SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549





FORM
10-Q


(Mark
One)


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


For
the quarterly period ended March 31, 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 of incorporation or organization)
            (I.R.S.
      Employer Identification No.)5
      Bissell Street, Lakeville, CT
            06039(Address
      of principal executive offices)
            (Zip
      code)(860)
      435-9801(Registrant's
      telephone number, including area
code)


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


Yes x No o


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.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
      filero
            Accelerated filero
            Non-accelerated filero
            Smaller reporting
      companyý


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


Yes o No x


The
number of shares of Common Stock outstanding as of May 17, 2010, is
1,687,661.







1


TABLEOF CONTENTS





PagePART
      I  FINANCIAL INFORMATIONItem
      1.
            Financial Statements:Consolidated Balance Sheets as of March 31, 2010 and December
      31, 2009
            3Consolidated Statements of Income for the three month
      periodsended March 31, 2010 and March 31, 2009
            4Consolidated Statements of Changes in Shareholders' Equity for
      the three monthperiods ended March 31, 2010 and March 31,
    2009
            5Consolidated Statements of Cash Flows for the three month
      periods endedMarch 31, 2010 and March 31, 2009
            6Notes to Consolidated Financial Statements
            8Item
      2.
            Management's Discussion and Analysis of Financial
      Conditionand Results of Operations
            18Item
      3.
            Quantitative and Qualitative Disclosure of Market
      Risk
            28Item
      4T.
            Controls and Procedures
            30PART
      II Other InformationItem
      1.
            Legal Proceedings
            30Item
      1A.
            Risk Factors
            31Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            31Item
      3.
            Defaults upon Senior Securities
            31Item
      4.
            Reserved
            31Item
      5.
            Other information
            31Item
      6.
            Exhibits
            31


2
 Table of Contents


PARTI - FINANCIAL INFORMATION


Salisbury
Bancorp, Inc. and Subsidiary


CONSOLIDATED
BALANCE SHEETS


(in thousands, except par value)
      unaudited
            
            March 31,
              2010
            
            
            December 31,2009ASSETSCash
      and due from banks
            
            $
            5,878
            
            
            $
            6,248Interest bearing demand deposits with other
      banks
            
            
            13,851
            
            
            
            37,050Total
      cash and cash equivalents
            
            
            19,729
            
            
            
            43,298Interest
      bearing time deposits with other banks
            
            
            5,000
            
            
            
            5,000SecuritiesAvailable-for-sale
      at fair value
            
            
            166,179
            
            
            
            145,031Held-to-maturity
      at amortized cost (fair value: $62 and $62)
            
            
            60
            
            
            
            62Federal
      Home Loan Bank of Boston stock at cost
            
            
            6,032
            
            
            
            6,032Loans
      held-for-sale
            
            
            1,178
            
            
            
            665Loans
      receivable, net (allowance for loan losses: $3,649 and
    $3,473)
            
            
            329,600
            
            
            
            327,257Investment
      in real estate
            
            
            75
            
            
            
            75Other
      real estate owned
            
            
            275
            
            
            
            275Bank
      premises and equipment, net
            
            
            11,398
            
            
            
            10,434Goodwill
            
            
            9,829
            
            
            
            9,829Intangible
      assets (net of accumulated amortization: $1,135 and
$1,079)
            
            
            1,409
            
            
            
            1,464Accrued
      interest receivable
            
            
            2,093
            
            
            
            2,177Cash
      surrender value of life insurance policies
            
            
            3,727
            
            
            
            3,685Deferred
      taxes
            
            
            2,957
            
            
            
            3,285Other assets
            
            
            3,577
            
            
            
            3,778Total Assets
            
            $
            563,118
            
            
            $
            562,347LIABILITIES
      and SHAREHOLDERS' EQUITYDepositsDemand
      (non-interest bearing)
            
            $
            68,852
            
            
            $
            70,026Demand
      (interest bearing)
            
            
            50,148
            
            
            
            43,845Money
      market
            
            
            68,317
            
            
            
            64,477Savings
      and other
            
            
            88,699
            
            
            
            86,316Certificates
      of deposit
            
            
            146,473
            
            
            
            153,539Total
      deposits
            
            
            422,489
            
            
            
            418,203Repurchase
      agreements
            
            
            7,973
            
            
            
            11,415Federal
      Home Loan Bank of Boston advances
            
            
            75,356
            
            
            
            76,364Accrued interest and other
      liabilities
            
            
            4,277
            
            
            
            4,010Total Liabilities
            
            
            510,095
            
            
            
            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:
      1,686,701 and 1,685,861
            
            
            168
            
            
            
            168Common
      stock warrants outstanding
            
            
            112
            
            
            
            112Paid-in
      capital
            
            
            21,899
            
            
            
            21,894Retained
      earnings
            
            
            35,266
            
            
            
            35,259Accumulated other comprehensive loss,
      net
            
            
            (4,422
            )
            
            
            (5,078
            )Total Shareholders' Equity
            
            
            53,023
            
            
            
            52,355Total Liabilities and Shareholders'
      Equity
            
            $
            563,118
            
            
            $
            562,347


3
 Table of Contents


SalisburyBancorp, Inc. and Subsidiary


CONSOLIDATED
STATEMENTS OF INCOME


Three months ended March 31, (in thousands except
      per share amounts) unaudited
            
            2010
            
            
            2009Interest
      incomeInterest
      and fees on loans
            
            $
            4,487
            
            
            $
            4,483Interest
      on debt securitiesTaxable
            
            
            926
            
            
            
            1,331Tax
      exempt
            
            
            560
            
            
            
            644Other interest
            
            
            46
            
            
            
            2Total interest income
            
            
            6,019
            
            
            
            6,460Interest
      expenseDeposits
            
            
            1,198
            
            
            
            1,483Repurchase
      agreements
            
            
            27
            
            
            
            39Federal Home Loan Bank of Boston
      advances
            
            
            758
            
            
            
            762Total interest expense
            
            
            1,983
            
            
            
            2,284Net
      interest income
            
            
            4,036
            
            
            
            4,176Provision for loan losses
            
            
            180
            
            
            
            430Net interest income after provision for loan
      losses
            
            
            3,856
            
            
            
            3,746Non-interest
      incomeTrust
      and wealth advisory
            
            
            545
            
            
            
            540Service
      charges and fees
            
            
            469
            
            
            
            398Gains
      on securities, net
            
            
            -
            
            
            
            427Gains
      on sales of mortgage loans, net
            
            
            60
            
            
            
            82Mortgage
      servicing, net
            
            
            15
            
            
            
            42Other
            
            
            57
            
            
            
            137Total non-interest income
            
            
            1,146
            
            
            
            1,626Non-interest
      expenseSalaries
            
            
            1,746
            
            
            
            1,753Employee
      benefits
            
            
            471
            
            
            
            438Premises
      and equipment
            
            
            515
            
            
            
            484Data
      processing
            
            
            408
            
            
            
            383Professional
      fees
            
            
            402
            
            
            
            356FDIC
      insurance
            
            
            171
            
            
            
            114Marketing
      and community support
            
            
            88
            
            
            
            76Amortization
      of intangibles
            
            
            56
            
            
            
            41Other
            
            
            472
            
            
            
            383Total non-interest expense
            
            
            4,329
            
            
            
            4,028Income
      before income taxes
            
            
            673
            
            
            
            1,344Income tax provision
            
            
            79
            
            
            
            263Net income
            
            $
            594
            
            
            $
            1,081Net income available to common
      shareholders
            
            $
            479
            
            
            $
            1,081Basic
      and diluted earnings per share
            
            $
            0.28
            
            
            $
            0.64Common
      dividends per share
            
            
            0.28
            
            
            
            0.28





See
accompanying notes to consolidated financial statements.


