Edgar Filing: SALISBURY BANCORP INC

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑

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

For the quarterly period ended June 30, 2016

☐

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

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 ☑ 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 ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☑

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

Yes ☐ No ☑

The number of shares of Common Stock outstanding as of August 12, 2016 is 2,758,186.

TABLE OF CONTENTS

Page

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2016 (unaudited) and DECEMBER 31, 2015	3
	CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2016 AND 2015 (unaudited)	4
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2016 AND 2015 (unaudited)	5
	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2016 AND 2015 ( (unaudited)	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2016 AND 2015 (unaudited)	6, 7
	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	8
Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	51
Item 4.	CONTROLS AND PROCEDURES	52
	PART II. OTHER INFORMATION	53
Item 1.	LEGAL PROCEEDINGS	53
Item 1A.	RISK FACTORS	53
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	53
Item 3.	DEFAULTS UPON SENIOR SECURITIES	53
Item 4.	MINE SAFETY DISCLOSURES	53
Item 5.	OTHER INFORMATION	54
Item 6.	EXHIBITS	54
SIGNATURES		55

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)	June 30, 2016			December 31, 2015
ASSETS		(unaudited)
Cash and due from banks	$	10,961		$	14,891
Interest bearing demand deposits with other banks		20,537			47,227
Total cash and cash equivalents		31,498			62,118
Securities
Available-for-sale at fair value		80,438			76,694
Federal Home Loan Bank of Boston stock at cost		3,436			3,176
Loans held-for-sale		—			763
Loans receivable, net (allowance for loan losses: $5,718 and $5,716)		749,523			699,018
Bank premises and equipment, net		14,507			14,307
Goodwill		12,552			12,552
Intangible assets (net of accumulated amortization: $3,216 and $2,909)		2,031			2,338
Accrued interest receivable		2,217			2,307
Cash surrender value of life insurance policies		13,862			13,685
Deferred taxes		1,998			1,989
Other assets		1,432			2,245
Total Assets	$	913,494		$	891,192
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	189,182		$	201,340
Demand (interest bearing)		120,142			125,465
Money market		197,869			183,783
Savings and other		124,019			119,651
Certificates of deposit		123,259			124,294
Total deposits		754,471			754,533
Repurchase agreements		3,355			3,914
Federal Home Loan Bank of Boston advances		47,083			26,979
Subordinated debt⁽¹⁾		9,776			9,764
Note payable		358			376
Capital lease liability		420			422
Accrued interest and other liabilities		5,447			4,630
Total Liabilities		820,910			800,618
Shareholders' Equity
Common stock - $0.10 per share par value
Authorized: 5,000,000
Issued: 2,758,186 and 2,733,576		276			273
Paid-in capital		42,056			41,364
Retained earnings		49,627			47,922
Unearned compensation - restricted stock awards		(483	)		(110	)
Accumulated other comprehensive income		1,108			1,125
Total Shareholders' Equity		92,584			90,574
Total Liabilities and Shareholders' Equity	$	913,494		$	891,192

⁽¹⁾Net of issuance costs, which are capitalized and amortized as a component of interest expense over a period of 10 years.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

		Three months ended				Six months ended
Periods ended June 30, (in thousands except per share amounts)		2016		2015		2016		2015
Interest and dividend income
Interest and fees on loans	$	7,930	$	7,850	$	15,855	$	15,772
Interest on debt securities
Taxable		286		298		579		624
Tax exempt		237		357		523		747
Other interest and dividends		60		40		134		73
Total interest and dividend income		8,513		8,545		17,091		17,216
Interest expense
Deposits		529		453		1,037		897
Repurchase agreements		1		2		2		3
Capital lease		17		17		35		35
Note payable		6		—		11		—
Subordinated debt		156		—		312		—
Federal Home Loan Bank of Boston advances		245		280		476		562
Total interest expense		954		752		1,873		1,497
Net interest and dividend income		7,559		7,793		15,218		15,719
Provision (benefit) for loan losses		525		196		988		(4	)
Net interest and dividend income after provision (benefit) for loan losses		7,034		7,597		14,230		15,723
Non-interest income
Trust and wealth advisory		884		890		1,668		1,712
Service charges and fees		785		778		1,515		1,509
Gains on sales of mortgage loans, net		57		87		96		181
Mortgage servicing, net		21		20		33		(20	)
Gains on sales and calls of available-for-sale securities, net		146		11		148		186
Other		116		114		233		228
Total non-interest income		2,009		1,900		3,693		3,796
Non-interest expense
Salaries		2,687		2,449		5,261		4,989
Employee benefits		910		960		1,998		1,965
Premises and equipment		844		913		1,739		1,821
Data processing		449		398		896		872
Professional fees		564		593		944		1,243
Collections, OREO and loan related		125		228		311		472
FDIC insurance		176		133		310		331
Marketing and community support		180		180		380		290
Amortization of core deposit intangibles		152		164		307		333
Other		552		522		1,334		1,059
Total non-interest expense		6,639		6,540		13,480		13,375
Income before income taxes		2,404		2,957		4,443		6,144
Income tax provision		669		885		1,196		1,838
Net income	$	1,735	$	2,072	$	3,247	$	4,306
Net income available to common shareholders	$	1,735	$	2,032	$	3,247	$	4,226
Basic earnings per common share	$	0.63	$	0.74	$	1.18	$	1.55
Weighted average common shares outstanding, to calculate basic earnings per share		2,735		2,706		2,729		2,703
Diluted earnings per common share		0.63		0.74		1.17		1.54
Weighted average common shares outstanding, to calculate diluted earnings per share		2,750		2,724		2,745		2,720
Common dividends per share		0.28		0.28		0.56		0.56

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

		Three months ended						Six months ended
Periods ended June 30, (in thousands)		2016			2015			2016			2015
Net income	$	1,735		$	2,072		$	3,247		$	4,306
Other comprehensive income (loss)
Net unrealized gains (losses) on securities available-for-sale		190			(739	)		122			(932	)
Reclassification of net realized gains in net income⁽¹⁾		(146	)		(11	)		(148	)		(186	)
Unrealized gains (losses) on securities available-for-sale		44			(750	)		(26	)		(1,118	)
Income tax (expense) benefit		(15	)		252			9			380
Unrealized gains (losses) on securities available-for-sale, net of tax		29			(498	)		(17	)		(738	)
Comprehensive income	$	1,764		$	1,574		$	3,230		$	3,568

^{(1) Reclassification
adjustments include realized security gains and losses. The gains and losses have been reclassified out of other
comprehensive income (loss) and have affected certain lines in the consolidated statements of income as follows: The pre-tax
amount is reflected as gains on sales and calls of available-for-sale securities, net, the tax effect is included in the
income tax provision and the after tax amount is included in net income.}

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) Six months ended June 30, 2016 and 2015

(dollars in thousands)	Common Stock				Preferred stock		Paid-in capital		Retained earnings			Unearned compensation – restricted stock awards			Accumulated other comp- rehensive income			Total share- holders' equity
	Shares		Amount
Balances at December 31, 2014		2,720,766	$	272	$	16,000	$	41,077	$	42,677		$	(313	)	$	2,108		$	101,821
Net income for period		—		—		—		—		4,306			—			—			4,306
Other comprehensive loss, net of tax		—		—		—		—		—			—			(738	)		(738	)
Common stock dividends declared		—		—		—		—		(1,525	)		—			—			(1,525	)
Preferred stock dividends declared		—		—		—		—		(80	)		—			—			(80	)
Stock options exercised		6,750		1		—		125		—			—			—			126
Issuance of common stock for executives		1,000		—		—		29		—			—			—			29
Issuance of common stock for directors		2,660		—		—		81		—			—			—			81
Stock based compensation – restricted stock awards		—		—		—		—		—			84			—			84
Balances at June 30, 2015		2,731,176	$	273	$	16,000	$	41,312	$	45,378		$	(229	)	$	1,370		$	104,104
Balances at December 31, 2015		2,733,576	$	273	$	—	$	41,364	$	47,922		$	(110	)	$	1,125		$	90,574
Net income for period		—		—		—		—		3,247			—			—			3,247
Other comprehensive loss, net of tax		—		—		—		—		—			—			(17	)		(17	)
Common stock dividends declared		—		—		—		—		(1,542	)		—			—			(1,542	)
Stock options exercised		4,050		—		—		87		—			—			—			87
Issuance of restricted stock awards		15,800		2		—		464		—			(466	)		—			—
Issuance of common stock for directors		4,760		1		—		141		—						—			142
Stock based compensation – restricted stock awards		—		—		—		—		—			93			—			93
Balances at June 30, 2016		2,758,186	$	276	$	—	$	42,056	$	49,627		$	(483	)	$	1,108		$	92,584

