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 June 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.
      Employerof
      incorporation or organization)
            Identification
      No.)5
      Bissell Street, Lakeville, CT
            06039(Address
      of principal executive offices)
            (Zip
      code)





(860)
435-9801


(Registrant's
telephone number, including area code)





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


Yes
[X]  No [  ]





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





Yes_________
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 fileroAccelerated fileroNon-accelerated fileroSmaller reporting companyý





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


Yes
[  ] No [X]


The
number of shares of Common Stock outstanding as of August 06, 2010, is
1,687,661.










1


TABLE
OF CONTENTS





PagePART
      I FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements:Consolidated
      Balance Sheets as of June 30, 2010 and December 31, 2009
            3Consolidated
      Statements of Income for the three and six month periods ended June 30,
      2010 and June 30, 2009
            4Consolidated
      Statements of Changes in Shareholders' Equity for the six
      month  periods ended June 30, 2010 and June 30,
    2009
            5Consolidated
      Statements of Cash Flows for the six month periods ended June 30, 2010 and
      June 30, 2009
            6Notes
      to Consolidated Financial Statements
            8Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            18Item
      3.
            Quantitative
      and Qualitative Disclosure of Market Risk
            31Item
      4T.
            Controls
      and Procedures
            33PART
      II Other InformationItem
      1.
            Legal
      Proceedings
            33Item
      1A.
            Risk
      Factors
            34Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            34Item
      3.
            Defaults
      upon Senior Securities
            34Item
      4.
            Reserved
            34Item
      5.
            Other
      information
            34Item
      6.
            Exhibits
            34











2


PART
I - FINANCIAL INFORMATION


Salisbury
Bancorp, Inc. and Subsidiary


CONSOLIDATED
BALANCE SHEETS





(in
      thousands, except per share amounts) unaudited
            
            June
      30,
              2010
            
            
            December
      31,
              2009ASSETSCash
      and due from banks
            
            $
            6,241
            
            
            $
            6,248Interest
      bearing demand deposits with other banks
            
            
            15,373
            
            
            
            37,050Total
      cash and cash equivalents
            
            
            21,614
            
            
            
            43,298Interest
      bearing time deposits with other banks
            
            
            5,000
            
            
            
            5,000SecuritiesAvailable-for-sale at fair
      value
            
            
            155,423
            
            
            
            145,031Held-to-maturity at amortized
      cost (fair value: $61 and $62)
            
            
            59
            
            
            
            62Federal Home Loan Bank of Boston
      stock at cost
            
            
            6,032
            
            
            
            6,032Loans
      held-for-sale
            
            
            513
            
            
            
            665Loans
      receivable, net (allowance for loan losses: $3,768 and
    $3,473)
            
            
            342,130
            
            
            
            327,257Investment
      in real estate
            
            
            75
            
            
            
            75Other
      real estate owned
            
            
            -
            
            
            
            275Bank
      premises and equipment, net
            
            
            11,543
            
            
            
            10,434Goodwill
            
            
            9,829
            
            
            
            9,829Intangible
      assets (net of accumulated amortization: $1,190 and
$1,079)
            
            
            1,353
            
            
            
            1,464Accrued
      interest receivable
            
            
            2,251
            
            
            
            2,177Cash
      surrender value of life insurance policies
            
            
            3,769
            
            
            
            3,685Deferred
      taxes
            
            
            2,432
            
            
            
            3,285Other
      assets
            
            
            3,499
            
            
            
            3,778Total Assets
            
            $
            565,522
            
            
            $
            562,347LIABILITIES
      and SHAREHOLDERS' EQUITYDepositsDemand (non-interest
      bearing)
            
            $
            71,255
            
            
            $
            70,026Demand (interest
      bearing)
            
            
            57,588
            
            
            
            43,845Money market
            
            
            74,942
            
            
            
            64,477Savings and
other
            
            
            88,438
            
            
            
            86,316Certificates of
      deposit
            
            
            131,767
            
            
            
            153,539Total deposits
            
            
            423,990
            
            
            
            418,203Repurchase
      agreements
            
            
            8,120
            
            
            
            11,415Federal
      Home Loan Bank of Boston advances
            
            
            74,946
            
            
            
            76,364Accrued
      interest and other liabilities
            
            
            4,077
            
            
            
            4,010Total
    Liabilities
            
            
            511,133
            
            
            
            509,992Commitments
      and contingencies
            
            
            -
            
            
            
            -Shareholders'
      EquityPreferred stock - $.01 per share
      par valueAuthorized: 25,000; Shares
      issued: 8,816;Liquidation preference: $1,000
      per share
            
            
            -
            
            
            
            -Common stock - $.10 per share
      par valueAuthorized: 3,000,000 and
      3,000,000;Issued: 1,687,661 and
      1,686,701
            
            
            168
            
            
            
            168Common stock warrants
      outstanding
            
            
            112
            
            
            
            112Paid-in capital
            
            
            21,927
            
            
            
            21,894Retained
earnings
            
            
            35,557
            
            
            
            35,259Accumulated other comprehensive
      loss, net
            
            
            (3,375
            )
            
            
            (5,078
            )Total Shareholders'
      Equity
            
            
            54,389
            
            
            
            52,355Total Liabilities and
      Shareholders' Equity
            
            $
            565,522
            
            
            $
            562,347


3


Salisbury
Bancorp, Inc. and Subsidiary


CONSOLIDATED
STATEMENTS OF INCOME





Three
      months ended
            
            
            Six
      months endedPeriods
      ended June 30, (in thousands except per share amounts)
      unaudited
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Interest
      incomeInterest
      and fees on loans
            
            $
            4,601
            
            
            $
            4,480
            
            
            $
            9,088
            
            
            $
            8,962Interest
      on debt securitiesTaxable
            
            
            1,033
            
            
            
            1,264
            
            
            
            1,959
            
            
            
            2,596Tax exempt
            
            
            559
            
            
            
            633
            
            
            
            1,119
            
            
            
            1,277Other
      interest
            
            
            38
            
            
            
            9
            
            
            
            84
            
            
            
            11Total interest
    income
            
            
            6,231
            
            
            
            6,386
            
            
            
            12,250
            
            
            
            12,846Interest
      expenseDeposits
            
            
            1,125
            
            
            
            1,511
            
            
            
            2,324
            
            
            
            2,995Repurchase
      agreements
            
            
            19
            
            
            
            28
            
            
            
            46
            
            
            
            67Federal
      Home Loan Bank of Boston advances
            
            
            761
            
            
            
            769
            
            
            
            1,518
            
            
            
            1,530Total interest
    expense
            
            
            1,905
            
            
            
            2,308
            
            
            
            3,888
            
            
            
            4,592Net
      interest income
            
            
            4,326
            
            
            
            4,078
            
            
            
            8,362
            
            
            
            8,254Provision
      for loan losses
            
            
            260
            
            
            
            315
            
            
            
            440
            
            
            
            745Net interest income after
      provision for loan losses
            
            
            4,066
            
            
            
            3,763
            
            
            
            7,922
            
            
            
            7,509Non-interest
      incomeTrust
      and wealth advisory
            
            
            491
            
            
            
            430
            
            
            
            1,036
            
            
            
            970Service
      charges and fees
            
            
            525
            
            
            
            453
            
            
            
            994
            
            
            
            851Gains
      (losses) on securities, net
            
            
            1
            
            
            
            9
            
            
            
            1
            
            
            
            436Gains
      on sales of mortgage loans, net
            
            
            141
            
            
            
            221
            
            
            
            201
            
            
            
            304Mortgage
      servicing, net
            
            
            9
            
            
            
            30
            
            
            
            24
            
            
            
            72Other
            
            
            89
            
            
            
            55
            
            
            
            146
            
            
            
            192Total non-interest income,
      excluding other-than-temporary impairment losses
            
            
            1,256
            
            
            
            1,198
            
            
            
            2,402
            
            
            
            2,825Other-than-temporary
      impairment losseson
      securities
            
            
            -
            
            
            
            (2,302
            )
            
            
            -
            
            
            
            (2,302
            )Portion
      of loss recognized in other comprehensive income (before
    tax)
            
            
            -
            
            
            
            1,174
            
            
            
            -
            
            
            
            1,174Net other-than-temporary
      impairment losses recognized in earnings
            
            
            -
            
            
            
            (1,128
            )
            
            
            -
            
            
            
            (1,128
            )Total non-interest
      income
            
            
            1,256
            
            
            
            70
            
            
            
            2,402
            
            
            
            1,697Non-interest
      expenseSalaries
            
            
            1,694
            
            
            
            1,596
            
            
            
            3,282
            
            
            
            3,207Employee
      benefits
            
            
            586
            
            
            
            552
            
            
            
            1,216
            
            
            
            1,132Premises
      and equipment
            
            
            495
            
            
            
            466
            
            
            
            1,011
            
            
            
            957Data
      processing
            
            
            363
            
            
            
            330
            
            
            
            772
            
            
            
            714Professional
      fees
            
            
            455
            
            
            
            376
            
            
            
            857
            
            
            
            733FDIC
      insurance
            
            
            182
            
            
            
            420
            
            
            
            354
            
            
            
            533Marketing
      and community support
            
            
            59
            
            
            
            88
            
            
            
            121
            
            
            
            164Amortization
      of intangibles
            
            
            56
            
            
            
            41
            
            
            
            111
            
            
            
            82Other
            
            
            382
            
            
            
            495
            
            
            
            876
            
            
            
            871Total non-interest
      expense
            
            
            4,272
            
            
            
            4,364
            
            
            
            8,600
            
            
            
            8,393Income
      (loss) before income taxes
            
            
            1,050
            
            
            
            (531
            )
            
            
            1,724
            
            
            
            813Income
      tax provision (benefit)
            
            
            172
            
            
            
            (348
            )
            
            
            251
            
            
            
            (85
            )Net
      income (loss)
            
            $
            878
            
            
            $
            (183
            )
            
            $
            1,473
            
            
            $
            898Net
      income (loss) available to common shareholders
            
            $
            763
            
            
            $
            (318
            )
            
            $
            1,243
            
            
            $
            764Basic
      and diluted earnings (loss) per share
            
            $
            0.45
            
            
            $
            (0.19
            )
            
            $
            0.74
            
            
            $
            0.45Common
      dividends per share
            
            
            0.28
            
            
            
            0.28
            
            
            
            0.56
            
            
            
            0.28





See
accompanying notes to consolidated financial statements.


4


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'
              equityBalances
      at December 31, 2009
            
            
            1,686,701
            
            
            $
            168
            
            
            $
            -
            
            
            $
            112
            
            
            $
            21,894
            
            
            $
            35,259
            
            
            $
            (5,078
            )
            
            $
            52,355Net
      income for year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,473
            
            
            
            -
            
            
            
            1,473Other
      comprehensive income, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,703
            
            
            
            1,703Total comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,176Issuance
      of preferred stock and warrants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Amortization
      (accretion) of preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10
            
            
            
            (10
            )
            
            
            -
            
            
            
            -Common
      stock dividends declared
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (945
            )
            
            
            -
            
            
            
            (945
            )Preferred
      stock dividends paid
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (220
            )
            
            
            -
            
            
            
            (220
            )Issuance
      of common stock fordirectors fees
            
            
            960
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            23
            
            
            
            -
            
            
            
            -
            
            
            
            23Balances
      at June 30, 2010
            
            
            1,687,661
            
            
            $
            168
            
            
            $
            -
            
            
            $
            112
            
            
            $
            21,927
            
            
            $
            35,557
            
            
            $
            (3,375
            )
            
            $
            54,389Balances
      at December 31, 2008
            
            
            1,685,861
            
            
            
            168
            
            
            
            -
            
            
            
            -
            
            
            
            13,158
            
            
            
            34,518
            
            
            
            (8,905
            )
            
            
            38,939Net
      income for year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            898
            
            
            
            -
            
            
            
            898Other
      comprehensive income, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (129
            )
            
            
            (129
            )Total comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            769Issuance
      of preferred stock and warrants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            112
            
            
            
            8,704
            
            
            
            -
            
            
            
            -
            
            
            
            8,816Amortization
      (accretion) of preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3
            
            
            
            (3
            )
            
            
            -
            
            
            
            -Common
      stock dividends declared
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (472
            )
            
            
            -
            
            
            
            (472
            )Preferred
      stock dividends paid
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (76
            )
            
            
            -
            
            
            
            (76
            )Issuance
      of common stock fordirectors fees
            
            
            840
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            19
            
            
            
            -
            
            
            
            -
            
            
            
            19Balances
      at June 30, 2009
            
            
            1,686,701
            
            
            $
            168
            
            
            $
            -
            
            
            $
            112
            
            
            $
            21,884
            
            
            $
            34,865
            
            
            $
            (9,034
            )
            
            $
            47,995





See
accompanying notes to consolidated financial statements.