4
 Table of Contents


SalisburyBancorp, Inc. and Subsidiary


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


Common Stock
            
            
            
            
            
            
            
            
            Paid-in
            
            
            Retained
            
            
            Accumulated
              other
      comp-
            
            
            Total
              share-holders'(dollars in thousands)
            
            Shares
            
            
            Amount
            
            
            PreferredStock
            
            
            Warrants
            
            
            capital
            
            
            earnings
            
            
            rehensive loss
            
            
            equityBalances
      at December 31, 2009
            
            
            1,686,701
            
            
            $
            168
            
            
            $
            -
            
            
            $
            112
            
            
            $
            21,894
            
            
            $
            35,259
            
            
            $
            (5,078
            )
            
            $
            52,355Net
      income for period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            594
            
            
            
            -
            
            
            
            594Other
      comprehensive income, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            656
            
            
            
            656Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,250Amortization
      (accretion) of preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5
            
            
            
            (5
            )
            
            
            -
            
            
            
            -Common
      stock dividends paid
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (472
            )
            
            
            -
            
            
            
            (472
            )Preferred stock dividends
    paid
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (110
            )
            
            
            -
            
            
            
            (110
            )Balances at March 31, 2010
            
            
            1,686,701
            
            
            
            168
            
            
            
            -
            
            
            
            112
            
            
            
            21,899
            
            
            
            35,266
            
            
            
            (4,422
            )
            
            
            53,023Balances
      at December 31,  2008
            
            
            1,685,861
            
            
            
            168
            
            
            
            -
            
            
            
            -
            
            
            
            13,158
            
            
            
            34,518
            
            
            
            (8,905
            )
            
            
            38,939Net
      income for period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,081
            
            
            
            -
            
            
            
            1,081Other
      comprehensive loss, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,107
            )
            
            
            (2,107
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,026
            )Issuance
      of preferred stock and warrants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            112
            
            
            
            8,704
            
            
            
            -
            
            
            
            -
            
            
            
            8,816Common stock dividends
    declared
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (472
            )
            
            
            -
            
            
            
            (472
            )Balances March 31, 2009
            
            
            1,685,861
            
            
            $
            168
            
            
            $
            -
            
            
            $
            112
            
            
            $
            21,862
            
            
            $
            35,127
            
            
            $
            (11,012
            )
            
            $
            46,257





See
accompanying notes to consolidated financial statements.


5
 Table of Contents


SalisburyBancorp, Inc. and Subsidiary


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Three months ended March 31, (in
      thousands)
            
            2010
            
            
            2009Operating
      ActivitiesNet
      income
            
            $
            594
            
            
            $
            1,081Adjustments
      to reconcile net income to net cash provided by operating
      activities:(Accretion),
      amortization and depreciationSecurities
            
            
            174
            
            
            
            101Bank
      premises and equipment
            
            
            193
            
            
            
            174Core
      deposit intangible
            
            
            56
            
            
            
            41Mortgage
      servicing rights
            
            
            31
            
            
            
            33Fair
      value adjustment on loans
            
            
            11
            
            
            
            12Fair
      value adjustment on deposits and borrowings
            
            
            -
            
            
            
            (33
            )(Gains)
      and lossesSales
      and calls of securities available-for-sale, net
            
            
            -
            
            
            
            (427
            )Provision
      for loan losses
            
            
            180
            
            
            
            430(Increase)
      decrease in loans held-for-sale
            
            
            (513
            )
            
            
            1,507Increase
      in deferred loan origination fees and costs, net
            
            
            (41
            )
            
            
            (7
            )Mortgage
      servicing rights originated
            
            
            (28
            )
            
            
            (61
            )Decrease
      in mortgage servicing rights impairment reserve
            
            
            (2
            )
            
            
            (41
            )Increase
      in unearned income on loans
            
            
            -
            
            
            
            6Decrease
      in interest receivable
            
            
            85
            
            
            
            229Deferred
      tax (benefit)
            
            
            (8
            )
            
            
            (1
            )Decrease
      (increase) in prepaid expenses
            
            
            68
            
            
            
            (63
            )Increase
      in cash surrender value of life insurance policies
            
            
            (42
            )
            
            
            (125
            )Increase
      in income tax receivable
            
            
            69
            
            
            
            155Increase
      in other assets
            
            
            (25
            )
            
            
            (81
            )Increase
      in accrued expenses
            
            
            431
            
            
            
            377(Decrease)
      increase in interest payable
            
            
            (40
            )
            
            
            21Decrease in other
    liabilities
            
            
            (111
            )
            
            
            (67
            )Net cash provided by operating
      activities
            
            
            1,082
            
            
            
            3,261Investing
      ActivitiesPurchases
      of securities available-for-sale
            
            
            (33,985
            )
            
            
            (53,864
            )Proceeds
      from sales of securities available-for-sale
            
            
            -
            
            
            
            24,956Proceeds
      from calls of securities available-for-sale
            
            
            1,550
            
            
            
            18,000Proceeds
      from maturities of securities available-for-sale
            
            
            12,089
            
            
            
            -Proceeds
      from maturities of securities held-to-maturity
            
            
            1
            
            
            
            1Loan
      originations and principle collections, net
            
            
            (2,499
            )
            
            
            (1,554
            )Purchases
      of loans
            
            
            -
            
            
            
            (76
            )Recoveries
      of loans previously charged-off
            
            
            6
            
            
            
            10Capital expenditures
            
            
            (1,068
            )
            
            
            (1,303
            )Net cash utilized by investing
      activities
            
            $
            (23,906
            )
            
            $
            (13,830
            )


6
 Table of Contents


Salisbury
Bancorp, Inc. and Subsidiary


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)





Three
      months ended March 31, (in thousands)
            
            2010
            
            
            2009Financing
      ActivitiesIncrease
      in deposit transaction accounts, net
            
            $
            11,352
            
            
            $
            7,986(Decrease)
      increase in time deposits, net
            
            
            (7,065
            )
            
            
            13,852Decrease
      in securities sold under agreements to repurchase, net
            
            
            (3,442
            )
            
            
            (2,122
            )Federal
      Home Loan Bank of Boston advances
            
            
            -
            
            
            
            12,000Principle
      payments on Federal Home Loan Bank of Boston advances
            
            
            (1,008
            )
            
            
            (405
            )Decrease
      in short term Federal Home Loan Bank of Boston advances,
    net
            
            
            -
            
            
            
            (20,878
            )Proceeds
      from issuance of preferred stock
            
            
            -
            
            
            
            8,816Common
      stock dividends paid
            
            
            (472
            )
            
            
            (472
            )Preferred
      stock dividends paid
            
            
            (110
            )
            
            
            -Net
      cash (utilized) provided by financing activities
            
            
            (745
            )
            
            
            18,777Net
      (decrease) increase in cash and cash equivalents
            
            
            (23,569
            )
            
            
            8,208Cash
      and cash equivalents, beginning of period
            
            
            43,298
            
            
            
            9,660Cash
      and cash equivalents, end of period
            
            $
            19,729
            
            
            $
            17,868Cash
      paid during periodInterest
            
            $
            2,023
            
            
            $
            2,295Income
      taxes
            
            
            139
            
            
            
            110


See
accompanying notes to consolidated financial statements.