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Six months ended June 30, (in thousands)		2016			2015
Operating Activities
Net income	$	3,247		$	4,306
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion), amortization and depreciation:
Securities		133			111
Bank premises and equipment		604			610
Core deposit intangible		307			333
Mortgage servicing rights		116			197
Fair value adjustment on loans		(988	)		(1,305	)
Fair value adjustment on deposits		(72	)		(258	)
(Gains) and losses, including write-downs
Gain on calls of securities available-for-sale, net		(2	)		(34	)
Gain on sales of securities available-for-sale, net		(146	)		(152	)
Gain on sales of loans, excluding capitalized servicing rights		(96	)		(78	)
Write-downs of other real estate owned		—			230
Loss on sale/disposals of premises and equipment		13			45
Provision (benefit) for loan losses		988			(4	)
Proceeds from loans sold		2,048			5,146
Loans originated for sale		(1,189	)		(4,800	)
Increase in deferred loan origination costs, net		(81	)		(13	)
Mortgage servicing rights originated		(45	)		(102	)
Increase in mortgage servicing rights impairment reserve		21			3
Decrease in interest receivable		90			42
Deferred tax benefit		—			(26	)
Decrease in prepaid expenses		64			116
Increase in cash surrender value of life insurance policies		(177	)		(185	)
Decrease (increase) in income tax receivable		414			(91	)
Decrease in other assets		234			129
Decrease in accrued expenses		(32	)		(146	)
Modification fees on Federal Home Loan Bank advances		116			—
Amortization of debt issuance costs		12			—
Decrease in interest payable		(32	)		(8	)
Increase in other liabilities		890			103
Stock based compensation-restricted stock awards		93			84
Net cash provided by operating activities		6,530			4,253
Investing Activities
Purchase of Federal Home Loan Bank of Boston stock		(319	)		—
Redemption of Federal Home Loan Bank of Boston stock		59			—
Purchases of securities available-for-sale		(32,536	)		(4,319	)
Proceeds from sales of securities available-for-sale		3,800			3,861
Proceeds from calls of securities available-for-sale		9,661			6,480
Proceeds from maturities of securities available-for-sale		15,320			4,830
Loan originations and principal collections, net		(50,488	)		(3,652	)
Recoveries of loans previously charged off		64			477
Proceeds from sales of other real estate owned		—			605
Capital expenditures		(817	)		(244	)
Net cash (used in) provided by investing activities		(55,256	)		8,038

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Six months ended June 30, (in thousands)		2016			2015
Financing Activities
Increase in deposit transaction accounts, net		973			12,284
Decrease in time deposits, net		(963	)		(6,718	)
Decrease in securities sold under agreements to repurchase, net		(559	)		(1,392	)
Advances from Federal Home Loan Bank of Boston		19,994			—
Principal payments on Federal Home Loan Bank of Boston advances		(6	)		(780	)
Principal payments on note payable		(18	)		—
Decrease in capital lease obligation		(2	)		(1	)
Stock options exercised		87			126
Issuance of shares for director fees		142			81
Issuance of shares for executives		—			29
Common stock dividends paid		(1,542	)		(1,525	)
Series B preferred stock dividends paid		—			(80	)
Net cash Provided by financing activities		18,106			2,024
Net (decrease) increase in cash and cash equivalents		(30,620	)		14,315
Cash and cash equivalents, beginning of period		62,118			36,105
Cash and cash equivalents, end of period	$	31,498		$	50,420
Cash paid during period
Interest	$	1,977		$	1,763
Income taxes		782			1,955
Non-cash investing and financing activities
Transfer from loans to other real estate owned		—			101

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 consolidated financial position of Salisbury and the consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the interim periods presented.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). 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, expected cash flows from loans acquired in a business combination, other-than-temporary impairment of securities and impairment of goodwill and intangibles.

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 interim period ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2015 Annual Report on Form 10-K for the year ended December 31, 2015.

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 provides 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 January 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – overall (subtopic 825-10): "Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. Salisbury does not expect ASU No. 2016-01 to have a material impact on its Consolidated Financial Statements; however, Salisbury will continue to closely monitor developments and additional guidance.

In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. Salisbury is currently evaluating this ASU to determine the impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation–Stock Compensation (Topic 718): "Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. Salisbury is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on Salisbury’s Consolidated Financial Statements.

In June 2016 the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods with those fiscal years beginning after December 15, 2019. Salisbury is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on Salisbury’s Consolidated Financial Statements.

NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)	Amortized cost (1)			Gross un- realized gains			Gross un- realized losses				Fair Value
June 30, 2016
Available-for-sale
U.S. Treasury notes		$	9,998		$	17		$	—			$	10,015
Municipal bonds			20,459			490			—				20,949
Mortgage-backed securities
U.S. Government agencies and U.S. Government-sponsored enterprises			38,220			430			(9	)			38,641
Collateralized mortgage obligations
U.S. Government agencies			1,732			8			—				1,740
Non-agency			3,928			395			(11	)			4,312
SBA bonds			2,628			26			—				2,654
CRA mutual funds			774			14			—				788
Corporate bonds			1,000			—			(3	)			997
Preferred stock			20			322			—				342
Total securities available-for-sale		$	78,759		$	1,702		$	(23	)		$	80,438
Non-marketable securities
Federal Home Loan Bank of Boston stock		$	3,436		$	—		$	—			$	3,436

(in thousands)	Amortized cost (1)			Gross un- realized gains			Gross un- realized losses				Fair Value
December 31, 2015
Available-for-sale
U.S. Treasury notes		$	2,499		$	42		$	—			$	2,541
U.S. Government agency notes			498			—			—				498
Municipal bonds			29,752			633			—				30,385
Mortgage-backed securities
U.S. Government agencies and U.S. Government-sponsored enterprises			31,900			385			(83	)			32,202
Collateralized mortgage obligations
U.S. Government agencies			2,002			12			—				2,014
Non-agency			4,487			468			(7	)			4,948
SBA bonds			3,065			31			—				3,096
CRA mutual funds			766			—			(2	)			764
Preferred stock			20			226			—				246
Total securities available-for-sale		$	74,989		$	1,797		$	(92	)		$	76,694
Non-marketable securities
Federal Home Loan Bank of Boston stock		$	3,176		$	—		$	—			$	3,176

(1)

Net of other-than-temporary impairment write-downs recognized in earnings.

Salisbury sold $3.6 million in securities available-for-sale during the six month period ended June 30, 2016, and sold $3.7 million in securities available-for-sale during the six month period ended June 30, 2015.

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

(in thousands)	Less than 12 Months					12 Months or Longer					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
June 30, 2016
Available-for-sale
Mortgage-backed securities	$	255	$	(3	)	$	218	$	(6	)	$	473	$	(9	)
Collateralized mortgage obligations:
Non-agency		323		(2	)		192		(4	)		515		(6	)
Corporate bonds		498		(3	)		—		—			498		(3	)
Total temporarily impaired securities		1,076		(8	)		410		(10	)		1,486		(18	)
Other-than-temporarily impaired securities
Collateralized mortgage obligations:
Non-agency		207		(5	)		—		—			207		(5	)
Total temporarily impaired and other-than-temporarily impaired securities	$	1,283	$	(13	)	$	410	$	(10	)	$	1,693	$	(23	)

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

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at June 30, 2016.

U.S. Government agency mortgage-backed securities: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these securities to be OTTI at June 30, 2016.

Non-agency CMOs: Salisbury performed a detailed cash flow analysis of its non-agency CMOs at June 30, 2016, to assess whether any of the securities were OTTI. Salisbury uses cash flow forecasts for each security based on a variety of market driven assumptions and securitization terms, including prepayment speed, default or delinquency rate, and default severity for losses including interest, legal fees, property repairs, expenses and realtor fees, that, together with the loan amount are subtracted from collateral sales proceeds to determine severity. In 2009, Salisbury determined that five non-agency CMO securities reflected OTTI and recognized losses for deterioration in credit quality of $1,128,000. Salisbury judged the four remaining securities not to have additional OTTI and all other CMO securities not to be OTTI as of June 30, 2016. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI for further deterioration in credit quality. Salisbury evaluates these securities for strategic fit and depending upon such factor could reduce its position in these securities, although it has no present intention to do so, and it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis.

Corporate Bonds: There is one corporate bond, which was purchased in June 2016, with an unrealized loss due to changes in interest rates. No loss on this bond is currently expected if held to maturity.

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 30 (in thousands)		2016		2015
Balance, beginning of period	$	1,128	$	1,128
Credit component on debt securities in which OTTI was not previously recognized		—		—
Balance, end of period	$	1,128	$	1,128

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank’s FHLBB stock as of June 30, 2016. Deterioration of the FHLBB’s capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

NOTE 3 – LOANS

The composition of loans receivable and loans held-for-sale is as follows:

	June 30, 2016									December 31, 2015
(In thousands)	Business Activities Loans			Acquired Loans			Total			Business Activities Loans			Acquired Loans			Total
Residential 1-4 family	$	280,253		$	7,249		$	287,502		$	261,495		$	7,799		$	269,294
Residential 5+ multifamily		7,230			5,960			13,190			6,411			6,136			12,547
Construction of residential 1-4 family		10,343			—			10,343			7,998			—			7,998
Home equity lines of credit		34,767			—			34,767			35,017			—			35,017
Residential real estate		332,593			13,209			345,802			310,921			13,935			324,856
Commercial		150,669			84,115			234,784			129,446			88,829			218,275
Construction of commercial		9,350			4,110			13,460			6,525			4,874			11,399
Commercial real estate		160,019			88,225			248,244			135,971			93,703			229,674
Farm land		4,036			—			4,036			3,193			—			3,193
Vacant land		8,149			—			8,149			8,563			—			8,563
Real estate secured		504,797			101,434			606,231			458,648			107,638			566,286
Commercial and industrial		101,109			31,941			133,050			74,657			46,764			121,421
Municipal		9,005			—			9,005			9,566			—			9,566
Consumer		5,617			68			5,685			6,195			77			6,272
Loans receivable, gross		620,528			133,443			753,971			549,066			154,479			703,545
Deferred loan origination costs, net		1,270			—			1,270			1,189			—			1,189
Allowance for loan losses		(5,478	)		(240	)		(5,718	)		(5,481	)		(235	)		(5,716	)
Loans receivable, net	$	616,320		$	133,203		$	749,523		$	544,774		$	154,244		$	699,018
Loans held-for-sale
Residential 1-4 family	$	—		$	—		$	—		$	763		$	—		$	763

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in northwestern Connecticut, 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.