5


Salisbury
Bancorp, Inc. and Subsidiary


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Six
      months ended June 30, (in thousands)
            
            2010
            
            
            2009Operating
      ActivitiesNet
      income
            
            $
            1,473
            
            
            $
            898Adjustments
      to reconcile net income to net cash provided by operating
      activities:(Accretion), amortization and
      depreciationSecurities
            
            
            305
            
            
            
            268Bank premises and
      equipment
            
            
            396
            
            
            
            351Core deposit
      intangible
            
            
            111
            
            
            
            82Mortgage servicing
      rights
            
            
            74
            
            
            
            88Fair value adjustment on
      loans
            
            
            22
            
            
            
            24Fair value adjustment on
      deposits and borrowings
            
            
            -
            
            
            
            (54
            )(Gains) and
    lossesSales and calls of securities
      available-for-sale, net
            
            
            (1
            )
            
            
            (436
            )Write
      down of available-for-sale securities
            
            
            -
            
            
            
            1,128Provision for loan
      losses
            
            
            440
            
            
            
            745Decrease in loans
      held-for-sale
            
            
            152
            
            
            
            2,103Increase in deferred loan
      origination fees and costs, net
            
            
            (44
            )
            
            
            (7
            )Mortgage servicing rights
      originated
            
            
            (112
            )
            
            
            (236
            )Decrease in mortgage servicing
      rights impairment reserve
            
            
            (5
            )
            
            
            (89
            )Increase in unearned income on
      loans
            
            
            -
            
            
            
            6(Increase) decrease in interest
      receivable
            
            
            (74
            )
            
            
            332Deferred tax (benefit)
      expense
            
            
            (42
            )
            
            
            105Decrease in prepaid
      expenses
            
            
            415
            
            
            
            65Increase in cash surrender
      value of life insurance policies
            
            
            (84
            )
            
            
            (170
            )Increase in income tax
      receivable
            
            
            (194
            )
            
            
            (373
            )Decrease (increase) in other
      assets
            
            
            40
            
            
            
            (59
            )Increase (decrease) in accrued
      expenses
            
            
            46
            
            
            
            (326
            )(Decrease) increase in interest
      payable
            
            
            (85
            )
            
            
            38Increase in other
      liabilities
            
            
            130
            
            
            
            226Issuance of shares for
      directors’ fee
            
            
            23
            
            
            
            19Net cash provided by operating
      activities
            
            
            2,986
            
            
            
            4,728Investing
      ActivitiesPurchase
      of interest-bearing time deposits with other banks
            
            
            -
            
            
            
            (5,000
            )Purchase
      of Federal Home Loan Bank stock
            
            
            -
            
            
            
            (420
            )Purchases
      of securities available-for-sale
            
            
            (37,987
            )
            
            
            (78,868
            )Proceeds
      from sales of securities available-for-sale
            
            
            -
            
            
            
            33,679Proceeds
      from calls of securities available-for-sale
            
            
            12,190
            
            
            
            27,991Proceeds
      from maturities of securities available-for-sale
            
            
            17,645
            
            
            
            -Proceeds
      from maturities of securities held-to-maturity
            
            
            3
            
            
            
            2Loan
      originations and principle collections, net
            
            
            (15,029
            )
            
            
            2,083Purchases
      of loans
            
            
            -
            
            
            
            (76
            )Recoveries
      of loans previously charged-off
            
            
            14
            
            
            
            16Capital
      expenditures
            
            
            (1,416
            )
            
            
            (1,477
            )Net
      cash utilized by investing activities
            
            $
            (24,580
            )
            
            $
            (22,070
            )





6


Salisbury
Bancorp, Inc. and Subsidiary


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)





Six
      months ended June 30, (in thousands)
            
            2010
            
            
            2009Financing
      ActivitiesIncrease
      in deposit transaction accounts, net
            
            $
            27,560
            
            
            $
            28,693(Decrease)
      increase in time deposits, net
            
            
            (21,772
            )
            
            
            28,415Decrease
      in securities sold under agreements to repurchase, net
            
            
            (3,295
            )
            
            
            (877
            )Federal
      Home Loan Bank of Boston advances
            
            
            -
            
            
            
            12,000Principle
      payments on Federal Home Loan Bank of Boston advances
            
            
            (1,418
            )
            
            
            (1,807
            )Decrease
      in short term Federal Home Loan Bank of Boston advances,
    net
            
            
            -
            
            
            
            (20,878
            )Proceeds
      from issuance of preferred and common stock
            
            
            -
            
            
            
            8,819Common
      stock dividends paid
            
            
            (945
            )
            
            
            (944
            )Preferred
      stock dividends paid
            
            
            (220
            )
            
            
            (79
            )Net cash (utilized) provided
      by financing activities
            
            
            (90
            )
            
            
            53,342Net
      (decrease) increase in cash and cash equivalents
            
            
            (21,684
            )
            
            
            36,000Cash
      and cash equivalents, beginning of period
            
            
            43,298
            
            
            
            9,659Cash
      and cash equivalents, end of period
            
            $
            21,614
            
            
            $
            45,659Cash
      paid during periodInterest
            
            $
            3,973
            
            
            $
            4,555Income taxes
            
            
            79
            
            
            
            183


See
accompanying notes to consolidated financial statements.


7


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 three month period ended June 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 have a significant impact on the Company’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, the 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.  The
Company is currently analyzing the impact of the changes to determine the
population of instruments that may be reclassified to trading upon
adoption.




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.  The Company adopted ASU 2010-06 as of January 1,
2010.  The required disclosures are included in Note
16.  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.




8







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.




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:




Amortized
            
            
            Gross
      un-
            
            
            Gross
      un-
            
            
            Fair(in
      thousands)
            
            cost
      (1)
            
            
            realized
      gains
            
            
            realized
      losses
            
            
            valueJune
      30, 2010Available-for-saleU.S.
      Treasury notes
            
            $
            4,999
            
            
            $
            180
            
            
            $
            -
            
            
            $
            5,179U.S.
      Government Agency notes
            
            
            43,603
            
            
            
            609
            
            
            
            -
            
            
            
            44,212Municipal
      bonds
            
            
            51,830
            
            
            
            129
            
            
            
            (4,098
            )
            
            
            47,861Mortgage
      backed securitiesU.S. Government
      Agencies
            
            
            24,106
            
            
            
            693
            
            
            
            (110
            )
            
            
            24,689Collateralized
      mortgage obligationsU.S. Government
      Agencies
            
            
            5,082
            
            
            
            5
            
            
            
            (13
            )
            
            
            5,074Non-agency
            
            
            22,276
            
            
            
            812
            
            
            
            (1,585
            )
            
            
            21,503SBA
      bonds
            
            
            5,682
            
            
            
            44
            
            
            
            -
            
            
            
            5,726Corporate
      bonds
            
            
            1,084
            
            
            
            49
            
            
            
            -
            
            
            
            1,133Preferred
      Stock
            
            
            20
            
            
            
            26
            
            
            
            -
            
            
            
            46Total securities
      available-for-sale
            
            $
            158,682
            
            
            $
            2,547
            
            
            $
            (5,806
            )
            
            $
            155,423Held-to-maturityMortgage
      backed security
            
            $
            59
            
            
            $
            2
            
            
            $
            -
            
            
            $
            61Non-marketable
      securitiesFederal
      Home Loan Bank of Boston stock
            
            $
            6,032
            
            
            $
            -
            
            
            $
            -
            
            
            $
            6,032December
      31, 2009Available-for-saleU.S.
      Treasury bills
            
            $
            1,999
            
            
            $
            1
            
            
            $
            -
            
            
            $
            2,000U.S.
      Government Agency notes
            
            
            24,833
            
            
            
            125
            
            
            
            (126
            )
            
            
            24,832Municipal
      bonds
            
            
            51,775
            
            
            
            113
            
            
            
            (4,735
            )
            
            
            47,153Mortgage
      backed securitiesU.S. Government
      Agencies
            
            
            33,535
            
            
            
            535
            
            
            
            (143
            )
            
            
            33,927Collateralized
      mortgage obligationsU.S. Government
      Agencies
            
            
            5,696
            
            
            
            -
            
            
            
            (58
            )
            
            
            5,638Non-agency
            
            
            25,317
            
            
            
            433
            
            
            
            (2,121
            )
            
            
            23,629SBA
      bonds
            
            
            6,581
            
            
            
            59
            
            
            
            -
            
            
            
            6,640Corporate
      bonds
            
            
            1,079
            
            
            
            49
            
            
            
            -
            
            
            
            1,128Preferred
      Stock
            
            
            20
            
            
            
            64
            
            
            
            -
            
            
            
            84Total securities
      available-for-sale
            
            $
            150,835
            
            
            $
            1,379
            
            
            $
            (7,183
            )
            
            $
            145,031Held-to-maturityMortgage
      backed security
            
            $
            62
            
            
            $
            -
            
            
            $
            -
            
            
            $
            62Non-marketable
      securitiesFederal
      Home Loan Bank of Boston stock
            
            $
            6,032
            
            
            $
            -
            
            
            $
            -
            
            
            $
            6,032


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




9







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




Three
      months
            
            
            Six
      monthsPeriod
      ended June 30, (in thousands)
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Proceeds
            
            $
            -
            
            
            $
            1,314
            
            
            $
            -
            
            
            $
            22,233Gains
      realized
            
            
            -
            
            
            
            1
            
            
            
            -
            
            
            
            416Losses
      realized
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8Net gains
      (losses)  realized
            
            
            -
            
            
            
            (1,119
            )
            
            
            1
            
            
            
            408Income
      tax (benefit) / provision
            
            
            -
            
            
            
            (380
            )
            
            
            -
            
            
            
            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
$5,870,000 and $5,044,000, respectively, that exceeded 10% of shareholders’
equity as of June 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
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
            
            
            TotalsFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized(in
      thousands)
            
            Value
            
            
            losses
            
            
            value
            
            
            losses
            
            
            value
            
            
            lossesJune
      30, 2010Available-for-saleU.S.
      Government Agency notes
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Municipal
      Bonds
            
            
            10,357
            
            
            
            279
            
            
            
            30,785
            
            
            
            3,820
            
            
            
            41,142
            
            
            
            4,099Mortgage
      backed securities
            
            
            1,314
            
            
            
            1
            
            
            
            1,292
            
            
            
            108
            
            
            
            2,606
            
            
            
            109Collateralized
      mortgage obligationsU.S. Government
      Agencies
            
            
            2,505
            
            
            
            13
            
            
            
            -
            
            
            
            -
            
            
            
            2,505
            
            
            
            13Non-agency
            
            
            1,665
            
            
            
            26
            
            
            
            5,442
            
            
            
            402
            
            
            
            7,107
            
            
            
            428Total
      temporarily impaired securities
            
            
            15,841
            
            
            
            319
            
            
            
            37,519
            
            
            
            4,330
            
            
            
            53,360
            
            
            
            4,649Other-than-temporarily
      impaired securitiesCollateralized mortgage
      obligationsNon-agency
            
            
            -
            
            
            
            -
            
            
            
            3,940
            
            
            
            1,157
            
            
            
            3,940
            
            
            
            1,157Total
      temporarily impaired and other-than-temporarily impaired
      securities
            
            $
            15,841
            
            
            $
            319
            
            
            $
            41,459
            
            
            $
            5,487
            
            
            $
            57,300
            
            
            $
            5,806




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.




10


Salisbury
performed a detailed cash flow analysis of its non-agency CMOs at June 30, 2010
to assess whether any of the 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 June 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)
            
            June
      30,
              2010
            
            
            December
      31,
              2009Non-Agency
      CMOsTotal
      OTTI losses (unrealized and realized)
            
            $
            -
            
            
            $
            2,302Less:
      unrealized OTTI recognized in other comprehensive loss
            
            
            -
            
            
            
            1,174Net
      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:




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







NOTE
3 - LOANS




The
composition of the loan portfolio is as follows:




(in
      thousands)
            
            June
      30, 2010
            
            
            December
      31, 2009Loans
      receivable, netReal
      estate mortgages:Residential
            
            $
            169,088
            
            
            $
            163,863Commercial
            
            
            80,347
            
            
            
            70,066Construction, land & land
      development
            
            
            28,874
            
            
            
            31,011Home equity credit
            
            
            33,193
            
            
            
            33,099Total mortgage
    loans
            
            
            311,502
            
            
            
            298,039Commercial
      and industrial
            
            
            28,255
            
            
            
            26,400Consumer
            
            
            5,078
            
            
            
            5,436Other
            
            
            370
            
            
            
            269Total loans, gross
            
            
            345,205
            
            
            
            330,144Deferred
      loan origination fees and costs, net
            
            
            693
            
            
            
            586Allowance
      for loan losses
            
            
            (3,768
            )
            
            
            (3,473
            )Total loans, net
            
            $
            342,130
            
            
            $
            327,257Loans
      held-for-saleResidential
      mortgages
            
            $
            513
            
            
            $
            665







11


Allowance
for Loan Losses




Changes
in the allowance for loan losses are as follows:




Three
      months
            
            
            Six
      monthsPeriods
      ended June 30, (in thousands)
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Balance,
      beginning of period
            
            $
            3,649
            
            
            $
            3,005
            
            
            $
            3,473
            
            
            $
            2,724Provision
      for losses
            
            
            260
            
            
            
            315
            
            
            
            440
            
            
            
            745Charge-offs
            
            
            (149
            )
            
            
            (16
            )
            
            
            (159
            )
            
            
            (176
            )Recoveries
            
            
            8
            
            
            
            5
            
            
            
            14
            
            
            