7
 Table of Contents


NOTESTO 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 March 31, 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


8
 Table of Contents


measurement
hierarchy will be required for fiscal years beginning 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
            
            
            valueMarch
      31, 2010Available-for-saleU.S.
      Treasury notes
            
            $
            4,999
            
            
            $
            -
            
            
            $
            (17
            )
            
            $
            4,982U.S.
      Government Agency notes
            
            
            50,253
            
            
            
            197
            
            
            
            (18
            )
            
            
            50,432Municipal
      bonds
            
            
            51,803
            
            
            
            125
            
            
            
            (4,374
            )
            
            
            47,553Mortgage
      backed securitiesU.S.
      Government Agencies
            
            
            27,641
            
            
            
            593
            
            
            
            (125
            )
            
            
            28,109Collateralized
      mortgage obligationsU.S.
      Government Agencies
            
            
            5,324
            
            
            
            3
            
            
            
            (31
            )
            
            
            5,296Non-agency
            
            
            23,690
            
            
            
            717
            
            
            
            (2,066
            )
            
            
            22,341SBA
      bonds
            
            
            6,196
            
            
            
            57
            
            
            
            -
            
            
            
            6,253Corporate
      bonds
            
            
            1,082
            
            
            
            48
            
            
            
            -
            
            
            
            1,130Preferred Stock
            
            
            20
            
            
            
            62
            
            
            
            -
            
            
            
            82Total securities
      available-for-sale
            
            $
            171,008
            
            
            $
            1,802
            
            
            $
            (6,631
            )
            
            $
            166,179Held-to-maturityMortgage backed security
            
            $
            60
            
            
            $
            2
            
            
            $
            -
            
            
            $
            62Non-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.





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


Three months ended March 31, (in
      thousands)
            
            2010
            
            
            2009Proceeds
            
            $
            -
            
            
            $
            21,347Gains
      realized
            
            
            -
            
            
            
            435Losses realized
            
            
            -
            
            
            
            8Net
      gains realized
            
            
            -
            
            
            
            427Income
      tax provision
            
            
            -
            
            
            
            145


9
 Table of Contents


Included
in non-agency Collateralized Mortgage Obligations (“CMOs”) are seven securities
issued by Wells Fargo with an aggregate amortized cost basis and fair value of
$6,827,000 and $5,943,000, respectively, that exceeded 10% of shareholders’
equity as of March 31, 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
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized(in thousands)
            
            Value
            
            
            losses
            
            
            value
            
            
            losses
            
            
            value
            
            
            lossesMarch
      31, 2010Available-for-saleU.S.
      Government Agency notes
            
            $
            4,472
            
            
            $
            35
            
            
            $
            -
            
            
            $
            -
            
            
            $
            4,472
            
            
            $
            35Municipal
      Bonds
            
            
            11,100
            
            
            
            377
            
            
            
            30,579
            
            
            
            3,997
            
            
            
            41,679
            
            
            
            4,374Mortgage
      backed securities
            
            
            2,937
            
            
            
            14
            
            
            
            1,652
            
            
            
            111
            
            
            
            4,589
            
            
            
            125Collateralized
      mortgage obligationsU.S.
      Government Agencies
            
            
            2,621
            
            
            
            31
            
            
            
            -
            
            
            
            -
            
            
            
            2,621
            
            
            
            31Non-agency
            
            
            3,180
            
            
            
            60
            
            
            
            7,464
            
            
            
            591
            
            
            
            10,644
            
            
            
            651Total temporarily impaired
      securities
            
            
            24,310
            
            
            
            517
            
            
            
            39,695
            
            
            
            4,699
            
            
            
            64,005
            
            
            
            5,216Other-than-temporarily
      impaired securitiesCollateralized
      mortgage obligationsNon-agency
            
            
            584
            
            
            
            57
            
            
            
            3,229
            
            
            
            1,358
            
            
            
            3,813
            
            
            
            1,415Total
      temporarily impaired and other-than-temporarily impaired
    securities
            
            $
            24,894
            
            
            $
            574
            
            
            $
            42,924
            
            
            $
            6,057
            
            
            $
            67,818
            
            
            $
            6,631





Salisbury
evaluates its individual available-for-sale investment securities for OTTI on at
least a quarterly basis. As part of this process, Salisbury considers its intent
to sell each debt security and whether it is more likely than not that it will
be required to sell the security before its anticipated recovery. If either of
these conditions is met, Salisbury recognizes an OTTI charge to earnings equal
to the entire difference between the security’s amortized cost basis and its
fair value at the balance sheet date. For securities that meet neither of these
conditions, an analysis is performed to determine if any of these securities are
at risk for OTTI.





Salisbury
believes that principal and interest on U.S Treasury securities, mortgage-backed
securities or securities backed by a U.S. government sponsored entity and the
Small Business Administration and bank qualified insured municipal securities
are deemed recoverable.





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





Salisbury
performed a detailed cash flow analysis of its non-agency CMOs at March 31, 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 March 31, 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.


10
 Table of Contents


NOTE
3 - LOANS





The
composition of the loan portfolio is as follows:


(in thousands)
            
            March 31, 2010
            
            
            December 31, 2009Loans
      receivable, netReal
      estate mortgages:Residential
            
            $
            164,119
            
            
            $
            163,863Commercial
            
            
            77,210
            
            
            
            70,066Construction,
      land & land development
            
            
            23,801
            
            
            
            31,011Home equity credit
            
            
            32,830
            
            
            
            33,099Total
      mortgage loans
            
            
            297,960
            
            
            
            298,039Commercial
      and industrial
            
            
            29,162
            
            
            
            26,400Consumer
            
            
            5,224
            
            
            
            5,436Other
            
            
            276
            
            
            
            269Total
      loans, gross
            
            
            332,622
            
            
            
            330,144Deferred
      loan origination fees and costs, net
            
            
            627
            
            
            
            586Allowance for loan losses
            
            
            (3,649
            )
            
            
            (3,473
            )Total loans, net
            
            $
            329,600
            
            
            $
            327,257Loans
      held-for-saleResidential mortgages
            
            $
            1,178
            
            
            $
            665





Allowance
for Loan Losses





Changes
in the allowance for loan losses are as follows:


Three
      months ended March 31, (in thousands)
            
            2010
            
            
            2009Balance,
      beginning of period
            
            $
            3,473
            
            
            $
            2,724Provision
      for losses
            
            
            180
            
            
            
            430Charge-offs
            
            
            (10
            )
            
            
            (160
            )Recoveries
            
            
            6
            
            
            
            11Balance,
      end of period
            
            $
            3,649
            
            
            $
            3,005





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:


Three months ended March 31, (in
      thousands)
            
            2010
            
            
            2009Residential
      mortgage loans serviced for others
            
            $
            75,414
            
            
            $
            55,652Fair value of mortgage servicing
      rights
            
            
            493
            
            
            
            227


11
 Table of Contents


Changes
in mortgage servicing rights are as follows:


Three months ended March 31, (in
      thousands)
            
            2010
            
            
            2009Loan
      Servicing RightsBalance,
      beginning of period
            
            $
            427
            
            
            $
            227Originated
            
            
            28
            
            
            
            61Amortization (1)
            
            
            (31
            )
            
            
            (33
            )Balance, end of period
            
            
            424
            
            
            
            255Valuation
      AllowanceBalance,
      beginning of period
            
            
            (30
            )
            
            
            (118
            )Decrease (increase) in impairment reserve
      (1)
            
            
            2
            
            
            
            41Balance, end of period
            
            
            (28
            )
            
            
            (77
            )Loan servicing rights, net
            
            $
            396
            
            
            $
            178





(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)
            
            March
      31, 2010
            
            
            December
      31, 2009Non-accrual
      loans, excluding troubled debt restructured loans
            
            $
            5,798
            
            
            $
            5,098Non-accrual
      troubled debt restructured loans
            
            
            6,263
            
            
            
            2,341Accruing troubled debt restructured
      loans
            
            
            5,046
            
            
            
            4,566Total impaired loans
            
            $
            17,107
            
            
            $
            12,004Requiring
      valuation allowance
            
            $
            4,551
            
            
            $
            3,388Not requiring valuation
      allowance
            
            
            12,556
            
            
            
            9,379Total impaired loans
            
            $
            17,107
            
            
            $
            12,004Valuation
      allowance
            
            $
            517
            
            
            $
            388Average
      impaired loans
            
            
            13,791
            
            
            
            9,443Commitments
      to lend additional amounts to impaired borrowers
            
            
            -
            
            
            
            -





NOTE
5 - PLEDGED ASSETS





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





(in
      thousands)
            
            March
      31, 2010
            
            
            December
      31, 2009Securities
      available-for-sale (at fair value)
            
            $
            60,081
            
            
            $
            63,097Loans
      receivable
            
            
            108,246
            
            
            
            104,960Total
      pledged assets
            
            $
            168,327
            
            
            $
            168,057





At March
31, 2010, securities were pledged as follows: $42 million to secure public
deposits and Treasury Tax and Loan deposits, $10.2 million to secure repurchase
agreements and $7.9 million to secure FHLBB advances. Loans receivable were
pledged to secure FHLBB advances and credit facilities.