Loan Credit Quality

The composition of loans receivable by risk rating grade is as follows:

Business Activities Loans

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
June 30, 2016
Residential 1-4 family	$	269,086	$	6,418	$	4,659	$	90	$	—	$	280,253
Residential 5+ multifamily		5,219		1,922		89		—		—		7,230
Construction of residential 1-4 family		10,343		—		—		—		—		10,343
Home equity credit		33,341		573		853		—		—		34,767
Residential real estate		317,989		8,913		5,601		90		—		332,593
Commercial		139,570		3,707		7,392		—		—		150,669
Construction of commercial		9,232		—		118		—		—		9,350
Commercial real estate		148,802		3,707		7,510		—		—		160,019
Farm land		3,018		—		1,018		—		—		4,036
Vacant land		5,232		65		2,852		—		—		8,149
Real estate secured		475,041		12,685		16,981		90		—		504,797
Commercial and industrial		97,051		3,402		654		2		—		101,109
Municipal		9,005		—		—		—		—		9,005
Consumer		5,582		34		1		—		—		5,617
Loans receivable, gross	$	586,679	$	16,121	$	17,636	$	92	$	—	$	620,528

Acquired Loans

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
June 30, 2016
Residential 1-4 family	$	6,470	$	1	$	778	$	—	$	—	$	7,249
Residential 5+ multifamily		5,837		—		123		—		—		5,960
Construction of residential 1-4 family		—		—		—		—		—		—
Home equity credit		—		—		—		—		—		—
Residential real estate		12,307		1		901		—		—		13,209
Commercial		76,876		2,631		4,608		—		—		84,115
Construction of commercial		3,852		—		258		—		—		4,110
Commercial real estate		80,728		2,631		4,866		—		—		88,225
Farm land		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—
Real estate secured		93,035		2,632		5,767		—		—		101,434
Commercial and industrial		31,652		233		56		—		—		31,941
Municipal		—		—		—		—		—		—
Consumer		65		3		—		—		—		68
Loans receivable, gross	$	124,752	$	2,868	$	5,823	$	—	$	—	$	133,443

Business Activities Loans

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2015
Residential 1-4 family	$	248,027	$	6,933	$	6,444	$	91	$	—	$	261,495
Residential 5+ multifamily		4,507		1,815		89		—		—		6,411
Construction of residential 1-4 family		7,111		887		—		—		—		7,998
Home equity lines credit		33,687		545		785		—		—		35,017
Residential real estate		293,332		10,180		7,318		91		—		310,921
Commercial		120,903		4,801		3,742		—		—		129,446
Construction of commercial		6,525		—		—		—		—		6,525
Commercial real estate		127,428		4,801		3,742		—		—		135,971
Farm land		2,162		—		1,031		—		—		3,193
Vacant land		5,567		69		2,927		—		—		8,563
Real estate secured		428,489		15,050		15,018		91		—		458,648
Commercial and industrial		72,887		1,214		555		1		—		74,657
Municipal		9,566		—		—		—		—		9,566
Consumer		6,171		18		6		—		—		6,195
Loans receivable, gross	$	517,113	$	16,282	$	15,579	$	92	$	—	$	549,066

Acquired Loans

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2015
Residential 1-4 family	$	6,824	$	199	$	776	$	—	$	—	$	7,799
Residential 5+ multifamily		6,136		—		—		—		—		6,136
Construction of residential 1-4 family		—		—		—		—		—		—
Home equity lines of credit		—		—		—		—		—		—
Residential real estate		12,960		199		776		—		—		13,935
Commercial		80,406		4,005		4,418		—		—		88,829
Construction of commercial		4,612		—		262		—		—		4,874
Commercial real estate		85,018		4,005		4,680		—		—		93,703
Farm land		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—
Real estate secured		97,978		4,204		5,456		—		—		107,638
Commercial and industrial		45,363		875		443		83		—		46,764
Municipal		—		—		—		—		—		—
Consumer		71		6		—		—		—		77
Loans receivable, gross	$	143,412	$	5,085	$	5,899	$	83	$	—	$	154,479

The composition of loans receivable by delinquency status is as follows:

Business Activities Loans

			Past due
												180		30
(in thousands)	Current			1-29		30-59		60-89		90-179		days		days			Accruing		Non-
				days		days		days		days		and		and		90 days			accrual
												over		over		and over
June 30, 2016
Residential 1-4 family	$	272,795		$	2,791	$	1,102	$	521	$	605	$	2,439	$	4,667		$	—	$	3,801
Residential 5+ multifamily		7,086			54		—		—		1		89		90			—		—
Construction of residential 1-4 family		10,343			—		—		—		—		—		—			—		—
Home equity lines of credit		33,739			345		453		60		10		160		683			10		693
Residential real estate		323,963			3,190		1,555		581		616		2,688		5,440			10		4,494
Commercial		148,166			918		20		254		288		1,023		1,585			288		2,869
Construction of commercial		9,350			—		—		—		—		—		—			—		—
Commercial real estate		157,516			918		20		254		288		1,023		1,585			288		2,869
Farm land		3,027			—		286		—		—		723		1,009			—		1,018
Vacant land		5,318			—		8		—		—		2,823		2,831			—		2,852
Real estate secured		489,824			4,108		1,869		835		904		7,257		10,865			298		11,233
Commercial and industrial		100,049			826		106		106		4		18		234			—		25
Municipal		9,005			—		—		—		—		—		—			—		—
Consumer		5,565			37		12		3		—		—		15			—		—
Loans receivable, gross	$	604,443		$	4,971	$	1,987	$	944	$	908	$	7,275	$	11,114		$	298	$	11,258

Acquired Loans

June 30, 2016
Residential 1-4 family	$	6,379	$	91	$	—	$	—	$	—	$	779	$	779	$	—	$	902
Residential 5+ multifamily		5,836		—		—		—		—		124		124				—
Construction of residential 1-4 family		—		—		—		—		—		—		—				—
Home equity lines of credit		—		—		—		—		—		—		—		—		—
Residential real estate		12,215		91		—		—		—		903		903		—		902
Commercial		78,259		2,753		—		1,241		321		1,541		3,103		322		1,541
Construction of commercial		3,852		—		—		—		—		258		258				258
Commercial real estate		82,111		2,753		—		1,241		321		1,799		3,361		322		1,799
Farm land		—		—		—		—		—		—		—				—
Vacant land		—		—		—		—		—		—		—		—		—
Real estate secured		94,326		2,844		—		1,241		321		2,702		4,264		322		2,701
Commercial and industrial		31,484		271		136		50		—		—		186		—		—
Municipal		—		—		—		—		—		—		—				—
Consumer		53		15		—		—		—		—		—				—
Loans receivable, gross	$	125,863	$	3,130	$	136	$	1,291	$	321	$	2,702	$	4,450	$	322	$	2,701

Business Activities Loans

			Past due
												180		30
(in thousands)	Current			1-29		30-59		60-89		90-179		days		days			Accruing		Non-
				days		days		days		days		and		and		90 days			accrual
												over		over		and over
December 31, 2015
Residential 1-4 family	$	254,152		$	1,781	$	1,931	$	683	$	973	$	1,975	$	5,562		$	—	$	5,671
Residential 5+ multifamily		6,254			—		68		—		—		89		157			—		89
Construction of residential 1-4 family		7,826			172		—		—		—		—		—			—		—
Home equity lines of credit		33,744			363		306		101		113		390		910			—		601
Residential real estate		301,976			2,316		2,305		784		1,086		2,454		6,629			—		6,361
Commercial		126,440			1,618		474		—		233		681		1,388			—		2,349
Construction of commercial		6,525			—		—		—		—		—		—			—		—
Commercial real estate		132,965			1,618		474		—		233		681		1,388			—		2,349
Farm land		2,172			298		—		—		—		723		723			—		1,031
Vacant land		5,734			—		6		—		—		2,823		2,829			—		2,855
Real estate secured		442,847			4,232		2,785		784		1,319		6,681		11,569			—		12,596
Commercial and industrial		73,698			906		35		—		—		18		53			—		461
Municipal		9,566			—		—		—		—		—		—			—		—
Consumer		6,096			61		21		17		—		—		38			—		80
Loans receivable, gross	$	532,207		$	5,199	$	2,841	$	801	$	1,319	$	6,699	$	11,660		$	—	$	13,137

Acquired Loans

December 31, 2015
Residential 1-4 family	$	6,823	$	—	$	—	$	110	$	—	$	866	$	976	$	90	$	776
Residential 5+ multifamily		6,136		—		—		—		—		—		—		—		—
Construction of residential 1-4 family		—		—		—		—		—		—		—		—		—
Home equity lines of credit		—		—		—		—		—		—		—		—		—
Residential real estate		12,959		—		—		110		—		866		976		90		776
Commercial		81,140		4,848		916		—		—		1,925		2,841		—		2,000
Construction of commercial		4,612		—		—		—		—		262		262		—		262
Commercial real estate		85,752		4,848		916		—		—		2,187		3,103		—		2,262
Farm land		—		—		—		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—		—		—		—
Real estate secured		98,711		4,848		916		110		—		3,053		4,079		90		3,038
Commercial and industrial		46,128		471		83		82		—		—		165		—		—
Municipal		—		—		—		—		—		—		—		—		—
Consumer		77		—		—		—		—		—		—		—		—
Loans receivable, gross	$	144,916	$	5,319	$	999	$	192	$	—	$	3,053	$	4,244	$	90	$	3,038

Interest on non-accrual loans that would have been recorded as additional interest income for the six months ended June 30, 2016 and 2015 had the loans been current in accordance with their original terms totaled $578,000 and $511,000, respectively.