            16Balance,
      end of period
            
            $
            3,768
            
            
            $
            3,309
            
            
            $
            3,768
            
            
            $
            3,309







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


Changes
in mortgage servicing rights are as follows:




Three
      months
            
            
            Six
      monthsPeriods
      ended June 30, (in thousands)
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Loan
      Servicing RightsBalance,
      beginning of period
            
            $
            424
            
            
            $
            255
            
            
            $
            427
            
            
            $
            227Originated
            
            
            84
            
            
            
            175
            
            
            
            112
            
            
            
            236Amortization
      (1)
            
            
            (43
            )
            
            
            (55
            )
            
            
            (74
            )
            
            
            (88
            )Balance,
      end of period
            
            
            465
            
            
            
            375
            
            
            
            465
            
            
            
            375Valuation
      AllowanceBalance,
      beginning of period
            
            
            (28
            )
            
            
            (77
            )
            
            
            (30
            )
            
            
            (118
            )Decrease
      (increase) in impairment reserve (1)
            
            
            4
            
            
            
            48
            
            
            
            6
            
            
            
            89Balance,
      end of period
            
            
            (24
            )
            
            
            (29
            )
            
            
            (24
            )
            
            
            (29
            )Loan
      servicing rights, net
            
            $
            441
            
            
            $
            346
            
            
            $
            441
            
            
            $
            346


(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)
            
            June
      30, 2010
            
            
            December
      31, 2009Non-accrual
      loans, excluding troubled debt restructured loans
            
            $
            5,326
            
            
            $
            5,098Non-accrual
      troubled debt restructured loans
            
            
            5,868
            
            
            
            2,341Accruing
      troubled debt restructured loans
            
            
            5,514
            
            
            
            4,566Total
      impaired loans
            
            $
            16,708
            
            
            $
            12,005Requiring valuation
      allowance
            
            $
            5,050
            
            
            $
            3,388Not requiring valuation
      allowance
            
            
            11,658
            
            
            
            8,617Total
      impaired loans
            
            $
            16,708
            
            
            $
            12,005Valuation
      allowance
            
            $
            527
            
            
            $
            388Commitments
      to lend additional amounts to impaired borrowers
            
            
            -
            
            
            
            -







12


NOTE
5 - PLEDGED ASSETS





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




(in
      thousands)
            
            June
      30, 2010
            
            
            December
      31, 2009Securities
      available-for-sale (at fair value)
            
            $
            56,162
            
            
            $
            63,097Loans
      receivable
            
            
            109,960
            
            
            
            104,960Total
      pledged assets
            
            $
            166,122
            
            
            $
            168,057




At June
30, 2010, securities were pledged as follows: $43.9 million to secure public
deposits and Treasury Tax and Loan deposits, $8.4 million to secure repurchase
agreements and $3.8 million to secure FHLBB advances. Loans receivable were
pledged to secure FHLBB advances and credit facilities.




NOTE
6 – EARNINGS (LOSS) PER SHARE




The
calculation of earnings per share is as follows:




Three
      months
            
            
            Six
      monthsPeriods
      ended June 30, (in thousands, except per share amounts)
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Net
      income (loss)
            
            $
            878
            
            
            $
            (183
            )
            
            $
            1,473
            
            
            $
            898Preferred
      stock net accretion
            
            
            5
            
            
            
            -
            
            
            
            10
            
            
            
            3Preferred
      stock dividends paid
            
            
            110
            
            
            
            135
            
            
            
            220
            
            
            
            131Net
      income (loss) available to common shareholders
            
            $
            763
            
            
            $
            (318
            )
            
            $
            1,243
            
            
            $
            764Weighted
      average common stock outstanding - basic
            
            
            1,687
            
            
            
            1,686
            
            
            
            1,687
            
            
            
            1,686Weighted
      average common and common equivalent stock outstanding-
      diluted
            
            
            1,687
            
            
            
            1,686
            
            
            
            1,687
            
            
            
            1,686Earnings
      (loss) per common and common equivalent shareBasic
            
            $
            0.43
            
            
            $
            (0.19
            )
            
            $
            0.74
            
            
            $
            0.45Diluted
            
            
            0.43
            
            
            
            (0.19
            )
            
            
            0.74
            
            
            
            0.45




NOTE
7 – SHAREHOLDERS’ EQUITY




Capital
Requirements




Salisbury
and the Bank are subject to various regulatory capital requirements administered
by the federal banking agencies.  Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional and
discretionary actions by the regulators that, if undertaken, could have a direct
material effect on Salisbury and the Bank's financial
statements.  Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Salisbury and the Bank must meet
specific guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices.  Salisbury and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.




Quantitative
measures established by regulation to ensure capital adequacy require Salisbury
and the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tier 1 capital (as defined) to average assets (as defined) and total
and Tier 1 capital (as defined) to risk-weighted assets (as
defined).  Management believes, as of June 30, 2010, that Salisbury
and the Bank meet all of their capital adequacy requirements.




The Bank
was classified, as of its most recent notification, as "well
capitalized".  The Bank's actual regulatory capital position and
minimum capital requirements as defined "To Be Well Capitalized Under Prompt
Corrective Action Provisions" and "For Capital Adequacy Purposes" are as
follows:




13







Actual
            
            
            For
      Capital Adequacy
              Purposes
            
            
            To
      be Well Capitalized
              Under
      Prompt
              Corrective
      Action
              Provisions(dollars
      in thousands)
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioJune
      30, 2010Total
      Capital (to risk-weighted assets)Salisbury
            
            $
            50,393
            
            
            
            13.39
            %
            
            $
            30,108
            
            
            
            8.0
            %
            
            
            n/a
            
            
            
            -Bank
            
            
            40,817
            
            
            
            10.88
            
            
            
            30,042
            
            
            
            8.0
            
            
            $
            37,553
            
            
            
            10.0
            %Tier
      1 Capital (to risk-weighted assets)Salisbury
            
            
            46,582
            
            
            
            12.38
            
            
            
            15,054
            
            
            
            4.0
            
            
            
            n/a
            
            
            
            -Bank
            
            
            36,712
            
            
            
            9.86
            
            
            
            15,613
            
            
            
            4.0
            
            
            
            23,420
            
            
            
            6.0Tier
      1 Capital (to average assets)Salisbury
            
            
            46,582
            
            
            
            8.35
            
            
            
            22,318
            
            
            
            4.0
            
            
            
            n/a
            
            
            
            -Bank
            
            
            37,006
            
            
            
            6.63
            
            
            
            22,318
            
            
            
            4.0
            
            
            
            27,898
            
            
            
            5.0June
      30, 2009Total
      Capital (to risk-weighted assets)Salisbury
            
            
            49,467
            
            
            
            14.27
            
            
            
            27,733
            
            
            
            8.0
            
            
            
            n/a
            
            
            
            -Bank
            
            
            39,776
            
            
            
            10.92
            
            
            
            26,150
            
            
            
            8.0
            
            
            
            36,437
            
            
            
            10.0Tier
      1 Capital (to risk-weighted assets)Salisbury
            
            
            46,118
            
            
            
            13.30
            
            
            
            13,867
            
            
            
            4.0
            
            
            
            n/a
            
            
            
            -Bank
            
            
            36,427
            
            
            
            10.00
            
            
            
            14,575
            
            
            
            4.0
            
            
            
            21,862
            
            
            
            6.0Tier
      1 Capital (to average assets)Salisbury
            
            
            46,118
            
            
            
            9.02
            
            
            
            20,452
            
            
            
            4.0
            
            
            
            n/a
            
            
            
            -Bank
            
            
            36,427
            
            
            
            7.12
            
            
            
            20,452
            
            
            
            4.0
            
            
            
            25,565
            
            
            
            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 percentage
of the current shareholders would be diluted by approximately 3.3%
percent.




14





NOTE
8 – PENSION AND OTHER BENEFITS




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




Three
      months
            
            
            Six
      monthsPeriods
      ended June 30, (in thousands)
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Service
      cost
            
            $
            74
            
            
            $
            107
            
            
            $
            174
            
            
            $
            214Interest
      cost on benefit obligation
            
            
            89
            
            
            
            101
            
            
            
            180
            
            
            
            202Expected
      return on plan assets
            
            
            (98
            )
            
            
            (90
            )
            
            
            (198
            )
            
            
            (180
            )Amortization
      of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Amortization
      of net loss
            
            
            16
            
            
            
            33
            
            
            
            34
            
            
            
            65Net
      periodic benefit cost
            
            $
            81
            
            
            $
            151
            
            
            $
            190
            
            
            $
            301




Salisbury’s
401(k) Plan contribution expense was $41,000 and $30,000, respectively, for the
three month periods ended June 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 June 30,
2010 and 2009.




NOTE
9 - COMPREHENSIVE INCOME (LOSS)




Comprehensive
income (loss) includes net income (loss) 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 (loss) 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 (loss) are as follows:




Three
      months
            
            
            Six
      monthsPeriods
      ended June 30, (in thousands)
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Net
      income (loss)
            
            $
            878
            
            
            $
            (183
            )
            
            $
            1,473
            
            
            $
            898Other
      comprehensive income (loss)Net unrealized gains (losses) on
      securities available-for-sale
            
            
            1,570
            
            
            
            2,538
            
            
            
            2,545
            
            
            
            701Reclassification of net realized
      gains in net income
            
            
            1
            
            
            
            427
            
            
            
            1
            
            
            
            (961
            )Unrealized gains (losses) on
      securities available-for-sale
            
            
            1,571
            
            
            
            2,965
            
            
            
            2,546
            
            
            
            (260
            )Income tax (expense)
      benefit
            
            
            (534
            )
            
            
            (1,008
            )
            
            
            (866
            )
            
            
            88Unrealized gains (losses) on
      securities available-for-sale, net of tax
            
            
            1,037
            
            
            
            1,957
            
            
            
            1,680
            
            
            
            (172
            )Pension plan
    income
            
            
            17
            
            
            
            32
            
            
            
            35
            
            
            
            65Income tax
    expense
            
            
            (6
            )
            
            
            (11
            )
            
            
            (12
            )
            
            
            (22
            )Pension plan income, net of
      tax
            
            
            11
            
            
            
            21
            
            
            
            23
            
            
            
            43Other
      comprehensive income (loss), net of tax
            
            
            1,048
            
            
            
            1,978
            
            
            
            1,703
            
            
            
            (129
            )Comprehensive
      income (loss)
            
            $
            1,926
            
            
            $
            (1,795
            )
            
            $
            3,176
            
            
            $
            769




The
components of accumulated other comprehensive loss is as follows:




(in
      thousands)
            
            June
      30, 2010
            
            
            December
      31, 2009Unrealized
      losses on securities available-for-sale, net of tax
            
            $
            (2,151
            )
            
            $
            (3,831
            )Unrecognized
      pension plan expense, net of tax
            
            
            (1,224
            )
            
            
            (1,247
            )Accumulated
      other comprehensive loss, net
            
            $
            (3,375
            )
            
            $
            (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.




15







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
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.




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 for December 31, 2009 and June 30,
2010.




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)
            
            
            
            
            Quoted
      prices in
              Active
      markets for
              Identical
      assets
            
            
            Significant
      other
              observable
              inputs
            
            
            Significant
              unobservable
              inputsJune
      30, 2010
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Items
      Measured at Fair ValueRecurring basisSecurities
      available-for-sale
            
            $
            155,423
            
            
            $
            46
            
            
            $
            155,377
            
            
            $
            -Non-recurring
    basisImpaired loans
            
            
            4,523
            
            
            
            -
            
            
            
            4,523
            
            
            
            -





16





Fair
      Value Measurements using significant
              unobservable
      inputsLevel
      3Three
      months ended June 30, 2010 (in thousands)
            
            Securities
              available-for-sale
            
            
            Impaired
      Loans
            
            
            TotalBalance,
      beginning of period
            
            $
            -
            
            
            $
            51
            
            
            $
            51Total
      gains or losses (realized/unrealized)Included in
      earnings
            
            
            -
            
            
            
            -
            
            
            
            -Included in other comprehensive
      income
            
            
            -
            
            
            
            -
            
            
            
            -Principal
      paydowns of securities, net of accretion
            
            
            -
            
            
            
            -
            
            
            
            -Transfers
      in and/or out of Level 3
            
            
            -
            
            
            
            (51
            )
            
            
            (51
            )Balance,
      end of period
            
            $
            -
            
            
            $
            -
            
            
            $
            -Amount
      of total gains or losses for the periodincluded in earnings
      attributable to the changein unrealized gains or losses
      relating to assetsstill held at the reporting
      date
            
            $
            -
            
            
            $
            -
            
            
            $
            -




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




June
      30, 2010
            
            
            December
      31, 2009Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            Estimated(in
      thousands)
            
            value
            
            
            fair
      value
            
            
            value
            
            
            fair
      valueFinancial
      AssetsCash
      and due from banks
            
            $
            21,614
            
            
            $
            21,614
            
            
            $
            43,298
            
            
            $
            43,298Interest
      bearing time deposits with other banks
            
            
            5,000
            
            
            
            5,000
            
            
            
            5,000
            
            
            
            5,000Securities
      available-for-sale
            
            
            155,423
            
            
            
            155,423
            
            
            
            145,031
            
            
            
            145,031Security
      held-to-maturity
            
            
            59
            
            
            
            62
            
            
            
            62
            
            
            
            62Federal
      Home Loan Bank stock
            
            
            6,032
            
            
            
            6,032
            
            
            
            6,032
            
            
            
            6,032Loans
      held-for-sale
            
            
            513
            
            
            
            517
            
            
            
            665
            
            
            
            670Loans
      receivable net
            
            
            342,130
            
            
            
            335,025
            
            
            
            327,257
            
            
            
            321,882Accrued
      interest receivable
            
            
            2,251
            
            
            
            2,251
            
            
            
            2,177
            
            
            
            2,177Financial
      LiabilitiesDemand
      (non-interest-bearing)
            
            $
            71,255
            
            
            $
            71,255
            
            
            $
            70,026
            
            
            $
            70,026Demand
      (interest-bearing)
            
            
            57,588
            
            
            
            57,588
            
            
            
            43,845
            
            
            
            43,845Money
      market
            
            
            74,942
            
            
            
            74,942
            
            
            
            64,477
            
            
            
            64,477Savings
      and other
            
            
            88,438
            
            
            
            88,438
            
            
            
            86,316
            
            
            
            86,316Certificates
      of deposit
            
            
            131,767
            
            
            
            132,434
            
            
            
            153,539
            
            
            
            155,441Total deposits
            
            $
            423,990
            
            
            $
            424,657
            
            
            $
            418,203
            
            
            $
            420,105FHLBB
      advances
            
            
            74,946
            
            
            
            80,061
            
            
            
            76,364
            
            
            
            80,830Repurchase
      agreements
            
            
            8,120
            
            
            
            8,120
            
            
            
            11,415
            
            
            
            11,415Accrued
      interest payable
            
            
            438
            
            
            
            438
            
            
            
            523
            
            
            
            523




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







17


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




Management's
discussion and analysis of financial condition and results of operations of
Salisbury and its subsidiary should be read in conjunction with Salisbury's
Annual Report on Form 10-K for the year ended December 31, 2009.