12
 Table of Contents


NOTE
6 – EARNINGS PER SHARE





The
calculation of earnings per share is as follows:


Three
      months ended March 31, (in thousands, except per share
      amounts)
            
            2010
            
            
            2009Net
      income
            
            $
            594
            
            
            $
            1,081Preferred
      stock net accretion
            
            
            5
            
            
            
            -Preferred
      stock dividends paid
            
            
            110
            
            
            
            -Net
      income available to common shareholders
            
            $
            479
            
            
            $
            1,081Weighted
      average common stock outstanding - basic
            
            
            1,687
            
            
            
            1,686Weighted
      average common and common equivalent stock outstanding-
      diluted
            
            
            1,687
            
            
            
            1,686Earnings
      per common and common equivalent shareBasic
            
            $
            0.28
            
            
            $
            0.64Diluted
            
            
            0.28
            
            
            
            0.64





NOTE
7 – SHAREHOLDERS’ EQUITY





Capital
Requirements





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





Quantitative
measures established by regulation to ensure capital adequacy require Salisbury
and the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tier 1 capital (as defined) to average assets (as defined) and total
and Tier 1 capital (as defined) to risk-weighted assets (as
defined).  Management believes, as of March 31, 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:


Actual
            
            
            For Capital Adequacy
    Purposes
            
            
            To be Well Capitalized Under Prompt Corrective
      Action Provisions(dollars in thousands)
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioMarch  31,
      2010Total
      Capital (to risk-weighted assets)Salisbury
            
            $
            49,916
            
            
            
            12.75
            %
            
            $
            31,311
            
            
            
            8.0
            %
            
            
            n/a
            
            
            
            -Bank
            
            
            40,420
            
            
            
            10.36
            
            
            
            31,227
            
            
            
            8.0
            
            
            $
            38,034
            
            
            
            10.0
            %Tier
      1 Capital (to risk-weighted assets)Salisbury
            
            
            46,207
            
            
            
            11.81
            
            
            
            15,656
            
            
            
            4.0
            
            
            
            n/a
            
            
            
            -Bank
            
            
            36,712
            
            
            
            9.41
            
            
            
            15,613
            
            
            
            4.0
            
            
            
            23,420
            
            
            
            6.0Tier
      1 Capital (to average assets)Salisbury
            
            
            46,207
            
            
            
            8.40
            
            
            
            22,387
            
            
            
            4.0
            
            
            
            n/a
            
            
            
            -Bank
            
            
            36,712
            
            
            
            6.68
            
            
            
            21,996
            
            
            
            4.0
            
            
            
            27,494
            
            
            
            5.0March
      31, 2009Total
      Capital (to risk-weighted assets)Salisbury
            
            
            49,354
            
            
            
            14.55
            
            
            
            27,130
            
            
            
            8.0
            
            
            
            n/a
            
            
            
            -Bank
            
            
            39,556
            
            
            
            11.74
            
            
            
            26,965
            
            
            
            8.0
            
            
            
            33,707
            
            
            
            10.0Tier
      1 Capital (to risk-weighted assets)Salisbury
            
            
            46,317
            
            
            
            13.66
            
            
            
            13,565
            
            
            
            4.0
            
            
            
            n/a
            
            
            
            -Bank
            
            
            36,516
            
            
            
            10.83
            
            
            
            13,483
            
            
            
            4.0
            
            
            
            20,224
            
            
            
            6.0Tier
      1 Capital (to average assets)Salisbury
            
            
            46,317
            
            
            
            9.48
            
            
            
            19,535
            
            
            
            4.0
            
            
            
            n/a
            
            
            
            -Bank
            
            
            36,519
            
            
            
            7.52
            
            
            
            19,426
            
            
            
            4.0
            
            
            
            24,282
            
            
            
            5.0


13
 Table of Contents


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.





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 ended March 31, (in
      thousands)
            
            2010
            
            
            2009Service
      cost
            
            $
            100
            
            
            $
            107Interest
      cost on benefit obligation
            
            
            91
            
            
            
            101Expected
      return on plan assets
            
            
            (100
            )
            
            
            (90
            )Amortization
      of prior service cost
            
            
            -
            
            
            
            -Amortization of net loss
            
            
            18
            
            
            
            33Net periodic benefit cost
            
            $
            109
            
            
            $
            151





Salisbury’s
401(k) Plan contribution expense was $41,000 and $30,000, respectively, for the
three month periods ended March 31, 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 March 31,
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


14
 Table of Contents


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 ended March 31, (in
      thousands)
            
            2010
            
            
            2009Net
      income
            
            $
            594
            
            
            $
            1,081Other
      comprehensive income (loss)Net
      unrealized gains (losses) on securities available-for-sale
            
            
            975
            
            
            
            (3,225
            )Reclassification of net realized gains in net
      income
            
            
            -
            
            
            
            427Unrealized
      gains (losses) on securities available-for-sale
            
            
            975
            
            
            
            (2,798
            )Income tax (expense)
benefit
            
            
            (331
            )
            
            
            670Unrealized gains (losses) on securities
      available-for-sale, net of tax
            
            
            644
            
            
            
            (2,128
            )Pension
      plan income
            
            
            18
            
            
            
            32Income tax expense
            
            
            (6
            )
            
            
            (11
            )Pension plan income, net of
    tax
            
            
            12
            
            
            
            21Other comprehensive income (loss), net of
      tax
            
            
            656
            
            
            
            (2,107
            )Comprehensive income (loss)
            
            $
            1,250
            
            
            $
            (1,026
            )





The
components of accumulated other comprehensive loss are as follows:


Three months ended March 31, (in
      thousands)
            
            2010
            
            
            2009Unrealized
      losses on securities available-for-sale, net of tax
            
            $
            (3,186
            )
            
            $
            (9,096
            )Unrecognized pension plan expense, net of
      tax
            
            
            (1,236
            )
            
            
            (1,916
            )Accumulated other comprehensive loss,
      net
            
            $
            (4,422
            )
            
            $
            (11,012
            )





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.





