SALISBURY BANCORP, INC. - Quarter Report: 2010 June (Form 10-Q)

form10q-109633_sal.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2010

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

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

(860) 435-9801

(Registrant's telephone number, including area code)

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

Yes [X] No [ ]

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

Yes_________ No_________

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

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

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

Yes [ ] No [X]

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

TABLE OF CONTENTS

		Page

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009	3

	Consolidated Statements of Income for the three and six month periods ended June 30, 2010 and June 30, 2009	4

	Consolidated Statements of Changes in Shareholders' Equity for the six month periods ended June 30, 2010 and June 30, 2009	5

	Consolidated Statements of Cash Flows for the six month periods ended June 30, 2010 and June 30, 2009	6

	Notes to Consolidated Financial Statements	8

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

Item 3.	Quantitative and Qualitative Disclosure of Market Risk	31

Item 4T.	Controls and Procedures	33

PART II Other Information

Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults upon Senior Securities	34
Item 4.	Reserved	34
Item 5.	Other information	34
Item 6.	Exhibits	34

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

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

Basic and diluted earnings (loss) per share	$	0.45	$	(0.19	)	$	0.74	$	0.45
Common dividends per share		0.28		0.28			0.56		0.28

See accompanying notes to consolidated financial statements.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

	Common Stock
(dollars in thousands)	Shares		Amount		Preferred Stock		Warrants		Paid-in capital		Retained earnings			Accumulated other comp- rehensive loss			Total share- holders' equity
Balances at December 31, 2009		1,686,701	$	168	$	-	$	112	$	21,894	$	35,259		$	(5,078	)	$	52,355
Net income for year		-		-		-		-		-		1,473			-			1,473
Other comprehensive income, net of tax		-		-		-		-		-		-			1,703			1,703
Total comprehensive income																		3,176
Issuance of preferred stock and warrants		-		-		-		-		-		-			-			-
Amortization (accretion) of preferred stock		-		-		-		-		10		(10	)		-			-
Common stock dividends declared		-		-		-		-		-		(945	)		-			(945	)
Preferred stock dividends paid		-		-		-		-		-		(220	)		-			(220	)
Issuance of common stock for
directors fees		960		-		-		-		23		-			-			23
Balances at June 30, 2010		1,687,661	$	168	$	-	$	112	$	21,927	$	35,557		$	(3,375	)	$	54,389

Balances at December 31, 2008		1,685,861		168		-		-		13,158		34,518			(8,905	)		38,939
Net income for year		-		-		-		-		-		898			-			898
Other comprehensive income, net of tax		-		-		-		-		-		-			(129	)		(129	)
Total comprehensive income																		769
Issuance of preferred stock and warrants		-		-		-		112		8,704		-			-			8,816
Amortization (accretion) of preferred stock		-		-		-		-		3		(3	)		-			-
Common stock dividends declared		-		-		-		-		-		(472	)		-			(472	)
Preferred stock dividends paid		-		-		-		-		-		(76	)		-			(76	)
Issuance of common stock for
directors fees		840		-		-		-		19		-			-			19
Balances at June 30, 2009		1,686,701	$	168	$	-	$	112	$	21,884	$	34,865		$	(9,034	)	$	47,995

See accompanying notes to consolidated financial statements.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

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

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 - BASIS OF PRESENTATION

The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Salisbury and the statements of income, shareholder’s equity and cash flows for the interim periods presented.

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

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the three month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2009 Annual Report on Form 10-K for the period ended December 31, 2009.

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

Impact of New Accounting Pronouncements Issued

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

In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives.” The ASU clarifies that certain embedded derivatives, such as those contained in certain securitizations, CDOs and structured notes, should be considered embedded credit derivatives subject to potential bifurcation and separate fair value accounting. The ASU allows any beneficial interest issued by a securitization vehicle to be accounted for under the fair value option at transition. At transition, the Company may elect to reclassify various debt securities (on an instrument-by-instrument basis) from held-to-maturity (HTM) or available-for-sale (AFS) to trading. The new rules are effective July 1, 2010. The Company is currently analyzing the impact of the changes to determine the population of instruments that may be reclassified to trading upon adoption.

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements.” The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 of the fair value hierarchy and describing the reasons for the transfers. The disclosures are effective for reporting periods beginning after December 15, 2009. The Company adopted ASU 2010-06 as of January 1, 2010. The required disclosures are included in Note 16. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in the Level 3 of the fair value measurement hierarchy will be required for fiscal years beginning after December 15, 2010.