BUSINESS




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




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.




Application of Critical
Accounting Policies




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




Salisbury’s
significant accounting policies are presented in Note 1 of Notes to Consolidated
Financial Statements. These policies, along with the disclosures presented in
Notes to Consolidated Financial Statements and in Management’s Discussion and
Analysis, 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.




The
allowance for loan losses represents management’s estimate of credit losses in
the loan portfolio. Determining the amount of the allowance for loan losses is
considered a critical accounting estimate because it requires significant
judgment and the use of estimates related to the amount and timing of expected
future cash flows on impaired loans, estimated losses on pools of homogeneous
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change.
The loan portfolio also represents the largest asset type on the balance sheet.
A discussion of the factors driving changes in the amount of the allowance for
loan losses is included in the “Provision and Allowance For Loan Losses” section
of Management’s Discussion and Analysis.




RESULTS
OF OPERATIONS




For
the three month periods ended June 30, 2010 and 2009


Overview




Net
income available to common shareholders was $763,000, or $0.45 per common share,
for the second quarter ended June 30, 2010 (second quarter 2010) compared with
$479,000, or $0.28 per common share, for the first quarter ended March 31, 2010
(first quarter 2010), and a net loss of $(318,000), or $(0.19) per common share,
for the second quarter ended June 30, 2009 (second quarter 2009).




Net
income available to common shareholders for second quarter 2010 and second
quarter 2009 is net of preferred stock accretion and dividends of $115,000 and
$135,000 respectively.




18


Selected
second quarter 2010 highlights:




·
            Net
      interest income increased $290,000, or 7%, versus first quarter 2010, and
      $248,000, or 6%, versus second quarter 2009, reflecting improvement in the
      net interest margin versus first quarter 2010 and growth in earning assets
      versus second quarter 2009.




·
            Non-interest
      income increased $110,000, or 10%, versus first quarter 2010 and
      $1,186,000 versus second quarter 2009. Included in second quarter 2009
      were impairment losses on securities of
  $1,128,000.




·
            Provision
      for loan losses increased $80,000 versus first quarter 2010 and decreased
      $55,000 versus second quarter 2009.




·
            Gross
      loans receivable increased $12.6 million, or 4%, versus first quarter 2010
      and $48.2 million, or 16%, versus second quarter
  2009.




·
            Deposits
      increased $1.5 million, or 0.3%, versus first quarter 2010 and $22.0
      million, or 5%, versus second quarter 2009. In December 2009, Salisbury
      assumed $11 million in deposits with the purchase of Webster Bank’s Canaan
      branch.




·
            Non-performing
      assets were $11.5 million, or 2.03% of total assets, at June 30, 2010,
      down $0.8 million from March 31, 2010 and up $3.8 million from December
      31, 2009. Loans receivable 30 days or more past due were $8.1 million, or
      2.33% of gross loans, at June 30, 2010, down $3.8 million from March 31,
      2010 and down $0.4 million from December 31,
  2009.




Net Interest
Income




Net
interest income for second quarter 2010 increased $248,000, or 6%, compared with
second quarter 2009. Average total deposits increased $36 million or 9%, from
June 30, 2009 to June 30, 2010, facilitating an increase in average earning
assets of $29 million, or 6%. The net interest margin (tax equivalent net
interest income) declined 3 basis points to 3.41% compared with 3.44% a year
ago.




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







Three
      months ended June 30,
            
            Average
      Balance
            
            
            Income
      / Expense
            
            
            Average
      Yield / Rate(dollars
      in thousands)
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Loans
      (a)
            
            $
            338,175
            
            
            $
            299,292
            
            
            $
            4,601
            
            
            $
            4,480
            
            
            
            5.44
            %
            
            
            5.99
            %Securities
      (c)(d)
            
            
            166,413
            
            
            
            167,541
            
            
            
            1,852
            
            
            
            2,191
            
            
            
            4.45
            
            
            
            5.23FHLBB
      stock
            
            
            6,032
            
            
            
            5,483
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Short
      term funds (b)
            
            
            27,339
            
            
            
            36,171
            
            
            
            38
            
            
            
            9
            
            
            
            0.56
            
            
            
            0.10Total
      earning assets
            
            
            537,959
            
            
            
            508,487
            
            
            
            6,491
            
            
            6,680
            
            
            
            4.83
            
            
            
            5.25Other
      assets
            
            
            32,319
            
            
            
            23,593Total
      assets
            
            $
            570,278
            
            
            $
            532,080Interest-bearing
      demand deposits
            
            $
            54,397
            
            
            $
            29,531
            
            
            
            153
            
            
            
            50
            
            
            
            1.13
            
            
            
            0.68Money
      market accounts
            
            
            75,002
            
            
            
            67,070
            
            
            
            105
            
            
            
            162
            
            
            
            0.56
            
            
            
            0.97Savings
      and other
            
            
            89,168
            
            
            
            80,371
            
            
            
            142
            
            
            
            180
            
            
            
            0.64
            
            
            
            0.90Certificates
      of deposit
            
            
            140,311
            
            
            
            148,643
            
            
            
            726
            
            
            
            1,119
            
            
            
            2.07
            
            
            
            3.01Total
      interest-bearing deposits
            
            
            358,878
            
            
            
            325,615
            
            
            
            1,126
            
            
            
            1,511
            
            
            
            1.26
            
            
            
            1.86Repurchase
      agreements
            
            
            9,730
            
            
            
            9,538
            
            
            
            19
            
            
            
            28
            
            
            
            0.78
            
            
            
            1.17FHLBB
      advances
            
            
            75,087
            
            
            
            77,604
            
            
            
            761
            
            
            
            769
            
            
            
            4.05
            
            
            
            3.96Total
      interest-bearing liabilities
            
            
            443,695
            
            
            
            412,757
            
            
            
            1,906
            
            
            
            2,308
            
            
            
            1.72
            
            
            
            2.24Demand
      deposits
            
            
            68,907
            
            
            
            65,712Other
      liabilities
            
            
            3,662
            
            
            
            4,909Shareholders’
      equity
            
            
            54,014
            
            
            
            48,702Total
      liabilities & shareholders’ equity
            
            $
            570,278
            
            
            $
            532,080Net
      interest income
            
            
            
            
            
            
            
            
            
            $
            4,585
            
            
            $
            4,372Spread
      on interest-bearing funds
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3.11
            
            
            
            3.02Net
      interest margin (e)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3.41
            
            
            
            3.44


(a)
            Includes
      non-accrual loans.


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


(c)
            Average
      balances of securities are based on historical
  cost.


(d)
            Includes
      tax exempt income of $260,000 and $294,000, respectively for 2010 and 2009
      on tax-exempt securities whose income and yields are calculated on a
      tax-equivalent basis.


(e)
            Net
      interest income divided by average interest-earning
  assets.


19





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




Three
      monthsPeriods
      ended June 30, (in thousands)
            
            2010
      versus 2009Change
      in interest due to
            
            Volume
            
            
            Rate
            
            
            NetInterest-earning
      assetsLoans
            
            $
            556
            
            
            $
            (435
            )
            
            $
            121Securities
            
            
            (14
            )
            
            
            (325
            )
            
            
            (339
            )Short term funds
            
            
            (7
            )
            
            
            36
            
            
            
            29Total
            
            
            535
            
            
            
            (724
            )
            
            
            (189
            )Interest-bearing
      liabilitiesDeposits
            
            
            35
            
            
            
            (421
            )
            
            
            (386
            )Repurchase
    agreements
            
            
            -
            
            
            
            (9
            )
            
            
            (9
            )FHLBB advances
            
            
            (25
            )
            
            
            17
            
            
            
            (8
            )Total
            
            
            10
            
            
            
            (413
            )
            
            
            (403
            )Net
      change in net interest income
            
            $
            525
            
            
            $
            (311
            )
            
            $
            214





Interest
Income




Tax
equivalent interest income decreased $189,000, or 2.9%, to $6.5 million for
second quarter 2010 as compared with second quarter 2009.  Loan income
increased $121,000, or 2.7%, primarily due to an increase in average loans,
which was partially offset by the decline in the average loan yield due to lower
market interest rates on new loan origination, re-financing and adjustable rate
re-pricing activity.




Tax
equivalent income from securities decreased $339,000, or 15.5%, for second
quarter 2010 as compared with second quarter 2009, as a result of a lower
average yield, down 78 basis points, and a $1.1 million, or 0.67%, decrease in
average volume. The lower yield was due to lower market interest rates on
securities purchases, calls of agency bonds and prepayments of mortgage backed
securities. Income from government-guaranteed and government-sponsored mortgage
backed securities owned at average prices above par were negatively impacted
during second quarter 2010 by increased prepayments that are believed to relate
to the agencies repurchases delinquent loans in 2010.




Income
from short term funds increased $29,000 for second quarter 2010 as compared with
second quarter 2009 as a result of shifting the short term funds into
instruments with higher yields.




Interest
Expense




Interest
expense decreased $402,000, or 17.4%, to $1.9 million for second quarter 2010 as
compared with second quarter 2009.




Interest
on deposit accounts decreased $385,000, or 25.5%, as a result of a lower average
rate, down 60 basis points to 1.26%, offset in part by a $33.2 million, or
10.2%, increase in the average balance. The lower average rate was due to lower
market interest rates on rates paid and changes in product mix. The higher
average volume resulted from deposit growth and deposits assumed with the
December 2010 Canaan branch purchase.




Interest
expense on FHLBB advances decreased $8,000 as a result of lower average
borrowings, down $2.5 million, offset in part by a higher average borrowing
rate, up 9 basis points as compared with 2009.




Provision and Allowance for
Loan Losses




The
provision for loan losses was $260,000 for the second quarter of 2010, compared
with $315,000 for the second quarter of 2009. Net loan charge-offs were $141,000
and $12,000, for the respective quarters. The following table sets forth changes
in the allowance for loan losses and other selected statistics:




Three
      months
            
            
            Six
      monthsPeriods
      ended June 30, (dollars in thousands)
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Balance,
      beginning of period
            
            $
            3,649
            
            
            $
            3,006
            
            
            $
            3,473
            
            
            $
            2,724Provision
      (benefit) or loan losses
            
            
            260
            
            
            
            315
            
            
            
            440
            
            
            
            745Charge-offsReal estate
    mortgages
            
            
            (135
            )
            
            
            -
            
            
            
            (135
            )
            
            
            (50
            )Commercial &
      industrial
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (75
            )Consumer
            
            
            (14
            )
            
            
            (17
            )
            
            
            (24
            )
            
            
            (51
            )Total
      charge-offs
            
            
            (149
            )
            
            
            (17
            )
            
            
            (159
            )
            
            
            (176
            )RecoveriesReal estate
    mortgages
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Commercial &
      industrial
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4Consumer
            
            
            8
            
            
            
            5
            
            
            
            14
            
            
            
            12Total
      recoveries
            
            
            8
            
            
            
            5
            
            
            
            14
            
            
            
            16Net
      (charge-offs) recoveries
            
            
            (141
            )
            
            
            (12
            )
            
            
            (145
            )
            
            
            (
      160
            )Balance,
      end of period
            
            $
            3,768
            
            
            $
            3,309
            
            
            $
            3,768
            
            
            $
            3,309Loans
      receivable, gross
            
            
            
            
            
            
            
            
            
            $
            345,898
            
            
            $
            297,673Non-performing
      loans
            
            
            
            
            
            
            
            
            
            
            11,520
            
            
            
            6,707Accruing
      loans past due 30-89 days
            
            
            
            
            
            
            
            
            
            
            830
            
            
            
            4,024Ratio
      of allowance for loan losses:to loans receivable,
      gross
            
            
            
            
            
            
            
            
            
            
            1.09
            %
            
            
            1.11
            %to non-performing
      loans
            
            
            
            
            
            
            
            
            
            
            32.71
            
            
            
            49.34Ratio
      of non-performing loans to loans receivable, gross
            
            
            
            
            
            
            
            
            
            
            3.33
            
            
            
            2.25Ratio
      of accruing loans past due 30-89 days to loans receivable,
      gross
            
            
            
            
            
            
            
            
            
            
            0.24
            
            
            
            1.35







20


Including
second quarter 2010 gross loan growth of $12.6 million, reserve coverage at June
30, 2010, as measured by the ratio of the allowance for loan losses to gross
loans, remained relatively unchanged at 1.09%, compared with 1.10% at March 31,
2010, 1.05% at December 31, 2009 and 1.11% a year ago at June 30, 2009.
Non-performing loans (non-accrual loans and accruing loans past-due 90 days or
more) decreased $0.8 million in second quarter 2010 versus first quarter 2010 to
$11.5 million, or 3.33% of gross loans receivable, and accruing loans past due
30-89 days decreased $4.5 million to $.8 million, or .24% of gross loans
receivable. See “Financial Condition – Loan Credit Quality” for further
discussion and analysis.