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 March 31,
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


15
 Table of Contents


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)
            
            March
      31,
            
            
            Quoted
      prices in Active markets for Identical assets
            
            
            Significant
      other observable inputs
            
            
            Significant
      unobservable inputs2010
            
            
            Level 1
            
            
            Level 2
            
            
            Level 3Items
      Measured at Fair ValueRecurring
      basisSecurities
      available-for-sale
            
            $
            166,179
            
            
            $
            82
            
            
            $
            166,097
            
            
            $
            -Non-recurring
      basisImpaired
      loans
            
            
            12,064
            
            
            
            9,014
            
            
            
            2,999
            
            
            
            51





Fair
      Value Measurements using significant
              unobservable
      inputsLevel
      3Three
      months ended March 31, 2010 (in thousands)
            
            Securities
      available-for-sale
            
            
            Impaired
      Loans
            
            
            TotalBalance,
      beginning of period
            
            $
            -
            
            
            $
            116
            
            
            $
            116Total
      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
            
            
            -
            
            
            
            (65
            )
            
            
            (65
            )Balance,
      end of period
            
            $
            -
            
            
            $
            51
            
            
            $
            51Amount
      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
            
            $
            -
            
            
            $
            -
            
            
            $
            -


16
 Table of Contents


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


March
      31, 2010
            
            
            December
      31, 2009Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            Estimated(in
      thousands)
            
            value
            
            
            fair
      value
            
            
            value
            
            
            fair
      valueFinancial
      AssetsCash
      and due from banks
            
            $
            19,729
            
            
            $
            19,729
            
            
            $
            43,298
            
            
            $
            43,298Interest
      bearing time deposits with other banks
            
            
            5,000
            
            
            
            5,000
            
            
            
            5,000
            
            
            
            5,000Securities
      available-for-sale
            
            
            166,179
            
            
            
            166,179
            
            
            
            145,031
            
            
            
            145,031Security
      held-to-maturity
            
            
            60
            
            
            
            62
            
            
            
            62
            
            
            
            62Federal
      Home Loan Bank stock
            
            
            6,032
            
            
            
            6,032
            
            
            
            6,032
            
            
            
            6,032Loans
      held-for-sale
            
            
            1,178
            
            
            
            1,187
            
            
            
            665
            
            
            
            670Loans
      receivable net
            
            
            329,600
            
            
            
            323,567
            
            
            
            327,257
            
            
            
            321,882Accrued
      interest receivable
            
            
            2,093
            
            
            
            2,093
            
            
            
            2,177
            
            
            
            2,177Financial
      LiabilitiesDemand
      (non-interest-bearing)
            
            $
            68,852
            
            
            $
            68,852
            
            
            $
            70,026
            
            
            $
            70,026Demand
      (interest-bearing)
            
            
            50,148
            
            
            
            50,148
            
            
            
            43,845
            
            
            
            43,845Money
      market
            
            
            68,317
            
            
            
            68,317
            
            
            
            64,477
            
            
            
            64,477Savings
      and other
            
            
            88,699
            
            
            
            88,699
            
            
            
            86,316
            
            
            
            86,316Certificates
      of deposit
            
            
            146,473
            
            
            
            146,956
            
            
            
            153,539
            
            
            
            155,441Total
      deposits
            
            
            422,489
            
            
            
            422,972
            
            
            
            418,203
            
            
            
            420,105FHLBB
      advances
            
            
            75,356
            
            
            
            79,092
            
            
            
            76,364
            
            
            
            80,830Repurchase
      agreements
            
            
            7,973
            
            
            
            7,973
            
            
            
            11,415
            
            
            
            11,415Accrued
      interest payable
            
            
            484
            
            
            
            484
            
            
            
            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
 Table of Contents


Item2.
            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 March 31, 2010 and 2009





Overview





Net
income available to common shareholders was $479,000, or $0.28 per common share,
for the first quarter ended March 31, 2010 compared with $1,081,000, or $0.64
per common share, for the first quarter of 2009.





Net
income available to common shareholders for the first quarter of 2010 is net of
preferred stock dividends of $115,000.


18
 Table of Contents


Net
interest income for the first quarter of 2010 decreased by $140,000, or 3%, from
the first quarter of 2009. Average earning assets grew $55.3 million, or 12%,
over the period, as a result of significant deposit growth, of which $34.0
million was invested in short term funds. The net interest margin (tax
equivalent) declined 55 basis points to 3.25% compared with 3.80% a year ago due
to several factors. The average yield on securities declined 103 basis points,
due to the re-pricing of callable Agency bonds, increased prepayments on
mortgage backed securities and lower volume. The increase in holdings of
short-term funds also had a dilutive effect on the net interest margin of
approximately 15 basis points.





The
provision for loan losses for the first quarter of 2010 was $180,000, compared
with $430,000 for the first quarter of 2009, which included a provision for
emerging risks or unallocated reserves. Net loan charge-offs were $4,000 and
$149,000 for the respective periods.





Non-interest
income for the first quarter of 2010 decreased $480,000, or 30%, due to several
one-time benefits in the first quarter of 2009, including $427,000 of securities
gains, a $72,000 market adjustment gain from the re-financing of Bank Owned Life
Insurance, and a $39,000 mortgage servicing rights impairment benefit. Income
from sales of mortgage loans decreased $22,000 in the first quarter of 2010 due
to lower loan origination volume. Loan sales were $4.4 million and $6.9 million,
respectively, for the 2010 and 2009 periods. Service fees and charges increased
$71,000, or 18%, in the first quarter of 2010 due to higher interchange,
overdraft and other fees. Trust and Wealth Advisory revenues were substantially
unchanged.





Non-interest
expense for the first quarter of 2010 increased $301,000, or 7%, due primarily
to higher facilities expenses due to the opening of the Millerton branch in
January 2010, increased FDIC insurance premiums, data processing and other
operating expenses resulting from deposit and loan growth, and increased
expenses for professional services, including audit.





The
effective income tax rate for the first quarter of 2010 was 11.74%, compared
with 19.58% for the first quarter of 2009. The decrease in the effective rate
resulted from a higher proportion of tax-exempt income to total income in the
2010 period.





Net Interest
Income





Net
interest income, on a tax equivalent basis, decreased $206,000, or 4.6%, to $4.3
million for the first quarter of 2010 as compared with the first quarter of
2009, while the net interest margin (presented on a tax-equivalent basis)
declined 55 basis points to 3.25% from 3.80%, for the respective
periods.





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 March 31,
              
              Average Balance
              
              
              Income / Expense
              
              
              Average Yield / Rate(dollars in thousands)
              
              2010
              
              
              2009
              
              
              2010
              
              
              2009
              
              
              2010
              
              
              2009Loans
      (a)
              
              $
              333,347
              
              
              $
              301,202
              
              
              $
              4,487
              
              
              $
              4,509
              
              
              
              5.40
              %
              
              
              5.99
              %Securities
      (c)(d)
              
              
              150,385
              
              
              
              160,428
              
              
              
              1,745
              
              
              
              2,274
              
              
              
              4.64
              
              
              
              5.67FHLBB
      stock
              
              
              6,032
              
              
              
              5,323
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Short term funds (b)
              
              
              40,746
              
              
              
              8,272
              
              
              
              46
              
              
              
              2
              
              
              
              0.45
              
              
              
              0.09Total
      earning assets
              
              
              530,510
              
              
              
              475,225
              
              
              
              6,278
              
              
              
              6,785
              
              
              
              4.74
              
              
              
              5.72Other assets
              
              
              32,884
              
              
              
              24,106Total assets
              
              $
              563,394
              
              
              $
              499,331Interest-bearing
      demand deposits
              
              $
              49,158
              
              
              $
              24,442
              
              
              
              147
              
              
              
              13
              
              
              
              1.20
              
              
              
              0.21Money
      market accounts
              
              
              66,413
              
              
              
              64,539
              
              
              
              95
              
              
              
              205
              
              
              
              0.58
              
              
              
              1.27Savings
      and other
              
              
              87,644
              
              
              
              73,650
              
              
              
              143
              
              
              
              214
              
              
              
              0.65
              
              
              
              1.16Certificates of deposit
              
              
              148,941
              
              
              
              132,038
              
              
              
              813
              
              
              
              1,051
              
              
              
              0.55
              
              
              
              0.80Total
      interest-bearing deposits
              
              
              352,156
              
              
              
              294,669
              
              
              
              1,198
              
              
              
              1,483
              
              
              
              1.36
              
              
              
              2.01Repurchase
      agreements
              
              
              12,601
              
              
              
              9,529
              
              
              
              27
              
              
              
              39
              
              
              
              0.86
              
              
              
              1.67FHLBB advances
              
              
              75,752
              
              
              
              81,307
              
              
              
              758
              
              
              
              762
              
              
              
              4.00
              
              
              
              3.75Total
      interest-bearing liabilities
              
              
              440,509
              
              
              
              385,505
              
              
              
              1,983
              
              
              
              2,284
              
              
              
              1.80
              
              
              
              2.37Demand
      deposits
              
              
              66,122
              
              
              
              64,575Other
      liabilities
              
              
              3,809
              
              
              
              7,145Shareholders’ equity
              
              
              52,954
              
              
              
              42,106Total liabilities & shareholders’
      equity
              
              $
              563,394
              
              
              $
              499,331Net
      interest income
              
              
              
              
              
              
              
              
              
              $
              4,295
              
              
              $
              4,501Spread
      on interest-bearing funds
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2.93
              
              
              
              3.33Net
      interest margin (e)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3.25
              
              
              
              3.80


19
 Table of Contents


(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 $259,000 and $325,000, 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 FTE interest due to volume and
rate.