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

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

Acquisition

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

NOTE 2 - SECURITIES

The composition of securities is as follows:

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

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

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

	Three months					Six months
Period ended June 30, (in thousands)	2010		2009			2010		2009
Proceeds	$	-	$	1,314		$	-	$	22,233
Gains realized		-		1			-		416
Losses realized		-		-			-		8
Net gains (losses) realized		-		(1,119	)		1		408
Income tax (benefit) / provision		-		(380	)		-		139

Included in non-agency Collateralized Mortgage Obligations (“CMOs”) are seven securities issued by Wells Fargo with an aggregate amortized cost basis and fair value of $5,870,000 and $5,044,000, respectively, that exceeded 10% of shareholders’ equity as of June 30, 2010.

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

	Less than 12 Months				12 Months or Longer				Totals
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		losses		value		losses		value		losses
June 30, 2010
Available-for-sale
U.S. Government Agency notes	$	-	$	-	$	-	$	-	$	-	$	-
Municipal Bonds		10,357		279		30,785		3,820		41,142		4,099
Mortgage backed securities		1,314		1		1,292		108		2,606		109
Collateralized mortgage obligations
U.S. Government Agencies		2,505		13		-		-		2,505		13
Non-agency		1,665		26		5,442		402		7,107		428
Total temporarily impaired securities		15,841		319		37,519		4,330		53,360		4,649
Other-than-temporarily impaired securities
Collateralized mortgage obligations
Non-agency		-		-		3,940		1,157		3,940		1,157
Total temporarily impaired and other-than-
temporarily impaired securities	$	15,841	$	319	$	41,459	$	5,487	$	57,300	$	5,806

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

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

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

Salisbury performed a detailed cash flow analysis of its non-agency CMOs at June 30, 2010 to assess whether any of the securities were OTTI. Salisbury uses a third party provider to generate cash flow forecasts of each security based on a variety of market driven assumptions and securitization terms, including prepayment speed, default or delinquency rate, and default severity for losses including interest, legal fees, property repairs, expenses and realtor fees, that, together with the loan amount are subtracted from collateral sales proceeds to determine severity.

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

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

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

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

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

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

NOTE 3 - LOANS

The composition of the loan portfolio is as follows:

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

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

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

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in northwestern Connecticut and nearby New York and Massachusetts towns, which constitute Salisbury's service area. Salisbury offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, equipment loans, and a variety of consumer loans, including home equity lines of credit, and installment and collateral loans. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in Salisbury’s market area.

Mortgage Servicing Rights

Loans serviced for others are not included in the Consolidated Balance Sheets. The balance of loans serviced for others and the fair value of mortgage servicing rights are as follows:

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

Changes in mortgage servicing rights are as follows:

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

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

NOTE 4 - IMPAIRED LOANS

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

(in thousands)	June 30, 2010		December 31, 2009
Non-accrual loans, excluding troubled debt restructured loans	$	5,326	$	5,098
Non-accrual troubled debt restructured loans		5,868		2,341
Accruing troubled debt restructured loans		5,514		4,566
Total impaired loans	$	16,708	$	12,005
Requiring valuation allowance	$	5,050	$	3,388
Not requiring valuation allowance		11,658		8,617
Total impaired loans	$	16,708	$	12,005
Valuation allowance	$	527	$	388
Commitments 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)	June 30, 2010		December 31, 2009
Securities available-for-sale (at fair value)	$	56,162	$	63,097
Loans receivable		109,960		104,960
Total pledged assets	$	166,122	$	168,057

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

NOTE 6 – EARNINGS (LOSS) PER SHARE

The calculation of earnings per share is as follows:

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

NOTE 7 – SHAREHOLDERS’ EQUITY

Capital Requirements

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

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

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

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

Restrictions on Cash Dividends to Common Shareholders

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

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

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

Preferred Stock

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

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

As part of the CPP, Salisbury issued to the Treasury a 10-year Warrant to purchase 57,671 shares of Common Stock at an exercise price of $22.93 per share. If the Warrant were fully exercised, Salisbury estimates that the ownership percentage of the current shareholders would be diluted by approximately 3.3% percent.