Salisbury
determines its allowance and provisions for loan losses based upon a detailed
evaluation of the loan portfolio through a process which considers numerous
factors, including estimated credit losses based upon internal and external
portfolio reviews, delinquency levels and trends, estimates of the current value
of underlying collateral, concentrations, portfolio volume and mix, changes in
lending policy, current economic conditions and historical loan loss
experience.  Determining the level of the allowance at any given
period is difficult, particularly during deteriorating or uncertain economic
periods, and therefore management takes a relatively long view of loan loss
asset quality measures.  Management must make estimates using
assumptions and information that are often subjective and changing
rapidly.  The review of the loan portfolio is a continuing event in
light of a changing economy and the dynamics of the banking and regulatory
environment.  Should the economic climate deteriorate, borrowers could
experience difficulty and the level of non-performing loans, charge-offs and
delinquencies could rise and require increased provisions.  In
management's judgment, Salisbury remains adequately reserved against both total
loans and non-performing loans at June 30, 2010.




The
allowance for loan losses is computed by segregating the portfolio into various
risk rating and product categories.  Some loans have been further
segregated and carry specific reserve amounts.  All other loans that
do not have specific reserves assigned are reserved based on a loss percentage
assigned to the outstanding balance.  The percentage applied to the
outstanding balance varies depending on the loan’s risk rating and product
category, as well as present economic conditions, which have or may adversely
affect the financial capacity and/or collateral values supporting the
loan.




Management’s
loan risk rating assignments, loss percentages and specific reserves are
subjected annually to an independent credit review by an external firm. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan
losses.  Such agencies could require the Bank to recognize additions
to the allowance based on their judgments of information available to them at
the time of their examination.  The Bank was examined by the FDIC in
February 2009, and by the State of Connecticut’s Department of Banking in August
2007, and no additions to the allowance were requested as a result of these
examinations.




Non-interest
income




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




Three
      months ended June 30, (dollars in thousands)
            
            2010
            
            
            2009
            
            
            2010
      vs. 2009Gains
      on securities, net
            
            $
            1
            
            
            $
            9
            
            
            $
            (8
            )
            
            
            (88.89
            )%Trust
      and wealth advisory fees
            
            
            491
            
            
            
            430
            
            
            
            61
            
            
            
            14.19Service
      charges and fees
            
            
            525
            
            
            
            453
            
            
            
            72
            
            
            
            15.89Gains
      on sales of mortgage loans, net
            
            
            141
            
            
            
            221
            
            
            
            (80
            )
            
            
            (36.20
            )Mortgage
      servicing, net
            
            
            9
            
            
            
            30
            
            
            
            (21
            )
            
            
            (70.00
            )Other
            
            
            89
            
            
            
            55
            
            
            
            34
            
            
            
            61.82Total
      non-interest income, excluding other-than-temporary impairment
      losses
            
            
            1,256
            
            
            
            1,198
            
            
            
            58
            
            
            
            4.84Net
      other-than-temporary impairment losses recognized in
    earnings
            
            
            -
            
            
            
            (1,128
            )
            
            
            1,128
            
            
            
            100.00Total
      non-interest income
            
            $
            1,256
            
            
            $
            70
            
            
            $
            1,186
            
            
            
            1,694.29








21





Non-interest
income for second quarter 2010 increased $1,186,000 due to the inclusion in
second quarter 2009 of an impairment loss of $1,128,000 on non-agency
collateralized mortgage obligations (“CMOs”). Excluding this impairment loss,
non-interest income increased $58,000 versus second quarter 2009. Income from
sales of mortgage loans decreased $80,000 due to lower loan sales. Loan sales
were $5.2 million and $19.8 million, respectively, for the 2010 and 2009
quarterly periods. Service fees and charges increased $72,000, or 16%, due to
higher interchange, overdraft and other fees. Trust and Wealth Advisory revenues
increased $61,000, or 15%. Other income increased $34,000, due to the inclusion
in second quarter 2010 of a $29,000 gain from the sale of surplus real
estate.




Non-interest
expense




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




Three
      months ended June 30, (dollars in thousands)
            
            2010
            
            
            2009
            
            
            2010
      vs. 2009Salaries
            
            $
            1,694
            
            
            $
            1,596
            
            
            $
            98
            
            
            
            6.14
            %Employee
      benefits
            
            
            586
            
            
            
            552
            
            
            
            34
            
            
            
            6.16Premises
      and equipment
            
            
            495
            
            
            
            466
            
            
            
            29
            
            
            
            6.22Data
      processing
            
            
            363
            
            
            
            330
            
            
            
            33
            
            
            
            10.00Professional
      fees
            
            
            455
            
            
            
            376
            
            
            
            79
            
            
            
            21.01FDIC
      insurance
            
            
            182
            
            
            
            420
            
            
            
            (238
            )
            
            
            (56.67
            )Marketing
      and community contributions
            
            
            59
            
            
            
            88
            
            
            
            (29
            )
            
            
            (32.95
            )Amortization
      of intangible assets
            
            
            56
            
            
            
            41
            
            
            
            15
            
            
            
            36.59Other
            
            
            382
            
            
            
            495
            
            
            
            (113
            )
            
            
            (22.83
            )Non-interest
      expense
            
            $
            4,272
            
            
            $
            4,364
            
            
            $
            (92
            )
            
            
            (2.11
            )




Non-interest
expense for second quarter 2010 decreased $92,000, or 2.1%. Compensation
increased $132,000 due to year-over-year merit increases, changes in staffing
levels and mix, and benefit plan cost increases. Premises and equipment
increased $29,000 due primarily to the opening of the Millerton branch in
January 2010, the acquisition of property for the new Sheffield branch, opening
on August 2, 2010, and other cost increases. Data processing increased $33,000,
reflecting growth in customer accounts and transactional activity. Professional
fees increased $79,000 primarily due to project related services. FDIC insurance
decreased $238,000 due to the inclusion in second quarter 2009 of a special
assessment, partially offset by higher premiums in 2010 from deposit growth.
Marketing decreased $29,000 due to lower spending. Amortization of core deposit
intangibles increased $15,000 due to the December 2009 branch acquisition. Other
operating expenses decreased $113,000 due to lower spending on printing,
postage, telecommunications, consumable supplies and other operational
items.




Income
taxes




The
effective income tax rates for second quarter 2010 and second quarter 2009 were
16.38% and (65.52)%, respectively. Second quarter 2009 included a $384,000 tax
benefit from the $1,128,000 securities impairment loss. Salisbury’s effective
tax rate is generally less than the 34% federal statutory rate due to holdings
of tax-exempt municipal bonds and bank owned life insurance.




Salisbury
did not incur Connecticut income tax in 2010 or 2009, other than minimum state
income tax, as a result of its utilization of Connecticut tax legislation that
permits banks to shelter certain mortgage income from the Connecticut
corporation business tax through the use of a special purpose entity called a
Passive Investment Company (“PIC”). In accordance with this legislation, in 2004
Salisbury formed a PIC, SBT Mortgage Service Corporation. Salisbury's income tax
provision reflects the full impact of the Connecticut legislation. Salisbury
does not expect to pay other than minimum state income tax in the foreseeable
future unless there is a change in the State of Connecticut corporate tax
law.




For
the six month periods ended June 30, 2010 and 2009




Overview




Net
income available to common shareholders was $1,243,000, or $0.74 per common
share,  for the six month period ended June 30, 2010 (year-to-date
2010) compared with $763,000, or $0.45 per common share, for the six month
period ended June 30, 2009 (year-to-date 2009).




Net
income available to common shareholders for year-to-date 2010 and year-to-date
2009 is net of preferred stock dividends of $230,000 and $134,000.




22


Net Interest
Income




Net
interest income for year-to-date 2010 increased $108,000, or 1.3%, compared with
year-to-date 2009. Average total deposits increased $48 million or 13%, over the
twelve month period, facilitating an increase in average earning assets of $42
million, or 9%. The net interest margin (tax equivalent net interest income)
declined 27 basis points to 3.33% compared with 3.60% a year ago.




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







Six
      months ended June 30,
            
            Average
      Balance
            
            
            Income
      / Expense
            
            
            Average
      Yield / Rate(dollars
      in thousands)
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Loans
      (a)
            
            $
            335,774
            
            
            $
            300,242
            
            
            $
            9,088
            
            
            $
            8,962
            
            
            
            5.41
            %
            
            
            5.97
            %Securities
      (c)(d)
            
            
            158,444
            
            
            
            164,004
            
            
            
            3,597
            
            
            
            4,465
            
            
            
            4.54
            
            
            
            5.44FHLBB
      stock
            
            
            6,032
            
            
            
            5,404
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Short
      term funds (b)
            
            
            34,006
            
            
            
            22,298
            
            
            
            84
            
            
            
            11
            
            
            
            0.49
            
            
            
            0.10Total
      earning assets
            
            
            534,256
            
            
            
            491,948
            
            
            
            12,769
            
            
            
            13,438
            
            
            
            4.78
            
            
            
            5.46Other
      assets
            
            
            32,590
            
            
            
            23,848Total
      assets
            
            $
            566,846
            
            
            $
            515,796Interest-bearing
      demand deposits
            
            $
            51,792
            
            
            $
            27,000
            
            
            
            301
            
            
            
            64
            
            
            
            1.16
            
            
            
            0.47Money
      market accounts
            
            
            70,731
            
            
            
            65,812
            
            
            
            201
            
            
            
            367
            
            
            
            0.57
            
            
            
            1.12Savings
      and other
            
            
            88,410
            
            
            
            77,029
            
            
            
            285
            
            
            
            394
            
            
            
            0.64
            
            
            
            1.02Certificates
      of deposit
            
            
            144,602
            
            
            
            140,387
            
            
            
            1,538
            
            
            
            2,170
            
            
            
            2.13
            
            
            
            3.09Total
      interest-bearing deposits
            
            
            355,535
            
            
            
            310,228
            
            
            
            2,325
            
            
            
            2,995
            
            
            
            1.31
            
            
            
            1.93Repurchase
      agreements
            
            
            11,158
            
            
            
            9,533
            
            
            
            46
            
            
            
            67
            
            
            
            0.82
            
            
            
            1.41FHLBB
      advances
            
            
            75,418
            
            
            
            79,445
            
            
            
            1,518
            
            
            
            1,530
            
            
            
            4.03
            
            
            
            3.85Total
      interest-bearing liabilities
            
            
            442,111
            
            
            
            399,206
            
            
            
            3,889
            
            
            
            4,592
            
            
            
            1.76
            
            
            
            2.30Demand
      deposits
            
            
            67,522
            
            
            
            65,147Other
      liabilities
            
            
            3,726
            
            
            
            6,021Shareholders’
      equity
            
            
            53,487
            
            
            
            45,422Total
      liabilities & shareholders’ equity
            
            $
            566,846
            
            
            $
            515,796Net
      interest income
            
            
            
            
            
            
            
            
            
            $
            8,880
            
            
            $
            8,846Spread
      on interest-bearing funds
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3.02
            
            
            
            3.16Net
      interest margin (e)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3.33
            
            
            
            3.60


(a)
            Includes
      non-accrual loans.


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


(c)
            Average
      balances of securities are based on historical
  cost.


(d)
            Includes
      tax exempt income of $519,000 and $592,000, respectively for 2010 and 2009
      on tax-exempt securities whose income and yields are calculated on a
      tax-equivalent basis.


(e)
            Net
      interest income divided by average interest-earning
  assets.