Three
      months ended March 31, (in thousands)
            
            2010 versus 2009Change in interest due to
            
            Volume
            
            
            Rate
            
            
            NetInterest-earning
      assetsLoans
            
            $
            457
            
            
            $
            (479
            )
            
            $
            (22
            )Securities
            
            
            (129
            )
            
            
            (400
            )
            
            
            (529
            )Short term funds
            
            
            22
            
            
            
            22
            
            
            
            44Total
            
            
            350
            
            
            
            (857
            )
            
            
            (507
            )Interest-bearing
      liabilitiesDeposits
            
            
            193
            
            
            
            (478
            )
            
            
            (285
            )Repurchase
      agreements
            
            
            10
            
            
            
            (23
            )
            
            
            (13
            )FHLBB advances
            
            
            (54
            )
            
            
            50
            
            
            
            (4
            )Total
            
            
            149
            
            
            
            (451
            )
            
            
            (302
            )Net change in net interest
      income
            
            $
            201
            
            
            $
            (406
            )
            
            $
            (205
            )





Interest
Income





On a tax
equivalent basis, interest income decreased $507,000, or 7.5%, to $6.3 million
for the first quarter of 2010 as compared with the first quarter of
2009.  Loan income decreased $22,000, or 0.5%, primarily due to a
lower average yield, down 61 basis points, the impact of which was substantially
offset by a $32.1 million, or 10.7%, increase in average loans.  The
decline in the average loan yield was caused by the effect of lower market
interest rates on new loan origination, re-financing and adjustable rate
re-pricing activity.





Income
from securities, on a tax equivalent basis, decreased $529,000, or 23.3%, for
the first quarter of 2010 as compared with the first quarter of 2009, as a
result of a lower average yield, down 103 basis points, and a $10.0 million, or
6.3%, decrease in average volume. The lower yield resulted from the effect of
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 announced intention to buy back delinquent loans during
the quarter.





Income
from short term funds increased $44,000 for the first quarter of 2010 as
compared with the first quarter of 2009 as a result of a $32.5 million increase
in average balance and higher yields.





Interest
Expense





Interest
expense decreased $301,000, or 13.2%, to $2.0 million for the first quarter of
2010 as compared with the first quarter of 2009.





Interest
on deposit accounts and retail repurchase agreements, decreased $298,000, or
19.6%, as a result of a lower average rate, down 65 basis points to 1.38%,
offset in part by a $60.6 million, or 19.9%, increase in the average balance.
The lower average rate resulted from the effect of lower market interest rates
on rates paid and changes in product mix. The higher average volume resulted
from deposit growth.





Interest
expense on FHLBB borrowings decreased $4,000 as a result of lower average
borrowings, down $5.6 million, offset in part by a higher average borrowing
rate, up 25 basis points as compared with 2009.





Provision and Allowance for
Loan Losses





The
provision for loan losses was $180,000 for the first quarter of 2010, compared
with $430,000 for the first quarter of 2009, which included a provision for
emerging risks or unallocated reserves. Net loan charge-offs were $4,000
and


20
 Table of Contents


$149,000,
for the respective quarters. The following table sets forth changes in the
allowance for loan losses and other selected statistics:





As of or for the three months ended (dollars in
      thousands)
            
            March 31,
              2010
            
            
            December 31,
              2009
            
            
            March 31,
              2009Balance,
      beginning of period
            
            $
            3,473
            
            
            $
            3,430
            
            
            $
            2,724Provision
      (benefit) or loan losses
            
            
            180
            
            
            
            60
            
            
            
            430Charge-offsReal
      estate mortgages
            
            
            -
            
            
            
            -
            
            
            
            (50
            )Commercial
      & industrial
            
            
            -
            
            
            
            (7
            )
            
            
            (76
            )Consumer
            
            
            (10
            )
            
            
            (15
            )
            
            
            (34
            )Total charge-offs
            
            
            (10
            )
            
            
            (22
            )
            
            
            (160
            )RecoveriesReal
      estate mortgages
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
      & industrial
            
            
            -
            
            
            
            -
            
            
            
            4Consumer
            
            
            6
            
            
            
            5
            
            
            
            7Total recoveries
            
            
            6
            
            
            
            5
            
            
            
            11Net (charge-offs)
recoveries
            
            
            (4
            )
            
            
            (17
            )
            
            
            ( 149
            )Balance, end of period
            
            $
            3,649
            
            
            $
            3,473
            
            
            $
            3,005Loans
      receivable, gross
            
            $
            332,622
            
            
            $
            330,144
            
            
            $
            300,938Non-performing
      loans
            
            
            12,064
            
            
            
            7,445
            
            
            
            6,275Accruing
      loans past due 30-89 days
            
            
            5,385
            
            
            
            4,098
            
            
            
            6,458Ratio
      of allowance for loan losses:to
      loans receivable, gross
            
            
            1.10
            %
            
            
            1.05
            %
            
            
            1.00
            %to
      non-performing loans
            
            
            30.25
            
            
            
            46.65
            
            
            
            47.90Ratio
      of non-performing loansto
      loans receivable, gross
            
            
            3.62
            
            
            
            2.25
            
            
            
            2.09Ratio
      of accruing loans past due 30-89 daysto loans receivable, gross
            
            
            1.62
            
            
            
            1.24
            
            
            
            2.15





Reserve
coverage at March 31, 2010, as measured by the ratio of allowance for loan
losses to gross loans, increased slightly to 1.10%, as compared with 1.05% at
December 31, 2009 and 1.00% a year ago at March 31, 2009. Non-performing loans
(non-accrual loans and accruing loans past-due 90 days or more) increased $4.6
million in the first quarter of 2010 to $12.1 million, or 3.62% of gross loans
receivable, while accruing loans past due 30-89 days increased $1.3 million to
$5.4 million, or 1.62% 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 both against total
loans and non-performing loans at March 31, 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


21
 Table of Contents


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 March 31, (dollars in
      thousands)
            
            2010
            
            
            2009
            
            
            2010 vs. 2009Gains
      on securities, net
            
            $
            -
            
            
            $
            427
            
            
            $
            (427
            )
            
            
            (100.00
            )%Trust
      and wealth advisory fees
            
            
            545
            
            
            
            540
            
            
            
            5
            
            
            
            0.93Service
      charges and fees
            
            
            469
            
            
            
            398
            
            
            
            71
            
            
            
            17.84Gains
      on sales of mortgage loans, net
            
            
            60
            
            
            
            82
            
            
            
            (22
            )
            
            
            (26.83
            )Mortgage
      servicing, net
            
            
            15
            
            
            
            42
            
            
            
            (27
            )
            
            
            (64.28
            )Other
            
            
            57
            
            
            
            137
            
            
            
            (80
            )
            
            
            (58.39
            )Total non-interest income
            
            $
            1,146
            
            
            $
            1,626
            
            
            $
            (480
            )
            
            
            (29.52
            )





The
$480,000 decrease in non-interest income for the first quarter of 2010 as
compared to the 2009 quarter was dueto
several one-time benefits in the first quarter of 2009, including $427,000 of
securities gains, a $72,000 market adjustment gain from the re-financing of Bank
Owned Life Insurance, and a $39,000 mortgage servicing rights impairment
benefit. Income from sales of mortgage loans decreased $22,000 in the first
quarter of 2010 due to lower loan origination volume. Loan sales were $4.4
million and $6.9 million, respectively for the 2010 and 2009 periods. Service
fees and charges increased $71,000, or 18%, in the first quarter of 2010 due to
higher interchange, overdraft and other fees. Trust and Wealth Advisory revenues
were substantially unchanged.