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

Business Activities Loans

	Six months ended
	June 30, 2016						June 30, 2015
(in thousands)	Quantity		Pre- modification balance		Post- modification balance		Quantity		Pre- modification balance		Post- modification balance
Residential real estate		3	$	316	$	316		1	$	875	$	875
Commercial real estate		1		1,863		1,863		1		184		184
Home equity lines of credit		—		—		—		—		—		—
Troubled debt restructurings		4	$	2,179	$	2,179		2	$	1,059	$	1,059
Rate reduction and term extension		2	$	262	$	262		1	$	184	$	184
Interest only and term extension		—		—		—		—		—		—
Interest only		—		—		—		—		—		—
Debt consolidation		1		1,863		1,863		—		—		—
Term extension		1		54		54		1		875		875
Troubled debt restructurings		4	$	2,179	$	2,179		2	$	1,059	$	1,059

Acquired Loans

Six months ended

June 30, 2016

June 30, 2015

(in thousands)

Quantity

Pre-

modification balance

Post-

modification balance

Quantity

Pre-

modification balance

Post-

modification balance

Residential real estate

—

Commercial real estate

—

Home equity lines of credit

—

Troubled debt restructurings

—

Rate reduction and term extension

—

Interest only and term extension

—

Interest only

—

Debt consolidation and term extension

—

Term extension

—

Troubled debt restructurings

—

Four loans were modified in troubled debt restructurings during 2016, none of which were past due at June 30, 2016.

As of June 30, 2016, there were no commitments to lend additional amounts on troubled debt restructurings.

As of June 30, 2016, the Bank had $2,736,000 in loans collateralized by residential real estate property in the process of foreclosure.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Business Activities Loans												Acquired Loans
(in thousands)	Three months ended June 30, 2016												Three months ended June 30, 2016
	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance
Residential	$	2,458	$	59		$	(287	)	$	18	$	2,248	$	69	$	—		$	—		$	—	$	69
Commercial		1,585		149			—			—		1,734		94		40			(1	)		1		134
Land		164		25			(23	)		—		166		—		—			—			—		—
Real estate		4,207		233			(310	)		18		4,148		163		40			(1	)		1		203
Commercial and industrial		781		60			—			10		851		141		299			(414	)		11		37
Municipal		59		(3	)		—			—		56		—		—			—			—		—
Consumer		114		(26	)		(7	)		8		89		—		—			—			—		—
Unallocated		412		(78	)		—			—		334		—		—			—			—		—
Totals	$	5,573	$	186		$	(317	)	$	36	$	5,478	$	304	$	339		$	(415	)	$	12	$	240
	Business Activities Loans												Acquired Loans
(in thousands)	Six months ended June 30, 2016												Six months ended June 30, 2016
	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance
Residential	$	2,477	$	146		$	(394	)	$	19	$	2,248	$	79	$	(10	)	$	—		$	—	$	69
Commercial		1,466		302			(35	)		1		1,734		132		96			(98	)		4		134
Land		188		24			(46	)		—		166		—		—			—			—		—
Real estate		4,131		472			(475	)		20		4,148		211		86			(98	)		4		203
Commercial and industrial		683		185			(32	)		15		851		24		413			(415	)		15		37
Municipal		61		(5	)		—			—		56		—		—			—			—		—
Consumer		124		(15	)		(30	)		10		89		—		—			—			—		—
Unallocated		482		(148	)		—			—		334		—		—			—			—		—
Totals	$	5,481	$	489		$	(537	)	$	45	$	5,478	$	235	$	499		$	(513	)	$	19	$	240

	Business Activities Loans												Acquired Loans
(in thousands)	Three months ended June 30, 2015												Three months ended June 30, 2015
	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision			Charge- offs		Reco- veries		Ending balance
Residential	$	2,386	$	(52	)	$	(188	)	$	1	$	2,147	$	—	$	15		$	—	$	—	$	15
Commercial		1,355		116			(132	)		—		1,339		18		59			—		—		77
Land		176		6			—			—		182		—		—			—		—		—
Real estate		3,917		70			(320	)		1		3,668		18		74			—		—		92
Commercial and industrial		637		52			—			2		691		45		(3	)		—		10		52
Municipal		61		3			—			—		64		—		—			—		—		—
Consumer		120		15			(16	)		4		123		—		—			—		—		—
Unallocated		384		(15	)		—			—		369		—		—			—		—		—
Totals	$	5,119	$	125		$	(336	)	$	7	$	4,915	$	63	$	71		$	—	$	10	$	144
	Business Activities Loans												Acquired Loans
(in thousands)	Six months ended June 30, 2015												Six months ended June 30, 2015
	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision			Charge- offs		Reco- veries		Ending balance
Residential	$	2,306	$	320		$	(481	)	$	2	$	2,147	$	—	$	15		$	—	$	—	$	15
Commercial		1,697		(154	)		(204	)		—		1,339		7		70			—		—		77
Land		164		18			—			—		182		—		—			—		—		—
Real estate		4,167		184			(685	)		2		3,668		7		85			—		—		92
Commercial and industrial		583		(288	)		(56	)		452		691		14		21			—		17		52
Municipal		61		3			—			—		64		—		—			—		—		—
Consumer		117		31			(31	)		6		123		—		—			—		—		—
Unallocated		409		(40	)		—			—		369		—		—			—		—		—
Totals	$	5,337	$	(110	)	$	(772	)	$	460	$	4,915	$	21	$	106		$	—	$	17	$	144

The composition of loans receivable and the allowance for loan losses is as follows:

Business Activities Loans

(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
June 30, 2016
Residential 1-4 family	$	273,585	$	1,574	$	6,668	$	230	$	280,253	$	1,804
Residential 5+ multifamily		5,471		39		1,759		—		7,230		39
Construction of residential 1-4 family		10,343		77		—		—		10,343		77
Home equity lines of credit		33,958		312		809		16		34,767		328
Residential real estate		323,357		2,002		9,236		246		332,593		2,248
Commercial		146,144		1,538		4,525		76		150,669		1,614
Construction of commercial		9,232		120		118		—		9,350		120
Commercial real estate		155,376		1,658		4,643		76		160,019		1,734
Farm land		3,018		25		1,018		6		4,036		31
Vacant land		5,080		121		3,069		14		8,149		135
Real estate secured		486,831		3,806		17,966		342		504,797		4,148
Commercial and industrial		101,024		850		85		1		101,109		851
Municipal		9,005		56		—		—		9,005		56
Consumer		5,617		89		—		—		5,617		89
Unallocated allowance		—		334		—		—		—		334
Totals	$	602,477	$	5,135	$	18,051	$	343	$	620,528	$	5,478

Acquired Loans

(in thousands)	Collectively evaluated				Individually evaluated				ASC 310-30 loans				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance
June 30, 2016
Residential 1-4 family	$	6,470	$	—	$	779	$	69	$	—	$	—	$	7,249	$	69
Residential 5+ multifamily		5,837		—		123		—		—		—		5,960		—
Construction of residential 1-4 family		—		—		—		—		—		—		—		—
Home equity lines of credit		—		—		—		—		—		—		—		—
Residential real estate		12,307		—		902		69		—		—		13,209		69
Commercial		77,041		24		2,291		26		4,783		81		84,115		131
Construction of commercial		3,852		3		258		—		—		—		4,110		3
Commercial real estate		80,893		27		2,549		26		4,783		81		88,225		134
Farm land		—		—		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—		—		—
Real estate secured		93,200		27		3,451		95		4,783		81		101,434		203
Commercial and industrial		31,592		27		—		—		349		10		31,941		37
Municipal		—		—		—		—		—		—		—		—
Consumer		52		—		—		—		16		—		68		—
Unallocated allowance		—		—		—		—		—		—		—		—
Totals	$	124,844	$	54	$	3,451	$	95	$	5,148	$	91	$	133,443	$	240

Business Activities Loans

(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2015
Residential 1-4 family	$	253,156	$	1,415	$	8,339	$	610	$	261,495	$	2,025
Residential 5+ multifamily		4,640		33		1,771		—		6,411		33
Construction of residential 1-4 family		7,998		65		—		—		7,998		65
Home equity lines of credit		34,298		286		719		68		35,017		354
Residential real estate		300,092		1,799		10,829		678		310,921		2,477
Commercial		125,173		1,265		4,273		113		129,446		1,378
Construction of commercial		6,403		87		122		1		6,525		88
Commercial real estate		131,576		1,352		4,395		114		135,971		1,466
Farm land		2,162		23		1,031		14		3,193		37
Vacant land		5,486		122		3,077		29		8,563		151
Real estate secured		439,316		3,296		19,332		835		458,648		4,131
Commercial and industrial		74,131		673		526		10		74,657		683
Municipal		9,566		61		—		—		9,566		61
Consumer		6,115		124		80		—		6,195		124
Unallocated allowance		—		482		—		—		—		482
Totals	$	529,128	$	4,636	$	19,938	$	845	$	549,066	$	5,481

Acquired Loans

(in thousands)	Collectively evaluated				Individually evaluated				ASC 310-30 loans				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2015
Residential 1-4 family	$	7,023	$	—	$	776	$	79	$	—	$	—	$	7,799	$	79
Residential 5+ multifamily		6,136		—		—		—		—		—		6,136		—
Construction of residential 1-4 family		—		—		—		—		—		—		—		—
Home equity lines of credit		—		—		—		—		—		—		—		—
Residential real estate		13,159		—		776		79		—		—		13,935		79
Commercial		81,300		19		2,742		107		4,787		2		88,829		128
Construction of commercial		4,612		4		262		—		—		—		4,874		4
Commercial real estate		85,912		23		3,004		107		4,787		2		93,703		132
Farm land		—		—		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—		—		—
Real estate secured		99,071		23		3,780		186		4,787		2		107,638		211
Commercial and industrial		45,650		24		—		—		1,114		—		46,764		24
Municipal		—		—		—		—		—		—		—		—
Consumer		61		—		—		—		16		—		77		—
Unallocated allowance		—		—		—		—		—		—		—		—
Totals	$	144,782	$	47	$	3,780	$	186	$	5,917	$	2	$	154,479	$	235

The credit quality segments of loans receivable and the allowance for loan losses are as follows:

Business Activities Loans

June 30, 2016 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	597,508	$	4,601	$	—	$	—	$	597,508	$	4,601
Potential problem loans		4,969		200		—		—		4,969		200
Impaired loans		—		—		18,051		343		18,051		343
Unallocated allowance		—		334		—		—		—		334
Totals	$	602,477	$	5,135	$	18,051	$	343	$	620,528	$	5,478

Acquired Loans

June 30, 2016 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	127,619	$	70	$	—	$	—	$	127,619	$	70
Potential problem loans		2,373		75		—		—		2,373		75
Impaired loans		—		—		3,451		95		3,451		95
Totals	$	129,992	$	145	$	3,451	$	95	$	133,443	$	240

Business Activities Loans

December 31, 2015 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	527,905	$	4,110	$	—	$	—	$	527,905	$	4,110
Potential problem loans		1,223		44		—		—		1,223		44
Impaired loans		—		—		19,938		845		19,938		845
Unallocated allowance		—		482		—		—		—		482
Totals	$	529,128	$	4,636	$	19,938	$	845	$	549,066	$	5,481

Acquired Loans

December 31, 2015 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	148,580	$	46	$	—	$	—	$	148,580	$	46
Potential problem loans		2,119		2		—		—		2,119		2
Impaired loans		—		—		3,780		187		3,780		187
Unallocated allowance		—		—		—		—		—		—
Totals	$	150,699	$	48	$	3,780	$	187	$	154,479	$	235

A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the fair value of expected cash flows or collateral, in accordance with the most likely means of recovery. Certain data with respect to loans individually evaluated for impairment is as follows:

Business Activities Loans

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
June 30, 2016
Residential 1-4 family	$	5,760	$	6,209	$	6,738	$	230	$	42	$	2,667	$	2,883	$	2,748	$	39
Home equity lines of credit		416		436		485		16		1		393		421		329		2
Residential real estate		6,176		6,645		7,223		246		43		3,060		3,304		3,077		41
Commercial		3,629		3,993		3,309		76		45		896		1,152		1,068		15
Construction of commercial		—		—		103		—		—		118		125		17		4
Farm land		722		760		319		6		—		296		361		706		—
Vacant land		2,870		3,881		2,870		14		1		199		235		203		—
Real estate secured		13,397		15,279		13,824		342		89		4,569		5,177		5,071		60
Commercial and industrial		4		4		55		1		—		81		109		276		1
Consumer		—		—		—		—		—		—		—		11		—
Totals	$	13,401	$	15,283	$	13,879	$	343	$	89	$	4,650	$	5,286	$	5,358	$	61

Acquired Loans

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
June 30, 2016
Residential 1-4 family	$	602	$	716	$	627	$	69	$	3	$	300	$	300	$	279	$	—
Home equity credit lines of credit		—		—		—		—		—		—		—		—		—
Residential real estate		602		716		627		69		3		300		300		279		—
Commercial		181		283		412		26		10		2,110		2,663		2,140		65
Construction of commercial		—		—		—		—		—		258		272		259		—
Farm land		—		—		—		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—		—		—		—
Real estate secured		783		999		1,039		95		13		2,668		3,235		2,678		65
Commercial and industrial		—		—		142		—		—		—		591		35		22
Consumer		—		—		—		—		—		—		—		—		—
Totals	$	783	$	999	$	1,181	$	95	$	13	$	2,668	$	3,826	$	2,713	$	87

Business Activities Loans

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
December 31, 2015
Residential 1-4 family	$	7,482	$	8,094	$	6,449	$	610	$	167	$	2,628	$	2,770	$	3,089	$	98
Home equity lines of credit		535		659		260		68		9		184		199		423		2
Residential real estate		8,017		8,753		6,709		678		176		2,812		2,969		3,512		100
Commercial		3,131		3,405		2,850		113		123		1,142		1,393		1,624		49
Construction of commercial		122		128		9		1		7		—		—		116		—
Farm land		733		773		400		14		25		298		352		461		—
Vacant land		2,870		3,836		3,015		29		3		207		241		72		9
Real estate secured		14,873		16,895		12,983		835		334		4,459		4,955		5,785		158
Commercial and industrial		95		98		145		10		4		431		481		383		22
Consumer		—		—		—		—		—		80		108		12		1
Totals	$	14,968	$	16,993	$	13,128	$	845	$	338	$	4,970	$	5,544	$	6,180	$	181

Acquired Loans

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
December 31, 2015
Residential 1-4 family	$	599	$	716	$	273	$	79	$	—	$	177	$	177	$	376	$	7
Home equity lines of credit		—		—		—		—		—		—		—		—		—
Residential real estate		599		716		273		79		—		177		177		376		7
Commercial		675		826		698		107		34		2,067		2,843		2,011		32
Construction of commercial		—		—		—		—		—		262		273		167		22
Farm land		—		—		—		—		—		—		—		—		—
Vacant land		—		—		—		—		—		—		—		—		—
Real estate secured		1,274		1,542		971		186		34		2,506		3,293		2,554		61
Commercial and industrial		—		—		6		—		—		—		4		—		—
Consumer		—		—		—		—		—		—		—		—		—
Totals	$	1,274	$	1,542	$	977	$	186	$	34	$	2,506	$	3,297	$	2,554	$	61

NOTE 4 - MORTGAGE SERVICING RIGHTS

June 30, (in thousands)		2016		2015
Residential mortgage loans serviced for others	$	128,141	$	135,831
Fair value of mortgage servicing rights		961		1,383

Changes in mortgage servicing rights are as follows:

		Three months						Six months
Periods ended June 30, (in thousands)		2016			2015			2016			2015
Mortgage Servicing Rights
Balance, beginning of period	$	456		$	637		$	487		$	694
Originated		24			40			45			102
Amortization (1)		(64	)		(78	)		(116	)		(197	)
Balance, end of period		416			599			416			599
Valuation Allowance
Balance, beginning of period		(24	)		(9	)		(4	)		—
(Increase) decrease in impairment reserve (1)		(1	)		7			(21	)		(2	)
Balance, end of period		(25	)		(2	)		(25	)		(2	)
Loan servicing rights, net	$	391		$	597		$	391		$	597

(1)

Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

NOTE 5 - PLEDGED ASSETS

(in thousands)		June 30, 2016		December 31, 2015
Securities available-for-sale (at fair value)	$	65,674	$	67,750
Loans receivable		162,232		153,269
Total pledged assets	$	227,906	$	221,019

At June 30, 2016, securities were pledged as follows: $59.3 million to secure public deposits, $6.3 million to secure repurchase agreements and $0.1 million to secure FHLBB advances. In addition to securities, loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 6 – EARNINGS PER SHARE

Salisbury defines unvested share-based payment awards that contain non-forfeitable rights to dividends as participating securities that are included in computing earnings per share (EPS) using the two-class method.

The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Basic EPS excludes dilution and is computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

The following table sets forth the computation of earnings per share (basic and diluted) for the periods indicated:

		Three months						Six months
Periods ended June 30, (in thousands, except share and per share data)		2016			2015			2016			2015
Net income	$	1,735		$	2,072		$	3,247		$	4,306
Less: Preferred stock dividends declared		—			(40	)		—			(80	)
Net income available to common shareholders		1,735			2,032			3,247			4,226
Less: Undistributed earnings allocated to participating securities		(13	)		(18	)		(27	)		(37	)
Net income allocated to common stock	$	1,722		$	2,014		$	3,220		$	4,189
Weighted-average common shares issued		2,756			2,730			2,751			2,727
Less: Unvested restricted stock awards		(21	)		(24	)		(22	)		(24	)
Weighted-average common shares outstanding used to calculate basic earnings per common share		2,735			2,706			2,729			2,703
Add: Dilutive effect of stock options		15			18			16			17
Weighted-average common shares outstanding used to calculate diluted earnings per common share		2,750			2,724			2,745			2,720
Earnings per common share (basic)	$	0.63		$	0.74		$	1.18		$	1.55
Earnings per common share (diluted)	$	0.63		$	0.74		$	1.17		$	1.54

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’s 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.

The Board of Governors of the Federal Reserve System (FRB) and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for bank holding companies and their bank subsidiaries. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by Salisbury and the Bank. The rules include a new common equity Tier 1 capital risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. The initial implementation of the capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each subsequent January 1, by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

As of June 30, 2016, Salisbury and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s category.

Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for Salisbury and the Bank are as follows:

											To be Well Capitalized
	Actual					For Capital Adequacy Purposes					Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2016
Total Capital (to risk-weighted assets)
Salisbury	$	93,863		13.08	%	$	57,390		8.0	%		n/a		—
Bank		91,122		12.70			57,390		8.0			71,738		10.0	%
Tier 1 Capital (to risk-weighted assets)
Salisbury		77,922		10.86			43,042		6.0			n/a		—
Bank		85,181		11.87			43,043		6.0			57,390		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)
Salisbury		77,922		10.86			39,997		4.5			n/a		—
Bank		85,181		11.87			39,997		4.5			57,772		6.5
Tier 1 Capital (to average assets)
Salisbury		77,922		8.77			35,553		4.0			n/a		—
Bank		85,181		9.58			35,553		4.0			44,441		5.0
December 31, 2015
Total Capital (to risk-weighted assets)
Salisbury	$	92,030		13.51	%	$	54,509		8.0	%		n/a		—
Bank		89,249		13.10			54,504		8.0		$	68,131		10.0	%
Tier 1 Capital (to risk-weighted assets)
Salisbury		76,120		11.17			40,878		6.0			n/a		—
Bank		83,340		12.23			40,878		6.0			54,504		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)
Salisbury		76,120		11.17			30,659		4.5			n/a		—
Bank		83,340		12.23			30,659		4.5			44,285		6.5
Tier 1 Capital (to average assets)
Salisbury		76,120		8.56			36,102		4.0			n/a		—
Bank		83,340		9.37			35,593		4.0			44,491		5.0

DIVIDENDS

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.