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




Six
      monthsPeriods
      ended June 30, (in thousands)
            
            2010
      versus 2009Change
      in interest due to
            
            Volume
            
            
            Rate
            
            
            NetInterest-earning
      assetsLoans
            
            $
            1,011
            
            
            $
            (885
            )
            
            $
            126Securities
            
            
            (139
            )
            
            
            (729
            )
            
            
            (868
            )Short term funds
            
            
            17
            
            
            
            56
            
            
            
            73Total
            
            
            889
            
            
            
            (1,558
            )
            
            
            (669
            )Interest-bearing
      liabilitiesDeposits
            
            
            224
            
            
            
            (894
            )
            
            
            (670
            )Repurchase
    agreements
            
            
            9
            
            
            
            (30
            )
            
            
            (21
            )FHLBB advances
            
            
            (79
            )
            
            
            67
            
            
            
            (12
            )Total
            
            
            154
            
            
            
            (857
            )
            
            
            (703
            )Net
      change in net interest income
            
            $
            735
            
            
            $
            (701
            )
            
            $
            34







23


Interest
Income




Tax
equivalent interest income decreased $669,000, or 5%, to $12.8 million for
year-to-date 2010 compared with year-to-date 2009.  Loan income
increased $126,000, or 1.4%, primarily due to a $35.5 million, or 11.8%,
increase in average loans, offset by a lower average yield, down 56 basis
points.  The decline in the average loan yield was due to lower market
interest rates on new loan origination, re-financing and adjustable rate
re-pricing activity.




Tax
equivalent income from securities decreased $868,000, or 19.4%, for year-to-date
2010 compared with year-to-date 2009, as a result of a lower average yield, down
90 basis points, and a $5.6 million, or 3.4%, decrease in average securities.
The lower yield was due to lower market interest rates on securities purchases,
calls of agency bonds and prepayments of mortgage backed securities. Income from
government-guaranteed and government-sponsored mortgage backed securities owned
at average prices above par were negatively impacted by increased prepayments
that are believed to relate to the agencies repurchases of delinquent loans in
2010.




Income
from short term funds increased $73,000 for year-to-date 2010 as compared with
year-to-date 2009 as a result of an $11.7 million increase in average balance
and higher yields.




Interest
Expense




Interest
expense decreased $703,000, or 15.3%, to $3.9 million for year-to-date 2010 as
compared with year-to-date 2009.




Interest
on deposit accounts and retail repurchase agreements decreased $691,000, or
22.6%, as a result of a lower average rate, down 62 basis points to 1.30%,
offset in part by a $46.9 million, or 14.7%, increase in the average balance.
The lower average rate was due to lower market interest rates on rates paid and
changes in product mix. The higher average volume resulted from deposit growth
and deposits assumed with the December 2010 Canaan branch purchase.




Interest
expense on FHLBB borrowings decreased $12,000 due to lower average borrowings,
down $4.0 million, offset in part by a higher average borrowing rate, up 18
basis points, due to change in mix.




Provision and Allowance for
Loan Losses




The
provision for loan losses was $440,000 for year-to-date 2010, compared with
$745,000 for year-to-date 2009. Net loan charge-offs were $145,000 and $160,000,
for the respective periods.




Non-interest
income




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




Six
      months ended June 30, (dollars in thousands)
            
            2010
            
            
            2009
            
            
            2010
      vs. 2009Gains
      on securities, net
            
            $
            1
            
            
            $
            436
            
            
            $
            (435
            )
            
            
            (99.77
            )%Trust
      and wealth advisory fees
            
            
            1,036
            
            
            
            970
            
            
            
            66
            
            
            
            6.80Service
      charges and fees
            
            
            994
            
            
            
            851
            
            
            
            143
            
            
            
            16.80Gains
      on sales of mortgage loans, net
            
            
            201
            
            
            
            304
            
            
            
            (103
            )
            
            
            (33.88
            )Mortgage
      servicing, net
            
            
            24
            
            
            
            72
            
            
            
            (48
            )
            
            
            (66.66
            )Other
            
            
            146
            
            
            
            192
            
            
            
            (46
            )
            
            
            (23.96
            )Total
      non-interest income, excluding other-than-temporary impairment
      losses
            
            
            2,402
            
            
            
            2,825
            
            
            
            (423
            )
            
            
            (14.97
            )Net
      other-than-temporary impairment losses recognized in
    earnings
            
            
            -
            
            
            
            (1,128
            )
            
            
            1,128
            
            
            
            100.00Total
      non-interest income
            
            $
            2,402
            
            
            $
            1,697
            
            
            $
            705
            
            
            
            41.54




Non-interest
income for year-to-date 2010 increased $705,000 due to the inclusion in
year-to-date 2009 of an impairment loss of $1,128,000 on non-agency CMOs.
Excluding this impairment loss, non-interest income decreased $423,000 versus
year-to-date 2009. Income from sales of mortgage loans decreased $103,000 due to
lower loan sales. Year-to-date loan sales were $9.6 million and $26.7 million,
respectively, for the 2010 and 2009 year-to-date periods. Service fees and
charges increased $143,000, or 17%, due to higher interchange, overdraft and
other fees. Trust and Wealth Advisory revenues increased $66,000, or 7%. Other
income decreased $46,000, due to the inclusion in year-to-date 2009 of a $72,000
market adjustment gain from the re-financing of Bank Owned Life Insurance,
offset in part by the inclusion in year-to-date 2010 of a $29,000 gain from the
sale of surplus real estate.




Non-interest
expense




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




Six
      months ended June 30, (dollars in thousands)
            
            2010
            
            
            2009
            
            
            2010
      vs. 2009Salaries
            
            $
            3,282
            
            
            $
            3,207
            
            
            $
            75
            
            
            
            2.33
            %Employee
      benefits
            
            
            1,216
            
            
            
            1,132
            
            
            
            84
            
            
            
            7.42Premises
      and equipment
            
            
            1,011
            
            
            
            957
            
            
            
            54
            
            
            
            5.64Data
      processing
            
            
            772
            
            
            
            714
            
            
            
            58
            
            
            
            8.12Professional
      fees
            
            
            857
            
            
            
            733
            
            
            
            124
            
            
            
            16.92FDIC
      insurance
            
            
            354
            
            
            
            533
            
            
            
            (179
            )
            
            
            (33.58
            )Marketing
      and community contributions
            
            
            121
            
            
            
            164
            
            
            
            (43
            )
            
            
            (26.22
            )Amortization
      of intangible assets
            
            
            111
            
            
            
            82
            
            
            
            29
            
            
            
            35.37Other
            
            
            876
            
            
            
            871
            
            
            
            5
            
            
            
            0.57Non-interest
      expense
            
            $
            8,600
            
            
            $
            8,393
            
            
            $
            207
            
            
            
            2.47







24


Non-interest
expense for year-to-date 2010 increased $207,000, or 2.5%. Compensation
increased $159,000 due to year-over-year merit increases, changes in staffing
levels and mix, and benefit plan cost increases. Premises and equipment
increased $54,000 due primarily to the opening of the Millerton branch in
January 2010, the acquisition of property for the new Sheffield branch, opening
on August 2, 2010, and other cost increases. Data processing increased $58,000,
reflecting growth in customer accounts and transactional activity. Professional
fees increased $124,000 primarily due to project related services. FDIC
insurance decreased $179,000 due to the inclusion in year-to-date 2009 of a
special assessment, partially offset by higher premiums in year-to-date 2010
from deposit growth. Marketing decreased $43,000 due to lower spending.
Amortization of core deposit intangibles increased $29,000 due to the December
2009 Canaan branch acquisition. Other operating expenses were substantially
unchanged.




Income
taxes




The
effective income tax rate for year-to-date 2010 was 14.56%, compared with
(10.46)% for year-to-date 2009. Year-to-date 2009 included a $384,000 tax
benefit from the $1,128,000 securities impairment loss. Salisbury’s effective
tax rate is generally less than the 34% federal statutory rate due to holdings
of tax-exempt municipal bonds and bank owned life insurance.




FINANCIAL
CONDITION




Overview




Total
assets were $566 million at June 30, 2010, up $3 million from December 31,
2009.  Loans receivable, net, were $342 million at June 30, 2010, up
$15 million, or 5%, from December 31, 2009.  Non-performing assets
were $11.5 million at June 30, 2010, up $3.8 million from $7.7 million at
December 31, 2009. Reserve coverage, as measured by the ratio of the allowance
for loan losses to gross loans, was 1.09, 1.05% and 1.11%, at June 30, 2010,
December 31, 2009 and June 30, 2009, respectively. Deposits were $424 million,
up $6 million from $418 million at December 31, 2009.




At June
30, 2010, book value and tangible book value per common share were $27.00 and
$20.38, respectively. Both
Salisbury and the Bank’s regulatory capital ratios remain in compliance with
regulatory “well capitalized” requirements.Salisbury’s Tier 1 leverage
and total risk-based capital ratios were 8.35% and 13.39%.




Securities
and Short Term Funds




Salisbury's
debt securities include U.S. Treasury bills and notes, U.S. Government sponsored
agency bonds, agency mortgage-backed securities (“MBS”) and agency
collateralized mortgage obligations (“CMO”), bank qualified municipal bonds,
non-agency CMO’s and Small Business Administration (“SBA”) pools.




Securities
available-for-sale were $155.4 million at June 30, 2010, up $10.4 million from
December 31, 2009. During the second quarter of 2010, Salisbury purchased $4.0
million of debt securities, including U.S. Treasury notes and U.S. Government
sponsored agency bonds. At June 30, 2010, the portfolio had a projected weighted
average life of 5.10 years, based on median projected prepayment speeds for MBS
and CMO, and likelihood of call for callable securities, at current interest
rates.  At June 30, 2010, substantially all securities were classified
as available-for-sale.




In 2009,
Salisbury determined that five non-agency CMO securities reflected OTTI and it
recognized credit losses of $1,128,000 by writing down the carrying value of
such securities. Salisbury does not intend to sell the securities that 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. No additional OTTI was determined for the
quarter ended June 30, 2010 and all other non-agency CMO securities were judged
not to be OTTI as of June 30, 2010. It is possible that future loss assumptions
could change and cause future OTTI credit losses in these
securities.




Salisbury
believes that principal and interest on all other debt securities are deemed
recoverable. Accumulated other comprehensive income at June 30, 2010 included
net unrealized holding losses, net of tax, of $2.2 million that management deems
as temporary impairment.




25







Loans




During
the second quarter of 2010, gross loans receivable grew $12.6 million, or 3.8%,
to $345.2 million at June 30, 2010, despite soft loan demand and competition for
loans in Salisbury’s market area. Second quarter 2010 loan growth compares with
loan growth of $2.5 million, or 0.7%, in the first quarter of 2010.




The
principal categories of loans receivable are as follows:




(in
      thousands)
            
            June
      30, 2010
            
            
            March
      31, 2010
            
            
            December
      31, 2009Loans
      receivableReal
      Estate MortgagesResidential
            
            $
            169,088
            
            
            $
            164,119
            
            
            $
            163,863Commercial
            
            
            80,347
            
            
            
            77,210
            
            
            
            70,066Construction, land & land
      development
            
            
            28,874
            
            
            
            23,801
            
            
            
            31,011Home equity credit
            
            
            33,193
            
            
            
            32,830
            
            
            
            33,099Total mortgage
    loans
            
            
            311,502
            
            
            
            297,960
            
            
            
            298,039Commercial
      and Industrial
            
            
            28,255
            
            
            
            29,162
            
            
            
            26,400Consumer
            
            
            5,078
            
            
            
            5,224
            
            
            
            5,436Other
            
            
            370
            
            
            
            276
            
            
            
            269Total
      loans, gross
            
            
            345,205
            
            
            
            332,622
            
            
            
            330,144Deferred
      loan origination costs, net
            
            
            693
            
            
            
            627
            
            
            
            586Allowance
      for loan losses
            
            
            (3,768
            )
            
            
            (3,649
            )
            
            
            (3,473
            )Loans receivable,
    net
            
            $
            342,130
            
            
            $
            329,600
            
            
            $
            327,257Loans
      held-for-saleResidential
    mortgages
            
            $
            513
            
            
            $
            1,176
            
            
            $
            665


Loan
Credit Quality




Loan
credit quality stabilized during the second quarter ended June 30, 2010,
following deterioration in the first quarter of 2010, reflecting the weakness in
the regional economy. During the second quarter of 2010 non-performing assets
decreased $0.8 million to $11.5 million, or 2.04% of assets, compared with $12.3
million, or 2.19% of assets, at March 31, 2010.




During
the second quarter of 2010 loans past due 30 days or more decreased $3.8 million
to $8.1 million, or 2.3% of loans, at June 30, 2010, compared with $11.9
million, or 3.6% of loans, at March 31, 2010.