Non-interest
expense





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


Three months ended March 31, (dollars in
      thousands)
            
            2010
            
            
            2009
            
            
            2010 vs. 2009Salaries
            
            $
            1,746
            
            
            $
            1,753
            
            
            $
            (7
            )
            
            
            (0.40
            )%Employee
      benefits
            
            
            471
            
            
            
            438
            
            
            
            33
            
            
            
            7.53Premises
      and equipment
            
            
            515
            
            
            
            484
            
            
            
            31
            
            
            
            6.40Data
      processing
            
            
            408
            
            
            
            383
            
            
            
            25
            
            
            
            6.53Professional
      fees
            
            
            402
            
            
            
            356
            
            
            
            46
            
            
            
            12.92FDIC
      insurance
            
            
            171
            
            
            
            114
            
            
            
            57
            
            
            
            0.50Marketing
      and community contributions
            
            
            88
            
            
            
            76
            
            
            
            12
            
            
            
            15.79Amortization
      of intangible assets
            
            
            56
            
            
            
            41
            
            
            
            15
            
            
            
            36.59Other
            
            
            472
            
            
            
            383
            
            
            
            89
            
            
            
            23.23Non-interest expense
            
            $
            4,329
            
            
            $
            4,028
            
            
            $
            301
            
            
            
            7.47





The
increase in non-interest expense for the first quarter of 2010 was primarily due
to higher operating costs. Benefits expense increased primarily due to higher
health plan rates and employee participation levels.  Increased
premises expense reflects the inclusion of the Millerton branch, opened in
January 2010, and the future Sheffield branch, expected to open in mid 2010, and
increases in real estate tax assessments.  Data processing expense
reflects loan and deposit account growth and related transactional volumes. The
increase in FDIC insurance premiums is due to deposit growth. The amortization
of intangible assets for the 2010 period includes amortization related to last
quarter’s assumption of Webster Bank’s Canaan branch deposits. Other operating
expenses increased primarily as a result of deposit and loan account
growth.





Income
taxes





The
effective income tax rate for the first quarter of 2010 was 11.74%, compared
with 19.58% for the first quarter of 2009. The decrease in the effective rate
resulted from a higher proportion of tax-exempt income to total income in the
2010 period. 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.


22
 Table of Contents


FINANCIAL
CONDITION





Overview





Total
assets were $563 million at March 31, 2010, up $771,000 from December 31,
2009.  Loans receivable, net, were $330 million at March 31, 2010, up
$2.3 million, or 0.7%, from December 31, 2009.  Non-performing assets
were $12.3 million at March 31, 2010, up $4.6 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 1.10%, 1.05% and 1.00%, at March 31, 2010,
December 31, 2009 and March 31, 2009, respectively. Deposits were $422 million,
up $4 million from $418 million at December 31, 2009.





At March
31, 2010, book value and tangible book value per common share were $26.21 and
$19.55, respectively. Salisbury’s Tier 1 leverage and total risk-based capital
ratios were 8.40% and 12.75%, respectively, and above the “well capitalized”
limits as defined by the FRB.





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 $166.2 million at March 31, 2010, up $21.1 million from
December 31, 2009. During the first quarter of 2010 Salisbury purchased $34.0
million of debt securities, including U.S. Treasury notes and U.S. Government
sponsored agency bonds. At March 31, 2010, the portfolio had a projected
weighted average life of 5.34 years, based on median projected prepayment speeds
for MBS and CMO, and likelihood of call for callable securities, at current
interest rates.  At March 31, 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 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. No additional OTTI was determined for the
quarter ended March 31, 2010 and all other non-agency CMO securities were judged
not to be OTTI as of March 31, 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 March 31, 2010 included
net unrealized holding losses, net of tax, of $3.2 million that management deems
as temporary impairment.





Loans





During
the first quarter of 2010, net loans receivable grew $2.3 million, or 0.7%, to
$329.6 million at March 31, 2010, despite soft loan demand and aggressive
competition for loans in Salisbury’s market area. First quarter 2010 loan growth
compares with loan growth of $1.6 million, or 0.5%, in the first quarter of
2009.





The
principal categories of loans receivable are as follows:


(in
      thousands)
            
            March
      31, 2010
            
            
            December
      31, 2009Loans
      receivableReal
      Estate MortgagesResidential
            
            $
            164,119
            
            
            $
            163,863Commercial
            
            
            77,210
            
            
            
            70,066Construction,
      land & land development
            
            
            23,801
            
            
            
            31,011Home
      equity credit
            
            
            32,830
            
            
            
            33,099Total
      mortgage loans
            
            
            297,960
            
            
            
            298,039Commercial
      and Industrial
            
            
            29,162
            
            
            
            26,400Consumer
            
            
            5,224
            
            
            
            5,436Other
            
            
            276
            
            
            
            269Total
      loans, gross
            
            
            333,622
            
            
            
            330,144Deferred
      loan origination costs, net
            
            
            627
            
            
            
            586Allowance
      for loan losses
            
            
            (3,649
            )
            
            
            (3,473
            )Loans
      receivable, net
            
            $
            329,600
            
            
            $
            327,257Loans
      held-for-saleResidential
      mortgages
            
            $
            1,178
            
            
            $
            665


23
 Table of Contents


Loan
Credit Quality





Loan
credit quality showed signs of deterioration during the first quarter ended
March 31, 2010, reflecting the weakness in the regional economy. Non-performing
assets increased $4.6 million to $12.3 million, or 2.19% of assets, compared
with $7.7 million, or 1.37% of assets, at December 31, 2009. Of this increase,
$3.9 million are classified as troubled debt restructurings. During the quarter
Salisbury restructured loans of $4.4 million.





During
the first quarter of 2010 loans past due 30 days or more increased $3.5 million
to $11.9 million, or 3.6% of loans, at March 31, 2010. Of this increase $2.2
million, or 63%, are on non-accrual status and included in non-performing
assets, and $1.3 million, or 37%, are accruing and none of which are classified
as troubled debt restructurings.





Non-Performing
Assets





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


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





During
the first quarter of 2010, loans totaling $4.7 million were placed on
non-accrual status, $2.9 million, or 62%, of which are represented by two loans,
a residential real estate mortgage and a commercial real estate mortgage,
neither of which are past due and both of which were previously classified as
troubled debt restructurings. 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.





Salisbury
pursues the resolution of all non-performing assets through restructurings,
credit enhancements or collections. When all 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. At March 31, 2010 Salisbury held one property,
acquired in 2009 as a result of collection activities, and that was subsequently
sold in April 2010.





