    269,364       28,674       27,873       -       -       325,911  
Commercial and industrial
    19,129       8,430       1,730       -       -       29,289  
Municipal
    4,563       -       -       -       -       4,563  
Consumer
    4,342       159       65       8       -       4,574  
Loans receivable, gross
  $ 297,398     $ 37,263     $ 29,668     $ 8     $ -     $ 364,337  
 
 
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.
 
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)
 
March 31, 2011
   
December 31, 2010
 
Non-accrual loans, excluding troubled debt restructured loans
  $ 7,080     $ 5,791  
Non-accrual troubled debt restructured loans
    3,645       4,254  
Accruing troubled debt restructured loans
    5,323       5,330  
Total impaired loans
  $ 16,048     $ 15,375  
Commitments to lend additional amounts to impaired borrowers
  $ -     $ -  
 
Certain data with respect to loans individually evaluated for impairment at March 31, 2011 is as follows:
 
   
Impaired loans with specific allowance
   
Impaired loans with no specific allowance
 
   
Loan balance
   
Specific
allowance
   
Income
recognized
   
Loan balance
   
Income
recognized
 
   
Book
   
Note
   
Average
   
Book
   
Note
   
Average
 
Residential 1-4 family
  $ 2,048     $ 2,217     $ 1,657     $ 150     $ 6     $ 3,853     $ 3,852     $ 4,278     $ 29  
Home equity credit
    -       -       -       -       -       359       361       361       3  
Residential real estate
    2,048       2,217       1,657       150       6       4,212       4,213       4,639       32  
Commercial
    2,701       2,803       2,395       179       41       2,032       2,380       2,429       11  
Vacant land
    670       774       787       64       -       3,263       3,627       3,202       -  
Real estate secured
    5,419       5,794       4,839       393       47       9,507       10,220       10,270       43  
Commercial and industrial
    396       403       229       137       1       726       1,252       673       3  
Totals
  $ 5,815     $ 6,197     $ 5,068     $ 530     $ 48     $ 10,233     $ 11,472     $ 10,943     $ 46  
 
NOTE 4 - MORTGAGE SERVICING RIGHTS
 
Loans serviced for others are not included in the Consolidated Balance Sheets. The balance of loans serviced for others and the fair value of mortgage servicing rights are as follows:
 
March 31, (in thousands)
 
2011
   
2010
 
Residential mortgage loans serviced for others
  $ 101,636     $ 75,414  
Fair value of mortgage servicing rights
    948       493  
 
Changes in mortgage servicing rights are as follows:
 
Three months ended March 31, (in thousands)
 
2011
   
2010
 
Loan Servicing Rights
           
Balance, beginning of period
  $ 683     $ 427  
Originated
    77       28  
Amortization (1)
    (59 )     (31 )
Balance, end of period
    701       424  
Valuation Allowance
               
Balance, beginning of period
    (10 )     (30 )
Decrease in impairment reserve (1)
    2       2  
Balance, end of period
    (8 )     (28 )
Loan servicing rights, net
  $ 693     $ 396  
 
(1)  
Amortization expense and changes in the impairment reserve are recorded in loan servicing fee income.
 
 
NOTE 5 - PLEDGED ASSETS
 
The following securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase, FHLBB advances and credit facilities available.
 
 in thousands)
 
March 31, 2011
   
December 31, 2010
 
Securities available-for-sale (at fair value)
  $ 61,866     $ 62,764  
Loans receivable
    116,489       114,424  
Total pledged assets
  $ 178,355     $ 177,188  
 
At March 31, 2011, securities were pledged as follows: $46.1 million to secure public deposits and Treasury Tax and Loan deposits, $12.5 million to secure repurchase agreements and $3.4 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 ended March 31, (in thousands, except per share amounts)
 
2011
   
2010
 
Net income
  $ 943     $ 594  
Preferred stock net accretion
    5       5  
Preferred stock dividends paid
    110       110  
Net income available to common shareholders
  $ 828     $ 479  
Weighted average common stock outstanding - basic
    1,688       1,687  
Weighted average common and common equivalent stock outstanding- diluted
    1,688       1,687  
Earnings per common and common equivalent share