Non-Performing
Assets




The
principal categories of non-performing assets are as follows:




(in
      thousands)
            
            June
      30, 2010
            
            
            March
      31, 2010
            
            
            December
      31, 2009Real
      Estate MortgagesResidential
            
            $
            2,516
            
            
            $
            3,332
            
            
            $
            765Commercial
            
            
            4,036
            
            
            
            4,196
            
            
            
            2,226Construction, land & land
      development
            
            
            3,756
            
            
            
            3,603
            
            
            
            3,535Home equity credit
            
            
            365
            
            
            
            366
            
            
            
            367Total mortgage
    loans
            
            
            10,673
            
            
            
            11,497
            
            
            
            6,893Commercial
      and Industrial
            
            
            521
            
            
            
            564
            
            
            
            546Non-accruing
      loans
            
            
            11,194
            
            
            
            12,061
            
            
            
            7,439Accruing
      loans past due 90 days or more
            
            
            326
            
            
            
            3
            
            
            
            6Total
      non-performing loans
            
            
            11,520
            
            
            
            12,064
            
            
            
            7,445Real
      estate acquired in settlement of loans
            
            
            -
            
            
            
            275
            
            
            
            275Total
      non-performing assets
            
            $
            11,520
            
            
            $
            12,339
            
            
            $
            7,720




During
the second quarter of 2010, $1.6 million of loans were placed on non-accrual
status, while $2.4 million of loans were returned to accrual status, following
satisfactory performance for a sustained period, and Salisbury’s single
foreclosed property was sold. Substantially all non-performing loans are
collateralized with real estate and the repayment of such loans is largely
dependent on the sale of the underlying real estate.




26


Salisbury
pursues the resolution of non-performing assets through restructurings, credit
enhancements or collections. When attempts to work with a customer to either
restructure and bring the loan back to performing, or to simply bring the loan
current are unsuccessful, Salisbury will initiate action to either foreclose the
property, to acquire it by deed in lieu of foreclosure, or to liquidate business
assets.




The past
due status of non-performing loans is as follows:




(in
      thousands)
            
            June
      30, 2010
            
            
            March
      31, 2010
            
            
            December
      31, 2009Current
            
            $
            3,546
            
            
            $
            5,248
            
            
            $
            3,105Past
      due 001-029 days
            
            
            728
            
            
            
            315
            
            
            
            -Past
      due 030-059 days
            
            
            -
            
            
            
            802
            
            
            
            349Past
      due 060-089 days
            
            
            1,012
            
            
            
            1,321
            
            
            
            405Past
      due 090-179 days
            
            
            2,515
            
            
            
            1,113
            
            
            
            321Past
      due 180 days and over
            
            
            3,719
            
            
            
            3,265
            
            
            
            3,265Total
      non-performing loans
            
            $
            11,520
            
            
            $
            12,064
            
            
            $
            7,445




At June
30, 2010, 30.8% of non-accrual loans were current with respect to loan payments,
compared with 43.5% at March 31, 2010 and 41.7% at December 31, 2009. Loans past
due 180 days include a single $3.0 million residential construction loan
relationship.




Troubled Debt Restructured
Loans




Loans are
considered restructured when Salisbury has granted concessions to a borrower due
to the borrower’s financial condition that it otherwise would not have
considered. These concessions include modifications of the terms of the debt
such as reduction of the stated interest rate other than normal market rate
adjustments, extension of maturity dates, or reduction of principal balance or
accrued interest. The decision to restructure a loan, versus aggressively
enforcing the collection of the loan, may benefit Salisbury by increasing the
ultimate probability of collection.




Restructured
loans are classified as accruing or non-accruing based on management’s
assessment of the collectability of the loan. Loans which are already on
nonaccrual status at the time of the restructuring generally remain on
nonaccrual status for approximately six months before management considers such
loans for return to accruing status. Accruing restructured loans are generally
placed into nonaccrual status if and when the borrower fails to comply with the
restructured terms.




The
principal categories of troubled debt restructured loans are as
follows:




(in
      thousands)
            
            June
      30, 2010
            
            
            March
      31, 2010
            
            
            December
      31, 2009Real
      Estate MortgagesResidential
            
            $
            673
            
            
            $
            662
            
            
            $
            2,708Commercial
            
            
            1,881
            
            
            
            4,384
            
            
            
            1,857Construction, land & land
      development
            
            
            2,960
            
            
            
            -
            
            
            
            -Accruing
      troubled debt restructured loans
            
            
            5,514
            
            
            
            5,046
            
            
            
            4,565Real
      Estate MortgagesResidential
            
            
            1,347
            
            
            
            2,213
            
            
            
            176Commercial
            
            
            4,037
            
            
            
            3,866
            
            
            
            2,008Construction, land & land
      development
            
            
            26
            
            
            
            26
            
            
            
            -Commercial
      and Industrial
            
            
            458
            
            
            
            158
            
            
            
            158Non-accrual
      troubled debt restructured loans
            
            
            5,868
            
            
            
            6,263
            
            
            
            2,342Total
      troubled debt restructured loans
            
            $
            11,382
            
            
            $
            11,309
            
            
            $
            6,907




During
the second quarter of 2010, Salisbury restructured nine loans totaling $2.3
million, of which $0.7 million are accruing and $1.6 million are on non-accrual
status. Also during the quarter, $2.1 million of loans were no longer classified
as troubled debt restructurings, due to sustained satisfactory performance, and
$135,000 of other loans classified as troubled debt restructurings was
charged-off. Accruing loans classified as troubled debt restructured loans at
March 31, 2010 continue to perform and none were placed on non-accrual status
during the quarter.




The past
due status of troubled debt restructured loans is as follows:




(in
      thousands)
            
            June
      30, 2010
            
            
            March
      31, 2010
            
            
            December
      31, 2009Current
            
            $
            5,058
            
            
            $
            4,799
            
            
            $
            4,565Past due 001-029
    days
            
            
            456
            
            
            
            247
            
            
            
            -Accruing
      troubled debt restructured loans
            
            
            5,514
            
            
            
            5,046
            
            
            
            4,565Current
            
            
            3,244
            
            
            
            4,001
            
            
            
            1,992Past due 001-029
    days
            
            
            402
            
            
            
            -
            
            
            
            -Past due 030-059
    days
            
            
            -
            
            
            
            729
            
            
            
            -Past due 060-089
    days
            
            
            729
            
            
            
            1,183
            
            
            
            350Past due 090-179
    days
            
            
            1,108
            
            
            
            350
            
            
            
            -Past due 180 days and
      over
            
            
            385
            
            
            
            -
            
            
            
            -Non-accrual
      troubled debt restructured loans
            
            
            5,868
            
            
            
            6,263
            
            
            
            2,342Total
      troubled debt restructured loans
            
            $
            11,382
            
            
            $
            11,309
            
            
            $
            6,907







27


At June
30, 2010 73% of such loans were current with respect to loan payments, down from
78% at March 31, 2010 and 95% at December 31, 2009.




Past Due
Loans




Loans
past due 30 days or greater are as follows:




(in
      thousands)
            
            June
      30, 2010
            
            
            March
      31, 2010
            
            
            December
      31, 2009Past due 030-059
    days
            
            $
            686
            
            
            $
            4,543
            
            
            $
            2,821Past due 060-089
    days
            
            
            144
            
            
            
            840
            
            
            
            1,272Past due 090-179
    days
            
            
            326
            
            
            
            3
            
            
            
            5Accruing
      loans
            
            
            1,156
            
            
            
            5,386
            
            
            
            4,098Past due 030-059
    days
            
            
            -
            
            
            
            801
            
            
            
            349Past due 060-089
    days
            
            
            1,012
            
            
            
            1,321
            
            
            
            405Past due 090-179
    days
            
            
            2,189
            
            
            
            1,110
            
            
            
            315Past due 180 days and
      over
            
            
            3,719
            
            
            
            3,265
            
            
            
            3,265Non-accrual
      loans
            
            
            6,920
            
            
            
            6,497
            
            
            
            4,334Total
      loans past due 30 days or greater
            
            $
            8,076
            
            
            $
            11,883
            
            
            $
            8,432




During
the second quarter of 2010 loans past due 30 days or more decreased $3.8 million
to $8.1 million, or 3.2% of gross loans receivable, compared with $11.9 million,
or 3.6% of loans, at March 31, 2010. The decrease resulted from improved
collection activity. At December 31, 2009, loans past due 30 days or more were
$8.4 million, or 2.5% of gross loans receivable.




Potential Problem
Loans




Salisbury
classifies certain loans as “substandard,” “doubtful,” or “loss” based on
criteria consistent with guidelines prescribed by banking regulators. Potential
problem loans consist of classified accruing commercial loans that were less
than 90 days past due at June 30, 2010, but where known information about
possible credit problems of the related borrowers causes management to have
doubts as to the ability of such borrowers to comply with the present loan
repayment terms and which may result in disclosure of such loans as
nonperforming at some time in the future. These loans are not included in the
classification of non-accrual or troubled debt restructured loans above.
Management cannot predict the extent to which economic conditions may worsen or
other factors, which may impact borrowers and the potential problem loans.
Accordingly, there can be no assurance that other loans will not become 90 days
or more past due, be placed on nonaccrual, restructured, or require increased
allowance coverage and provision for loan losses. Salisbury has identified
approximately $10.0 million in potential problem commercial loans at June 30,
2010, 74% of which is represented by 6 commercial lending
relationships.




Deposits
and Borrowings




Deposits
grew $5.8 million, or 1%, during year-to-date 2010 to $424 million, while retail
repurchase agreements decreased $3.3 million to $8 million.




During
this period Salisbury’s Federal Home Loan Bank of Boston (FHLBB) advances
decreased by $1.4 million from scheduled loan repayments.




LIQUIDITY




Salisbury
manages its liquidity position to ensure that there is sufficient funding
availability at all times to meet both anticipated and unanticipated deposit
withdrawals, loan originations and advances, securities purchases and other
operating cash outflows. Salisbury's primary sources of liquidity are principal
payments and maturities of securities and loans, short-term borrowings through
repurchase agreements and Federal Home Loan Bank advances, net deposit growth
and funds provided by operations.  Liquidity can also be provided
through sales of loans and available-for-sale securities.




28







Operating
activities for year-to-date 2010 provided net cash of $3.0
million.  Investing activities utilized net cash of $24.6 million,
principally to fund $38.0 million of securities purchases, $15.0 million of net
loan advances and $1.4 million in capital expenditures, related to the new
Millerton and Sheffield branches, offset in part by $29.8 million from security
repayments, calls and maturities. Financing activities utilized net cash of $0.1
million, principally for $1.4 million of scheduled FHLB advance repayments and
$1.2 million of common and preferred stock cash dividends, offset in part by
$2.5 million of net deposit and repurchase agreement inflows.




At June
30, 2010, Salisbury's liquidity ratio, as represented by cash, short term
available-for-sale securities and marketable assets to net deposits and short
term unsecured liabilities, was 31.0% and exceeded Salisbury's minimum guideline
of 30%.




At June
30, 2010, Salisbury had outstanding commitments to fund new loans not closed of
$2 million and unused lines of credit on existing loans of $49 million.
Salisbury believes that these commitments can be met in the normal course of
business.  Salisbury believes that its liquidity sources will continue
to provide funding sufficient to support operating activities, loan originations
and commitments, and deposit withdrawals.




CAPITAL
RESOURCES




Shareholders’
equity was $54.4 million at June 30, 2010, up $2.0 million from December 31,
2009. Book value and tangible book value per share were $27.00 and $20.38,
respectively, compared with $25.81 and $19.12, respectively, at December 31,
2009. Contributing to the increase in shareholders’ equity for year-to-date 2010
was net income of $1.5 million and other comprehensive income of $1.7 million,
less common and preferred stock dividend payments of $1.2 million. Other
comprehensive income includes unrealized gains on securities available-for-sale,
net of tax, of $1.7 million.




Capital
Requirements




Salisbury
and the Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Under current regulatory definitions, Salisbury
and the Bank are considered to be “well capitalized” for capital adequacy
purposes. As a result, the Bank pays lower federal deposit insurance premiums
than banks that are not “well capitalized.” Salisbury and the Bank's regulatory
capital ratios are as follows:




Well
            
            
            June
      30, 2010
            
            
            December
      31, 2009capitalized
            
            
            Salisbury
            
            
            Bank
            
            
            Salisbury
            
            
            BankTotal
      Capital (to risk-weighted assets)
            
            
            10.00
            %
            
            
            13.39
            %
            
            
            10.88
            %
            
            
            12.86
            %
            
            
            10.40
            %Tier
      1 Capital (to risk-weighted assets)
            
            
            6.00
            
            
            
            12.38
            
            
            
            9.86
            
            
            
            11.95
            
            
            
            9.48Tier
      1 Capital (to average assets)
            
            
            5.00
            
            
            
            8.35
            
            
            
            6.63
            
            
            
            8.39
            
            
            
            6.70




A well
capitalized institution, which is the highest capital category for an
institution as defined by the Prompt Corrective Regulations issued by the FDIC
and the FRB, is one which maintains a Total Risk-Based ratio of 10% or above, a
Tier 1 Risk-Based ratio of 6% or above and a Leverage ratio of 5% or above, and
is not subject to any written order, written agreement, capital directive, or
prompt corrective action directive to meet and maintain a specific capital
level. Maintaining strong capital is essential to Salisbury and the Bank’s
safety and soundness.  However, the effective management of capital
resources requires generating attractive returns on equity to build value for
shareholders while maintaining appropriate levels of capital to fund growth,
meet regulatory requirements and be consistent with prudent industry
practices.




Dividends




During
year-to-date 2010 Salisbury paid $220,000 in preferred stock dividends to the
U.S. Treasury’s TARP CPP, and $945,000 in common stock dividends.




The Board
of Directors of Salisbury declared a common stock dividend of $0.28 per common
share payable on August 26, 2010 to shareholders of record on August 12, 2010.
Common stock dividends, when declared, will generally be paid the last business
day of February, May, August and November, although Salisbury is not obligated
to pay dividends on those dates or at any other time.