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


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





At March
31, 2010, 43.5% of non-accrual loans were current with respect to loan payments,
compared with 41.7% at December 31, 2009. Loans past due 180 days and over
consists primarily of 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


24
 Table of Contents


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)
            
            March 31, 2010
            
            
            December 31, 2009Real
      Estate MortgagesResidential
            
            $
            662
            
            
            $
            2,708Commercial
            
            
            4,384
            
            
            
            1,857Accruing
      troubled debt restructured loans
            
            
            5,046
            
            
            
            4,565Real
      Estate MortgagesResidential
            
            
            2,213
            
            
            
            176Commercial
            
            
            3,866
            
            
            
            2,008Construction,
      land & land development
            
            
            26
            
            
            
            -Commercial
      and Industrial
            
            
            158
            
            
            
            158Non-accrual
      troubled debt restructured loans
            
            
            6,263
            
            
            
            2,342Total
      troubled debt restructured loans
            
            $
            11,309
            
            
            $
            6,907





During
the first quarter of 2010, Salisbury restructured six loans totaling $4.4
million, of which $3.6 million are accruing and $0.8 million were placed on
non-accrual status. Also during the quarter, Salisbury placed on non-accrual
$3.1 million of loans previously classified as troubled debt restructured loans,
$2.9 million of which are represented by the aforementioned two loans, a
residential real estate mortgage and a commercial real estate
mortgage.





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


(in thousands)
            
            March 31, 2010
            
            
            December 31, 2009Current
            
            $
            4,799
            
            
            $
            4,566Past due 001-029 days
            
            
            247
            
            
            
            -Accruing troubled debt restructured
      loans
            
            
            5,046
            
            
            
            4,566Current
            
            
            4,001
            
            
            
            1,991Past
      due 030-059 days
            
            
            729
            
            
            
            -Past
      due 060-089 days
            
            
            1,183
            
            
            
            350Past due 090-179 days
            
            
            350
            
            
            
            -Non-accrual troubled debt restructured
      loans
            
            
            6,263
            
            
            
            2,341Total troubled debt restructured
      loans
            
            $
            11,309
            
            
            $
            6,907





At March
31, 2010 77% of such loans were current with respect to loan payments, down from
95% at December 31, 2009.





Past Due
Loans





Loans
past due 30 days or greater are as follows:


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


25
 Table of Contents


During
the first quarter of 2010 loans past due 30 days or more increased $3.5 million
to $11.9 million, or 3.6% of gross loans receivable, at March 31, 2010, up from
2.3% of gross loans receivable, at December 31, 2009. Of this increase $2.2
million, or 63%, are on non-accrual status and included in non-performing
assets, and $1.3 million, or 37%, are accruing and none of which are classified
as troubled debt restructurings.





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 March 31, 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 March 31,
2010, 74% of which is represented by 6 commercial lending
relationships.





Deposits
and Borrowings





During
the three-month period ended March 31, 2010 deposits grew $4.3 million, or
1.02%, to $422.5 million, while retail repurchase agreements decreased $3.4
million to $7.9 million. Salisbury opened its Millerton branch in January
2010.





During
this period Salisbury’s Federal Home Loan Bank of Boston (FHLBB) advances
decreased by $1 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.





Operating
activities for the three-month period ended March 31, 2010 provided net cash of
$1.1 million.  Investing activities utilized net cash of $23.9
million, principally to purchase $34.0 million of securities, and fund $2.5
million of net loan advances and $1.1 million in capital expenditures, offset in
part by $13.6 million from security repayments, calls and maturities. Financing
activities utilized net cash of $745,000, principally for $1.0 million of
scheduled FHLB advance repayments and $582,000 of cash dividends, offset in part
by $845,000 of net deposit and repurchase agreement inflows.





At March
31, 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 33.4% and exceeded Salisbury's minimum guideline
of 30%.





At March
31, 2010, Salisbury had outstanding commitments to fund new loan originations of
$3.5 million, construction mortgage commitments of $3.6 million and unused lines
of credit of $46.2 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 $53.0 million at March 31, 2010, up $668,000 from December 31, 2009.
Book value and tangible book value per share were $26.21 and $19.55,
respectively, compared with $25.81 and $19.12, respectively, at December 31,
2009. Contributing to the increase in shareholders’ equity for the first quarter
of 2010 was net income of $594,000, other comprehensive income of $656,000, less
common and preferred stock dividends of $472,000 and $110,000, respectively.
Other comprehensive income includes unrealized gains on securities
available-for-sale, net of tax, of $644,000 and pension plan income, net of tax,
of $656,000.


26
 Table of Contents


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
            
            
            March
      31, 2010
            
            
            December
      31, 2009capitalized
            
            
            Salisbury
            
            
            Bank
            
            
            Salisbury
            
            
            BankTotal
      Capital (to risk-weighted assets)
            
            
            10.00
            %
            
            
            12.75
            %
            
            
            10.36
            %
            
            
            12.86
            %
            
            
            10.40
            %Tier
      1 Capital (to risk-weighted assets)
            
            
            6.00
            
            
            
            11.81
            
            
            
            9.41
            
            
            
            11.95
            
            
            
            9.48Tier
      1 Capital (to average assets)
            
            
            5.00
            
            
            
            8.40
            
            
            
            6.68
            
            
            
            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
the three month period ended March 31, 2010 Salisbury paid $110,000 in preferred
stock dividends to the U.S. Treasury’s TARP CPP, and $472,000 in common stock
dividends.





The Board
of Directors of Salisbury declared a common stock dividend of $0.28 per common
share payable on May 26, 2010 to shareholders of record on May 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 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 Commissioner of Banking, exceed the total of
its net profits of that year combined with its retained net profits of the
preceding two years.





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 first 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


27
 Table of Contents


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.





Item3.
            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


28
 Table of Contents


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 March 31, 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 150 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 100
basis points for the 10-year Treasury; and (4) gradually rising interest rates –
gradual non-parallel upward shift in market interest rates ranging from 400
basis points for short term rates to 185 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
March 31, 2009 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 March 31, 2010.


As
      of March 31, 2010
            
            Months
      1-12
            
            
            Months
      13-24Immediately
      rising interest rates
            
            
            (9.70
            )%
            
            
            (13.46
            )%Immediately
      falling interest rates
            
            
            0.17
            
            
            
            (1.48
            )Gradually
      rising interest rates
            
            
            (0.81
            )
            
            
            (10.39
            )





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.





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 industry-standard 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:


29
 Table of Contents




As
      of March 31, 2010 (in thousands)
            
            Rates
      up 100bp
            
            
            Rates
      up 200bpU.S.
      Treasury notes
            
            $
            (143
            )
            
            $
            (276
            )U.S.
      Government agency notes
            
            
            (2,118
            )
            
            
            (4,455
            )Municipal
      bonds
            
            
            (4,125
            )
            
            
            (7,883
            )Mortgage
      backed securities
            
            
            (744
            )
            
            
            (1,802
            )Collateralized
      mortgage obligations
            
            
            (1,789
            )
            
            
            (3,287
            )SBA
      pools
            
            
            (27
            )
            
            
            (46
            )Total
      available-for-sale debt securities
            
            $
            (8,946
            )
            
            $
            (17,749
            )





Item4T.
            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 March 31, 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 March 31, 2010 that has materially affected,
or is reasonably likely to materially affect, Salisbury’s internal control over
financial reporting.





PARTII.
            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 pending in the Connecticut Superior
Court within the Judicial District of Bridgeport.  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.


30
 Table of Contents


Item 1A.
            RISK
    FACTORS





Not
      applicable.





Item2.
            UNREGISTERED SALES OF EQUITY
      SECURITIES AND USE OF
PROCEEDS





None





Item3.
            DEFAULTS UPON SENIOR
      SECURITIES





None





Item4.
            RESERVED





Item 5.
            OTHER
      INFORMATION





None





Item6.
            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.





May
      17, 2010
            by/s/ Richard J.
      Cantele, Jr.Richard
      J. Cantele, Jr.,Chief
      Executive OfficerMay
      17, 2010
            by/s/ B. Ian
      McMahonB.
      Ian McMahon,Chief
      Financial Officer







31