FRB Supervisory Letter SR 09-4, February 24, 2009, revised December 21, 2015, 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.

Preferred Stock

In August 2011, Salisbury issued to the U.S. Secretary of the Treasury (the “Treasury”) $16 million of its Series B Preferred Stock under the Small Business Lending Fund (the “SBLF”) program. The SBLF program is a $30 billion fund established under the Small Business Jobs Act of 2010 to encourage lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. The Preferred Stock qualified as Tier 1 capital for regulatory purposes and ranked senior to the Common Stock.

During fourth quarter 2015, Salisbury completed an offering of $10 million of unsecured 6.00% fixed-to–floating rate subordinated notes due in 2025. The notes qualify as Tier II capital and are included as such within Salisbury’s total risk-based capital ratio.

The net proceeds of the offering, along with cash on hand, were used during the fourth quarter 2015 to redeem the $16 million of Senior Non-Cumulative Perpetual Preferred Stock issued in conjunction with the Salisbury’s participation in the U.S. Treasury’s SBLF program.

NOTE 8 – BENEFITS

Salisbury’s 401(k) Plan expense was $173,000 and $189,000, respectively, for the three month periods ended June 30, 2016 and 2015, and $389,000 and $351,000, respectively, for the six month periods ended June 30, 2016 and 2015. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $19,000 and $14,000, respectively, for the three month periods ended June 30, 2016 and 2015, and $38,000 and $31,000, respectively, for the six month periods ended June 30, 2016 and 2015.

In 2014, Salisbury terminated the Defined Benefit Pension Plan. Excess assets in the amount of $1,018,000 were distributed to the Bank’s Defined Contribution Plan (401k) and the Employee Stock Ownership Plan (ESOP) for future allocations to employees. The division of the excess pension assets was 66.67% to the 401k account (or $679,000) and 33.33% to the ESOP account (or $339,000).

ESOP

Salisbury offers an ESOP to eligible employees. Under the Plan, Salisbury may make discretionary contributions to the Plan, which generally vest in full upon six years of qualified service.

Salisbury’s ESOP expense was $45,000 and $96,000, respectively, for the three month periods ended June 30, 2016 and 2015, and $81,000 and $192,000, respectively, for the six month periods ended June 30, 2016 and 2015.

Other Retirement Plans

A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and who have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section of the Code.

In 2015, 2014, and 2013, the Bank awarded six (6), seven (7) and six (6) Executives, respectively, with discretionary contributions to the plan. Expenses related to this Plan amounted to $10,000 for the second quarter of 2016 and $8,000 for the second quarter of 2015. Additionally, expenses related to this plan amounted to $20,000 and $18,000 for the six months ended June 30, 2016 and 2015, respectively. Based on the Executive’s date of retirement, the vesting schedule ranges from 7.7% per year to 50% per year.

On January 29, 2016, the Compensation Committee granted a total of 47,470 Phantom Stock Appreciation Units pursuant to its 2011 Long Term Incentive Plan, which was approved by shareholders at the 2011 Annual Meeting, including 23,012 units to three Named Executive Officers. Richard J. Cantele, Jr., President and Chief Executive Officer received 11,484 units, John Davies, President of the New York Region and Chief Lending Officer received 5,963 units and Donald E. White, Chief Financial Officer received 5,565 units. The units will vest on the third anniversary of the grant date.

Grants of Restricted Stock and Options

On February 16, 2016, 1,350 shares of stock options were exercised at $21.48 per share by one former Riverside Bank executive.

On January 29, 2016, Salisbury granted a total of 15,800 shares of restricted stock pursuant to its 2011 Long Term Incentive Plan, which was approved by shareholders at the 2011 Annual Meeting, to 42 employees, including 6,000 shares to three Named Executive Officers. Richard J. Cantele, Jr., President and Chief Executive Officer received 5,000 and John Davies, President New York Region and Chief Lending Officer and Donald E. White, Chief Financial Officer each received 500 shares. The fair value of all such stock as of the grant date was determined to be $466,000 and the stock will be vested three years from the grant date.

On January 26, 2016, 2,700 shares of stock options were exercised at $21.48 per share by two former Riverside Bank executives.

On February 17, 2015 and February 25, 2015, 1,350 and 5,400 shares of stock options were exercised, respectively, at $18.52 per share by two former Riverside Bank executives.

On March 27, 2015, Salisbury granted a total of 1,000 shares of restricted stock, pursuant to its 2011 Long Term Incentive Plan, to one (1) Named Executive Officer, Richard J. Cantele, Jr., President and Chief Executive Officer. The fair value of the stock as of the grant date was determined to be $29,000 and the stock vested immediately.

Expense related to such grants in the three months ended June 30, 2016 and 2015 totaled $46,000 and $42,000, respectively, and for the six months ended June 30, 2016 and 2015 totaled $93,000 and $84,000, respectively. Unrecognized compensation cost relating to the awards as of June 30, 2016 and 2015 totaled $483,000 and $229,000, respectively. There were no forfeitures in the six months ended June 30, 2016 or the six months ended June 30, 2015.

NOTE 9 –ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income are as follows:

(in thousands)		June 30, 2016		December 31, 2015
Unrealized gains on securities available-for-sale, net of tax	$	1,108	$	1,125
Accumulated other comprehensive income, net	$	1,108	$	1,125

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, other assets are recorded at fair value 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.

Accounting Standards Codification (ASC) 820-10, “Fair Value Measurement-Overall,” provides a framework for measuring fair value under generally accepted accounting principles. This guidance permitted Salisbury the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Salisbury did not elect fair value treatment for any financial assets or liabilities upon adoption.

In accordance with ASC 820-10, 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.

GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury’s market assumptions. These two types of inputs have created the following fair value hierarchy:

•

Level 1. Quoted prices in active markets for identical assets. 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. Significant other observable inputs. 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. Significant unobservable inputs. 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. Salisbury did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the quarter ended June 30, 2016.

The following is a description of valuation methodologies for assets recorded at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

•

Securities available-for-sale. Securities available-for-sale are recorded at fair value on a recurring basis. Level 1 securities include exchange-traded equity securities. Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of the U.S. Treasury and U.S. government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, municipal bonds, SBA bonds, corporate bonds and certain preferred equities. 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.

•

Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3.

•

Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

•

Mortgage servicing assets are accounted for at cost, subject to impairment testing. When the carrying cost exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors; as such, the primary risk inherent in valuing mortgage servicing assets is the impact of fluctuating interest rates on the servicing revenue stream. Mortgage servicing assets are classified within Level 2 of the fair value hierarchy.

Assets measured at fair value are as follows:

	Fair Value Measurements Using						Assets at
(in thousands)	Level 1		Level 2		Level 3		fair
							value
June 30, 2016
Assets at fair value on a recurring basis
U.S. Treasury notes	$	—	$	10,015	$	—	$	10,015
Municipal bonds		—		20,949		—		20,949
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		38,641		—		38,641
Collateralized mortgage obligations:
U.S. Government agencies		—		1,740		—		1,740
Non-agency		—		4,312		—		4,312
SBA bonds		—		2,654		—		2,654
CRA mutual funds		—		788		—		788
Corporate bonds		—		997		—		997
Preferred stock		342		—		—		342
Securities available-for-sale	$	342	$	80,096	$	—	$	80,438
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans		—		—		13,743		13,743
Mortgage servicing rights		—		961		—		961
December 31, 2015
Assets at fair value on a recurring basis
U.S. Treasury notes	$	—	$	2,541	$	—	$	2,541
U.S. Government agency notes		—		498		—		498
Municipal bonds		—		30,385		—		30,385
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		32,202		—		32,202
Collateralized mortgage obligations:
U.S. Government agencies		—		2,014		—		2,014
Non-agency		—		4,948		—		4,948
SBA bonds		—		3,096		—		3,096
CRA mutual funds		—		764		—		764
Preferred stock		246		—		—		246
Securities available-for-sale	$	246	$	76,448	$	—	$	76,694
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans		—		—		15,211		15,211
Mortgage servicing rights		—		1,315				1,315

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

(in thousands)	Carrying		Estimated		Fair value measurements using
	value		fair value		Level 1		Level 2		Level 3
June 30, 2016
Financial Assets
Cash and cash equivalents	$	31,498	$	31,498	$	31,498	$	—	$	—
Securities available-for-sale		80,438		80,438		342		80,096		—
Federal Home Loan Bank stock		3,436		3,436		—		3,436		—
Loans receivable, net		749,523		754,270		—		—		754,270
Accrued interest receivable		2,217		2,217		—		—		2,217
Cash surrender value of life insurance		13,862		13,862		13,862		—		—
Mortgage servicing rights		391		961		—		961		—
Financial Liabilities
Demand (non-interest-bearing)	$	189,182	$	189,182	$	—	$	—	$	189,182
Demand (interest-bearing)		120,142		120,142		—		—		120,142
Money market		197,869		197,869		—		—		197,869
Savings and other		124,019		124,019		—		—		124,019
Certificates of deposit		123,259		124,556		—		—		124,556
Deposits		754,471		755,768		—		—		755,768
Repurchase agreements		3,355		3,355		—		—		3,355
FHLBB advances		47,083		49,154		—		—		49,154
Subordinated debt		9,776		10,162		—		—		10,162
Note payable		358		385		—		—		385
Capital lease liability		420		903		—		—		903
Accrued interest payable		118		118		—		—		118
December 31, 2015
Financial Assets
Cash and cash equivalents	$	62,118	$	62,118	$	62,118	$	—	$	—
Securities available-for-sale		76,694		76,694		246		76,448		—
Federal Home Loan Bank stock		3,176		3,176		—		3,176		—
Loans held-for-sale		763		778		—		—		778
Loans receivable, net		699,018		707,154		—		—		707,154
Accrued interest receivable		2,307		2,307		—		—		2,307
Cash surrender value of life insurance		13,685		13,685		13,685		—		—
Mortgage servicing rights		597		1,383		—		1,383		—
Financial Liabilities
Demand (non-interest-bearing)	$	201,340	$	201,340	$	—	$	—	$	201,340
Demand (interest-bearing)		125,465		125,465		—		—		125,465
Money market		183,783		183,783		—		—		183,783
Savings and other		119,651		119,651		—		—		119,651
Certificates of deposit		124,294		125,437		—		—		125,437
Deposits		754,533		755,676		—		—		755,676
Repurchase agreements		3,914		3,914		—		—		3,914
FHLBB advances		26,979		28,559		—		—		28,559
Subordinated debt		9,764		9,764		—		—		9,764
Note payable		376		405		—		—		405
Capital lease liability		422		870		—		—		870
Accrued interest payable		150		150		—		—		150

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, 2015. Readers should also review other disclosures Salisbury files from time to time with the Securities and Exchange Commission (the “SEC”).