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 can not 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 Commissioner of
Banking, exceed the total of its net profits of that year combined with its
retained net profits of the preceding two years.









29


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 Federal Reserve 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
participation in the TARP, 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 second three years
Salisbury is a TARP participant unless all TARP preferred shares are redeemed or
transferred to third parties.




Salisbury
believes that the payment of common stock cash dividends is appropriate,
provided that such payment considers Salisbury's capital needs, asset quality,
and overall financial condition and does not adversely affect the financial
stability of Salisbury or the Bank.  The continued payment of common
stock cash dividends by Salisbury will be dependent on Salisbury's future core
earnings, financial condition and capital needs, regulatory restrictions, and
other factors deemed relevant by the Board of Directors of
Salisbury.




IMPACT
OF INFLATION AND CHANGING PRICES




Salisbury’s
consolidated financial statements are prepared in conformity with generally
accepted accounting principles that require the measurement of financial
condition and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money, over time, due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of Salisbury are monetary and as a result, interest rates have a
greater impact on Salisbury’s performance than do the effects of general levels
of inflation, although interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
Although not a material factor in recent years, inflation could impact earnings
in future periods.




FORWARD-LOOKING
STATEMENTS




This Form
10-Q and future filings made by Salisbury with the Securities and Exchange
Commission, as well as other filings, reports and press releases made or issued
by Salisbury and the Bank, and oral statements made by executive officers of
Salisbury and the Bank, may include forward-looking statements relating to such
matters as:




(a)
            assumptions
      concerning future economic and business conditions and their effect on the
      economy in general and on the markets in which Salisbury and the Bank do
      business; and




(b)
            expectations
      for revenues and earnings for Salisbury and
  Bank.




Such
forward-looking statements are based on assumptions rather than historical or
current facts and, therefore, are inherently uncertain and subject to
risk.  For those statements, Salisbury claims the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Act of 1995.




Salisbury
notes that a variety of factors could cause the actual results or experience to
differ materially from the anticipated results or other expectations described
or implied by such forward-looking statements.  The risks and
uncertainties that may effect the operation, performance, development and
results of Salisbury’s and Bank’s business include the following:




(a)
            the
      risk of adverse changes in business conditions in the banking industry
      generally and in the specific markets in which the Bank
      operates;




(b)
            changes
      in the legislative and regulatory environment that negatively impacts
      Salisbury and Bank through increased operating
  expenses;




(c)
            increased
      competition from other financial and non-financial
      institutions;




(d)
            the
      impact of technological advances;
and




(e)
            other
      risks detailed from time to time in Salisbury’s filings with the
      Securities and Exchange Commission.






Such
developments could have an adverse impact on Salisbury’s and the Bank’s
financial position and results of operations.




30


Item
      3.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURE OF MARKET RISK




Salisbury
manages its exposure to interest rate risk through its Asset/Liability
Management Committee (“ALCO”) using risk limits and policy guidelines to manage
assets and funding liabilities to produce financial results that are consistent
with Salisbury’s liquidity, capital adequacy, growth, risk and profitability
targets. Interest rate risk is the risk of loss to future earnings due to
changes in interest rates.




The ALCO
manages interest rate risk using income simulation to measure interest rate risk
inherent in Salisbury’s financial instruments at a given point in time by
showing the effect of interest rate shifts on net interest income over a
24-month horizon. The simulations incorporate management’s growth assumptions
over the simulation horizons, with allowances made for loan, deposit and
security product mix shifts in selected interest rate scenarios, such as
movements between lower rate savings and money market deposit accounts and
higher rate time deposits, and changes in the reinvestment of loan and
securities cash flows. Additionally, the simulations take into account the
specific re-pricing, maturity and prepayment characteristics of differing
financial instruments that may vary under different interest rate
scenarios.




The ALCO
reviews the simulation results to determine whether Salisbury’s exposure to
change in net interest income remains within established tolerance levels over
the simulation horizons and to develop appropriate strategies to manage this
exposure. Salisbury’s tolerance levels for changes in net interest income in its
income simulations varies depending on the magnitude of interest rate changes
and level of risk-based capital. All changes are measured in comparison to the
projected net interest income that would result from an “unchanged” rate
scenario where interest rates remain stable over the forecast horizon. The ALCO
also evaluates the directional trends of net interest income, net interest
margin and other financial measures over the forecast horizon for consistency
with its liquidity, capital adequacy, growth, risk and profitability
targets.




The ALCO
uses four interest rate scenarios to evaluate interest risk exposure and may
vary these interest rate scenarios to show the effect of steepening or
flattening changes in yield curves as well as parallel changes in interest
rates. At June 30, 2010 the ALCO used the following interest rate scenarios: (1)
unchanged interest rates; (2) immediately rising interest rates – immediate
non-parallel upward shift in market interest rates ranging from 300 basis points
for short term rates to 200 basis points for the 10-year Treasury; (3)
immediately falling interest rates – immediate non-parallel downward shift in
market interest rates ranging from 0 basis points for short term rates to 105
basis points for the 10-year Treasury; and (4) gradually rising interest rates –
gradual non-parallel upward shift in market interest rates ranging from 225
basis points for short term rates to 175 basis points for the 10-year Treasury.
Deposit rates are assumed to shift by lesser amounts due to their relative
historical insensitivity to market interest rate movements. Further, deposits
are assumed to have certain minimum rate levels below which they will not fall.
Because income simulations assume that Salisbury’s balance sheet will remain
static over the simulation horizon, the results do not reflect adjustments in
strategy that the ALCO could implement in response to rate shifts.




As of
June 30, 2010 net interest income simulations indicated that the Bank’s exposure
to changing interest rates over the simulation horizons remained within its
tolerance levels. The following table sets forth the estimated change in net
interest income from an unchanged interest rate scenario over the periods
indicated for changes in market interest rates using the Bank’s financial
instruments as of June 30, 2010.




As
      of June 30, 2010
            
            Months
      1-12
            
            
            Months
      13-24Immediately
      rising interest rates
            
            
            (9.07
            )%
            
            
            (12.88
            )%Immediately
      falling interest rates
            
            
            0.18
            
            
            
            (1.44
            )Gradually
      rising interest rates
            
            
            0.54
            
            
            
            (2.49
            )




The
negative exposure of net interest income to immediately and gradually rising
rates as compared to the unchanged rate scenario results from a faster projected
rise in the cost of funds versus income from earning assets, as relatively
rate-sensitive money market and time deposits re-price faster than longer
duration earning assets.  The negative exposure of net interest income
to immediately falling rates as compared to an unchanged rate scenario results
from a greater decline in earning asset yields compared to rates paid on funding
liabilities, as a result of faster prepayments on existing assets and lower
reinvestment rates on future loans originated and securities
purchased.




31







While the
ALCO reviews simulation assumptions and back-tests simulation results to ensure
that they are reasonable and current, income simulation may not always prove to
be an accurate indicator of interest rate risk or future net interest margin.
Over time, the re-pricing, maturity and prepayment characteristics of financial
instruments and the composition of Salisbury’s balance sheet may change to a
different degree than estimated. Simulation modeling assumes a relatively static
balance sheet that does not necessarily reflect Salisbury’s expectation for
future balance sheet growth, which is a function of the business environment and
customer behavior. Another significant simulation assumption is the sensitivity
of core savings deposits to fluctuations in interest rates. Income simulation
results assume that changes in both core savings deposit rates and balances are
related to changes in short-term interest rates. The assumed relationship
between short-term interest rate changes and core deposit rate and balance
changes used in income simulation may differ from the ALCO’s estimates. Lastly,
mortgage-backed securities and mortgage loans involve a level of risk that
unforeseen changes in prepayment speeds may cause related cash flows to vary
significantly in differing rate environments. Such changes could affect the
level of reinvestment risk associated with cash flow from these instruments, as
well as their market value. Changes in prepayment speeds could also increase or
decrease the amortization of premium or accretion of discounts related to such
instruments, thereby affecting interest income.




Salisbury
also monitors the potential change in market value of its available-for-sale
debt securities in changing interest rate environments. The purpose is to
determine market value exposure that may not be captured by income simulation,
but which might result in changes to Salisbury’s capital and liquidity position.
Results are calculated using analytical techniques and securities data.
Available-for-sale equity securities are excluded from this analysis because the
market value of such securities cannot be directly correlated with changes in
interest rates. The following table summarizes the potential change in market
value of available-for-sale debt securities resulting from immediate parallel
rate shifts:




32





As
      of June 30, 2010 (in thousands)
            
            Rates
      up 100bp
            
            
            Rates
      up 200bpU.S.
      Treasury notes
            
            $
            (288
            )
            
            $
            (557
            )U.S.
      Government agency notes
            
            
            (1,298
            )
            
            
            (3,046
            )Municipal
      bonds
            
            
            (4,184
            )
            
            
            (8,022
            )Mortgage
      backed securities
            
            
            (468
            )
            
            
            (1,293
            )Collateralized
      mortgage obligations
            
            
            (879
            )
            
            
            (1,738
            )SBA
      pools
            
            
            (23
            )
            
            
            (40
            )Total
      available-for-sale debt securities
            
            $
            (7,140
            )
            
            $
            (14,696
            )





Item
      4T.
            CONTROLS AND
      PROCEDURES




Evaluation of Disclosure
Controls and Procedures




Salisbury’s
management, including its Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the design and operation of the disclosure
controls and procedures as of June 30, 2010.  Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective.




Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that the information required to be disclosed in reports filed or
submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in our reports filed under the Exchange Act is accumulated
and communicated to management, including the principle executive officer and
principle financial officer, as appropriate to allow timely decisions regarding
required disclosure.




In
addition, based on an evaluation of its internal controls over financial
reporting, no change in Salisbury’s internal control over financial reporting
occurred during the quarter ended June 30, 2010 that has materially affected, or
is reasonably likely to materially affect, Salisbury’s internal control over
financial reporting.




PART
      II.
            OTHER
      INFORMATION




Item
      1.
            LEGAL
      PROCEEDINGS




The Bank
is a party defendant, both in its capacity as Salisbury Bank and Trust Company
and in its former capacity as the Trustee of the Erling C. Christophersen
Revocable Trust, in litigation currently filed in the Connecticut Superior
Court within the Judicial District of Stamford.  The other parties to
the litigation are the Plaintiff, John R. Christophersen of Norwalk, Connecticut
and Defendants, Erling C. Christophersen, of Westport, Connecticut; Bonnie
Christophersen of  Westport, Connecticut; Elena Dreiske of Wanetka,
Illinois; and People’s United Bank with its principal place of business in
Bridgeport, Connecticut.




The
litigation involves the ownership of certain real property located within
Westport, Connecticut, which was conveyed by the Defendant, Erling
Christophersen, to the Erling Christophersen Trust, of which the Bank was a
co-Trustee.  Subsequent to this conveyance, the Bank loaned $3,386,609
to the Erling Christophersen Trust, which was secured by an open-end commercial
mortgage in favor of the Bank on the Westport real estate referenced above,
which was appraised at a value significantly greater than the loan
amount.




The claim
of the Plaintiff John R. Christophersen is that he had an interest in the real
property of which he was wrongfully divested.  He has brought this
action seeking restoration of his allegedly divested interest as well as money
damages.




In
addition to his efforts to restore his alleged interest in the real property,
the Plaintiff has made two additional claims directed at the Bank.  He
has alleged that by financing the property, and holding it as a co-Trustee, the
Bank participated in “stealing” the value of the Plaintiff’s interest in the
property.  He has also alleged an implied trust against the Bank
alleging that it acquired title to the property adverse to the Plaintiff’s
interest and in contravention of the Plaintiffs entitlements, and therefore
holds the property in trust for Plaintiff.  The Bank, at the time of
the financing referenced above, acquired a lender’s title insurance policy from
the Chicago Title & Insurance Company.  The Bank has resigned as a
trustee and is actively defending the case.  The validity of the
conveyance to Erling Christophersen is also the subject of a probate proceeding
in New York State.  This Connecticut proceeding has been stayed until
the New York Court litigation is resolved.  Prior to the resolution,
the liquidity of the real estate collateral, which secures the loan, is
diminished. To protect its interests, the Bank commenced an action to foreclose
on the property on July 14, 2010 in the Connecticut Superior Court within the
Judicial District of Stamford.




33


Item
1A.                 RISK FACTORS




Not
applicable.




Item
      2.
            UNREGISTERED SALES OF EQUITY
      SECURITIES AND USE OF
PROCEEDS




None




Item
      3.
            DEFAULTS UPON SENIOR
      SECURITIES




None




Item
4.RESERVED





Item
      5.
            OTHER
      INFORMATION




None




Item
      6.
            EXHIBITS




31.1
            Rule
      13a-14(a)/15d-14(a) Certification.





31.2
            Rule
      13a-14(a)/15d-14(a) Certification.





32
            Section
      1350 Certifications








SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.








SALISBURY
      BANCORP, INC.August
      9, 2010
            by/s/ Richard J. Cantele,
      Jr.Richard
      J. Cantele, Jr.,Chief
      Executive OfficerAugust
      9, 2010
            by/s/ B. Ian McMahonB.
      Ian McMahon,Chief
      Financial Officer




34