NOTE 8 – PENSION AND OTHER BENEFITS

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

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

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

NOTE 9 - COMPREHENSIVE INCOME (LOSS)

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

The components of comprehensive income (loss) are as follows:

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

The components of accumulated other comprehensive loss is as follows:

(in thousands)	June 30, 2010			December 31, 2009
Unrealized losses on securities available-for-sale, net of tax	$	(2,151	)	$	(3,831	)
Unrecognized pension plan expense, net of tax		(1,224	)		(1,247	)
Accumulated other comprehensive loss, net	$	(3,375	)	$	(5,078	)

NOTE 10 – FAIR VALUE OF ASSETS AND LIABILITIES

Salisbury uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, Salisbury may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

Salisbury groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of Salisbury’s financial assets and financial liabilities carried at fair value for December 31, 2009 and June 30, 2010.

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

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

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

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

			Fair Value Measurements at Reporting Date Using
(in thousands)			Quoted prices in Active markets for Identical assets		Significant other observable inputs		Significant unobservable inputs
	June 30, 2010		Level 1		Level 2		Level 3
Items Measured at Fair Value
Recurring basis
Securities available-for-sale	$	155,423	$	46	$	155,377	$	-
Non-recurring basis
Impaired loans		4,523		-		4,523		-

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

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

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

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

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

BUSINESS

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

Acquisition

Application of Critical Accounting Policies

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

Salisbury’s significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements. These policies, along with the disclosures presented in Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

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

RESULTS OF OPERATIONS

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

Overview

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

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

Selected second quarter 2010 highlights:

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

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

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

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

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

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

Net Interest Income

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

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

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

(a)	Includes non-accrual loans.

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

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

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

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

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

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

Interest Income

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

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

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

Interest Expense

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

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

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

Provision and Allowance for Loan Losses

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

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

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

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

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

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

Non-interest income

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

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

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

Non-interest expense

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

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

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

Income taxes

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

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

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

Overview

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

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

Net Interest Income

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

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

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

(a)	Includes non-accrual loans.

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

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

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

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

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

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

Interest Income

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

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

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

Interest Expense

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

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

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

Provision and Allowance for Loan Losses

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

Non-interest income

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

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

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

Non-interest expense

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

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

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

Income taxes

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

FINANCIAL CONDITION

Overview

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

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

Securities and Short Term Funds

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

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

In 2009, Salisbury determined that five non-agency CMO securities reflected OTTI and it recognized credit losses of $1,128,000 by writing down the carrying value of such securities. Salisbury does not intend to sell the securities that it has judged to be OTTI and it is not more likely than not that it will be required to sell these securities before its anticipated recovery of each security’s remaining amortized cost basis. No additional OTTI was determined for the quarter ended June 30, 2010 and all other non-agency CMO securities were judged not to be OTTI as of June 30, 2010. It is possible that future loss assumptions could change and cause future OTTI credit losses in these securities.

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

Loans

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

The principal categories of loans receivable are as follows:

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

Loan Credit Quality

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

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

Non-Performing Assets

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

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

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

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

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

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

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

Troubled Debt Restructured Loans

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

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

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

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

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

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

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

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

Past Due Loans

Loans past due 30 days or greater are as follows:

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

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

Potential Problem Loans

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

Deposits and Borrowings

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

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

LIQUIDITY

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

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

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

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

CAPITAL RESOURCES

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

Capital Requirements

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

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

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

Dividends

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

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

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

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

Further restrictions on cash dividends are imposed on Salisbury because of Salisbury’s participation in the TARP, CPP. These preclude the payment of any common stock cash dividends if Salisbury is not paying the preferred stock dividend. Additionally, the common stock dividend may not be increased without prior approval from the Treasury for the second three years Salisbury is a TARP participant unless all TARP preferred shares are redeemed or transferred to third parties.

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

IMPACT OF INFLATION AND CHANGING PRICES

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

FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

(d)	the impact of technological advances; and

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

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

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

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

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

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

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

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

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

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

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

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

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

Item 4T.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

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

PART II.

OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

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

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

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

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

Item 1A. RISK FACTORS

Not applicable.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None

Item 4. RESERVED

Item 5.

OTHER INFORMATION

None

Item 6.

EXHIBITS

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

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

32	Section 1350 Certifications

SIGNATURES

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

	SALISBURY BANCORP, INC.



August 9, 2010	by /s/ Richard J. Cantele, Jr.
	Richard J. Cantele, Jr.,
	Chief Executive Officer



August 9, 2010	by /s/ B. Ian McMahon
	B. Ian McMahon,
	Chief Financial Officer