BUSINESS

Salisbury, a Connecticut corporation, formed in 1998, is the bank holding company for the Bank, a Connecticut-chartered and FDIC insured commercial bank headquartered in Lakeville, Connecticut. Salisbury's principal business consists of the management and operations 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 thirteen full-service offices in the towns of: Canaan, Lakeville, Salisbury and Sharon, Connecticut; Great Barrington, South Egremont and Sheffield, Massachusetts; and, Fishkill, Newburgh, Poughkeepsie, Red Oaks Mill, Dover Plains and Millerton, New York. The Bank’s trust and wealth advisory services are based in Lakeville, Connecticut. In May 2014, the Bank established a new branch in Great Barrington, Massachusetts. In June 2014, the Bank acquired a branch office and related deposits from another institution in Sharon, Connecticut and consolidated its existing Sharon office with the new branch. In December 2014, the Bank completed its acquisition of Riverside Bank of Poughkeepsie, New York, adding four new offices and a strong commercial lending focus to Salisbury’s New York market presence.

Critical Accounting Policies and Estimates

Salisbury’s consolidated financial statements follow GAAP as applied to 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, which, along with this Management’s Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating Salisbury’s reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

Loans acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of cash flows initially expected to be collected and discounting those cash flows at an appropriate market rate of interest. The Bank continues to evaluate reasonableness of the timing and the amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired. For collateral dependent loans with deteriorated credit quality, the Bank estimates the fair value of the underlying collateral of the loans. These values are discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.

The allowance for loan losses represents management’s estimate of credit losses inherent 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. Note 1 “Basis of Presentation” describes the methodology used to determine the allowance for loan losses. A discussion of the factors driving changes in the amount of the allowance for loan losses are included in the “Provision and Allowance for Loan Losses” section of Management’s Discussion and Analysis.

Management evaluates goodwill and identifiable intangible assets for impairment annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates, which are used to determine the carrying value of goodwill and identifiable intangible assets or which otherwise adversely affect their value or estimated lives could have a material adverse impact on the results of operations.

Management evaluates securities for other-than-temporary impairment giving consideration to the extent to which the fair value has been less than cost, estimates of future cash flows, delinquencies and default severity, and the intent and ability of Salisbury to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The consideration of the above factors is subjective and involves estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

FINANCIAL CONDITION

Overview

Total assets were $913.5 million at June 30, 2016, up $22.3 million from December 31, 2015. Loans receivable, net, were $749.5 million at June 30, 2016, up $50.3 million, or 7.2%, from December 31, 2015. Non-performing assets were $14.6 million at June 30, 2016, down $1.7 million from $16.3 million at December 31, 2015. Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, was 0.76%, 0.81% and 0.74%, at June 30, 2016, December 31, 2015 and June 30, 2015, respectively. Deposits were $754.5 million at June 30, 2016 and December 31, 2015. FHLBB advances increased $20.1 million to help fund the loan growth.

At June 30, 2016, book value and tangible book value per common share were $33.57 and $28.28, respectively. Salisbury’s Tier 1 leverage, total risk-based and common equity Tier 1 capital ratios were 8.77%, 13.08%, and 10.86%, respectively.

Securities and Short Term Funds

During the first six months of 2016, securities increased $4.0 million to $83.9 million at June 30, 2016. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) decreased $30.6 million.

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

Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider any of its securities, other than four non-agency CMO securities reflecting OTTI, to be OTTI at June 30, 2016.

Salisbury has, and continues to monitor, CMO securities where historical recognition of losses has occurred as a result of OTTI. Salisbury determined, as of June 30, 2016, that additional recognition of OTTI was not required. It is possible that future loss assumptions could change necessitating Salisbury to recognize future OTTI.

Loans

Net loans receivable increased $50.5 million to $749.5 million at June 30, 2016, compared with $699.0 million at December 31, 2015 and increased $71.8 million from $677.7 million at June 30, 2015.

Loan Credit Quality

During the first six months of 2016, total impaired and potential problem loans increased to $28.8 million, or 3.8% of gross loans receivable at June 30, 2016, from $27.1 million, or 3.8% of gross loans receivable at December 31, 2015 and decreased from $30.3 million at June 30, 2015. The percentage of such loans at June 30, 2016 when compared to June 30, 2015 improved from 4.4% of gross loans.

Changes in impaired and potential problem loans are as follows:

	June 30, 2016												June 30, 2015

Three months ended	Impaired loans							Potential					Impaired loans							Potential
(in thousands)		Non-						problem						Non-						problem
		accural			Accruing			loans			Total			accrual			Accruing			loans			Total
Loans placed on non-accrual status	$	680		$	1		$	(605	)	$	76		$	1,888		$	—		$	(901	)	$	987
Loans restored to accrual status		(2,423	)		146			2,035			(242	)		(512	)		—			512			—
Loan risk rating downgrades to substandard		—			—			2,303			2,303			(103	)		—			—			(103	)
Loan risk rating upgrades from substandard		—			—			(2,900	)		(2,900	)		—			—			(788	)		(788	)
Loan repayments		(427	)		(47	)		(8	)		(482	)		(238	)		(64	)		(409	)		(711	)
Loan charge-offs		(700	)		—			—			(700	)		(321	)		—			—			(321	)
Increase (decrease) in TDR loans		—			175			—			175			—			1,059			(766	)		293
Inter-month tax advances		—			—			—			—			13			—			—			13
(Decrease) increase in loans	$	(2,870	)	$	275		$	825		$	(1,770	)	$	727		$	995		$	(2,352	)	$	(630	)

During the second quarter of 2016, Salisbury placed $0.1 million of loans on non-accrual status as a result of deteriorated payment and financial performance and charged-off $700,000 of non-accrual loans primarily as a result of credit or collateral deficiencies.

Salisbury has cooperative relationships with the vast majority of its non-performing loan customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral. Salisbury pursues the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, Salisbury will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.

Credit Quality Segments

Salisbury categorizes loans receivable into the following credit quality segments:

•

Impaired loans consist of all non-accrual loans and troubled debt restructured loans, and represent loans for which it is probable that Salisbury will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreements.

•

Non-accrual loans, a sub-set of impaired loans, are loans for which the accrual of interest has been discontinued because, in the opinion of management, full collection of principal or interest is unlikely.

•

Non-performing loans consist of non-accrual loans, and accruing loans past due 90 days and over that are well collateralized, in the process of collection and where full collection of principal and interest is reasonably assured. Non-performing assets consist of non-performing loans plus real estate acquired in settlement of loans.

•

Troubled debt restructured loans are loans for which concessions such as reduction of interest rates, other than normal market rate adjustments, or deferral of principal or interest payments, extension of maturity dates, or reduction of principal balance or accrued interest, have been granted due to a borrower’s financial condition. Loan restructuring is employed when management believes the granting of a concession will increase the probability of the full or partial collection of principal and interest.

•

Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired.

Credit Risk Ratings

Salisbury assigns credit risk ratings to loans receivable in order to manage credit risk and to determine the allowance for loan losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. Salisbury's rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are pass ratings and 5 through 8 are ratings (special mention, substandard, doubtful, and loss) defined by the bank's regulatory agencies, the FDIC and CTDOB. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.

•

Loans risk rated as "special mention" possess credit deficiencies or potential weaknesses deserving management’s close attention that if left uncorrected may result in deterioration of the repayment prospects for the loans at some future date.

•

Loans risk rated as "substandard" are loans where the Bank’s position is clearly not protected adequately by borrower current net worth or payment capacity. These loans have well defined weaknesses based on objective evidence and include loans where future losses to the Bank may result if deficiencies are not corrected, and loans where the primary source of repayment such as income is diminished and the Bank must rely on sale of collateral or other secondary sources of collection.

•

Loans risk rated as "doubtful" have the same weaknesses as substandard loans with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, to be highly improbable. The possibility of loss is high, but due to certain important and reasonably specific pending factors, which may work to strengthen the loan, its reclassification as an estimated loss is deferred until its exact status can be determined.

•

Loans risk rated as "loss" are considered uncollectible and of such little value that continuance as Bank assets is unwarranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this loan even though partial recovery may be made in the future.

Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank’s loan portfolio and risk ratings are examined annually on a rotating basis by its two primary regulatory agencies, the FDIC and CTDOB.

Impaired Loans

Loans individually evaluated for impairment (impaired loans) are loans for which Salisbury does not expect to collect all contractual principal and interest in accordance with the contractual terms of the loan. Impaired loans include all modified loans classified as troubled debt restructurings (TDRs) and loans on non-accrual status. The components of impaired loans are as follows:

(in thousands)		June 30, 2016		December 31, 2015
Accruing troubled debt restructured loans	$	7,543	$	7,544
Non-accrual troubled debt restructured loans		3,000		3,044
Non-accrual loans, excluding troubled debt restructured loans		10,959		13,131
Total impaired loans	$	21,502	$	23,719
Commitments to lend additional amounts to impaired borrowers	$	—	$	—

Non-Performing Assets

Non-performing assets decreased $1.7 million to $14.6 million, or 1.6% of assets at June 30, 2016, from $16.3 million, or 1.8% of assets at December 31, 2015, and decreased $0.4 million from $15.0 million, or 1.7% of assets at June 30, 2015.

The 10% decrease in non-performing assets in 2016 resulted primarily from $2.4 million of loans reinstated to accrual status, $0.4 million in payoffs and repayments, and $0.7 million charged off. This decrease was offset in part by $0.7 million placed on non-accrual, and $0.6 million change in 90+ past due and accruing status.

The components of non-performing assets are as follows:

(in thousands)		June 30, 2016		December 31, 2015
Residential 1-4 family	$	4,703	$	6,447
Residential 5+ multifamily		—		89
Home equity lines of credit		693		601
Commercial		4,668		4,611
Farm land		1,018		1,031
Vacant land		2,852		2,855
Real estate secured		13,934		15,634
Commercial and industrial		25		461
Consumer		—		80
Non-accruing loans		13,959		16,175
Accruing loans past due 90 days and over		620		90
Non-performing loans		14,579		16,265
Real estate acquired in settlement of loans		—		—
Non-performing assets	$	14,579	$	16,265
The past due status of non-performing loans is as follows:
(in thousands)		June 30, 2016		December 31, 2015
Current	$	2,458	$	4,497
Past due 001-029 days		126		362
Past due 030-059 days		715		306
Past due 060-089 days		75		27
Past due 090-179 days		1,229		1,320
Past due 180 days and over		9,976		9,753
Total non-performing loans	$	14,579	$	16,265

At June 30, 2016, 16.86% of non-performing loans were current with respect to loan payments, compared with 27.65% at December 31, 2015. Loans past due 180 days include a $2.8 million loan secured by vacant land (residential building lots) with respect to which Salisbury initiated a foreclosure action which was completed in the third calendar quarter of 2016, and is discussed further in Item 1 of Part II, Legal Proceedings.

On a combined basis, the five largest non-performing loan relationships account for 49% of the non-performing assets while the combined ten largest loan relationships account for 69% of total non-performing assets. Accordingly, asset quality issues are confined to a small number of relationships and management does not consider them to be systemic. All of the ten largest non-performing relationships are secured by real estate and eight of these are actively moving through the legal process.

Troubled Debt Restructured Loans

Troubled debt restructured loans decreased $0.1 million during the six (6) month period ended June 30, 2016 to $10.5 million, or 1.40% of gross loans receivable at June 30, 2016, from $10.6 million, or 1.50% of gross loans receivable at December 31, 2015.

The components of troubled debt restructured loans are as follows:

(in thousands)		June 30, 2016		December 31, 2015
Residential 1-4 family	$	4,627	$	4,351
Home equity lines of credit		116		118
Personal		—		222
Vacant land		216		122
Commercial		2,524		2,666
Real estate secured		7,483		7,479
Commercial and industrial		60		65
Accruing troubled debt restructured loans		7,543		7,544
Residential 1-4 family		925		1,149
Commercial		2,075		1,554
Real estate secured		3,000		2,703
Commercial and industrial		—		341
Non-accrual troubled debt restructured loans		3,000		3,044
Troubled debt restructured loans	$	10,543	$	10,588
The past due status of troubled debt restructured loans is as follows:
(in thousands)		June 30, 2016		December 31, 2015
Current	$	6,808	$	6,771
Past due 1-29 days		447		453
Past due 30-59 days		—		320
Past due 90-179 days		288		—
Accruing troubled debt restructured loans		7,543		7,544
Current		1,985		1,810
Past due 30-59 days		27		28
Past due 90-179 days		—		1,206
Past due 180 days and over		988		—
Non-accrual troubled debt restructured loans		3,000		3,044
Total troubled debt restructured loans	$	10,543	$	10,588

At June 30, 2016, 83.41% of troubled debt restructured loans were current with respect to loan payments, as compared with 81.04% at December 31, 2015.

Past Due Loans

Loans past due 30 days or more decreased $0.3 million during 2016 to $15.6 million, or 2.06% of gross loans receivable at June 30, 2016, compared with $15.9 million, or 2.26% of gross loans receivable at December 31, 2015.

The components of loans past due 30 days or greater are as follows:

(in thousands)		June 30, 2016		December 31, 2015
Past due 030-059 days	$	1,408	$	3,534
Past due 060-089 days		2,160		966
Past due 090-179 days		620		—
Past due 180 days and over		—		90
Accruing loans		4,188		4,590
Past due 030-059 days		715		306
Past due 060-089 days		75		27
Past due 090-179 days		609		1,319
Past due 180 days and over		9,977		9,662
Non-accrual loans		11,376		11,314
Total loans past due 30 days or greater	$	15,564	$	15,904

Potential Problem Loans

Potential problem loans increased $4.0 million during the first six months of 2016 to $7.3 million, or 0.97% of gross loans receivable at June 30, 2016, compared with $3.3 million, or 0.48% of gross loans receivable at December 31, 2015.

The components of potential problem loans are as follows:

(in thousands)		June 30, 2016		December 31, 2015
Residential 1-4 family	$	543	$	655
Residential 5+ multifamily		—		—
Home equity credit		126		150
Residential real estate		669		805
Commercial real estate		6,048		2,030
Vacant land		—		23
Real estate secured		6,717		2,858
Commercial and industrial		624		478
Consumer		1		6
Other classified loans receivable	$	7,342	$	3,342

The past due status of potential problem loans is as follows:

(in thousands)		June 30, 2016		December 31, 2015
Current	$	6,389	$	2,716
Past due 001-029 days		248		229
Past due 030-059 days		85		150
Past due 060-089 days		620		247
Past due 090-179 days		—		—
Total potential problem loans	$	7,342	$	3,342

At June 30, 2016, 87.01% of potential problem loans were current with respect to loan payments, as compared with 81.27% at December 31, 2015.

Management cannot predict the extent to which economic or other factors may impact such borrowers’ future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Deposits and Borrowings

Deposits remained stable during the six months ended June 30, 2016 at $754.5 million for both June 30, 2016 and December 31, 2015, and increased $33.8 million year-over-year from $720.7 million at June 30, 2015. Retail repurchase agreements decreased $0.5 million during the six months ended June 30, 2016 to $3.4 million compared with $3.9 million at December 31, 2015, and increased $0.6 million for year-over-year compared with $2.8 million at June 30, 2015.

Federal Home Loan Bank of Boston (FHLBB) advances increased $20.1 million during the six months ended June 30, 2016 to $47.1 million at June 30, 2016, from $27.0 million at December 31, 2015, and increased $19.1 million for year-over-year from $28.0 million at June 30, 2015. The increases were used to fund loan growth and were partially offset by amortizing payments of advances and maturities of advances that were not renewed.

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 FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of assets, primarily loans and available-for-sale securities.

Salisbury manages its liquidity in accordance with a liquidity funding policy, and also maintains a contingency funding plan that provides for the prompt and comprehensive response to unexpected demands for liquidity. At June 30, 2016, 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 22.77%, up from 22.67% at December 31, 2015. Management believes Salisbury’s funding sources will meet anticipated funding needs.

Operating activities for the six-month period ended June 30, 2016 provided net cash of $6.5 million. Investing activities used net cash of $55.3 million primarily to fund loan growth of $50.5 million and purchase investments of $32.5 million. Investment activities generated $28.9 million of funds from the sale, principal payments, calls and maturities of securities available-for-sale. Financing activities provided net cash of $18.1 million, principally due to the $20.0 million increase in FHLBB advances. Financing activities also utilized net cash of $1.5 million for the payment of common stock dividends.

At June 30, 2016, Salisbury had outstanding commitments to fund new loan originations of $12.2 million and unused lines of credit of $108.5 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.

RESULTS OF OPERATIONS

For the three month periods ended June 30, 2016 and 2015

OVERVIEW

Net income available to common shareholders was $1.7 million, or $0.63 per common share, for the second quarter ended June 30, 2016 (second quarter 2016), compared with $2.0 million, or $0.74 per common share, for the second quarter ended June 30, 2015 (second quarter 2015).

	•	Earnings Per Share decreased 14.9% to $0.63 for the second quarter 2016 as compared with the $0.74 for the second quarter 2015.
	•	Net Loans increased $20.7 million, or 2.8%, in the second quarter 2016 to $749.5 million versus the first quarter 2016 and increased $71.8 million, or 10.6% versus the second quarter 2015.
	•	Book value per common share increased $0.37 to $33.57 at June 30, 2016 from $33.20 at March 31, 2016, and $1.31 as compared to $32.26 at June 30, 2015.
	•	Tangible book value per common share of $28.28 at June 30, 2016 increased $0.44 from $27.84 at March 31, 2016, and $1.59 as compared to $26.69 at June 30, 2015.

Net Interest Income

Tax equivalent net interest income for second quarter 2016 decreased $101,000, or 1.3%, versus first quarter 2016, and decreased $211,000 or 2.6%, versus second quarter 2015. Average earning assets increased $7.8 million versus first quarter 2016, and increased $42.1 million versus second quarter 2015. Average total interest bearing deposits increased $4.2 million versus first quarter 2016 and increased $8.4 million versus second quarter 2015. The net interest margin of 3.71% decreased 9 basis points versus 3.80% for the first quarter 2016 and decreased 30 basis points versus 4.01% for the second quarter 2015.

Interest income for the second quarter 2016 reflects net accretion related to the fair value adjustments of loans acquired in the Riverside Bank acquisition in the amount of $403,000 ($46,000 net of impairment). The first quarter 2016 and second quarter of 2015 included similar adjustments of $586,000 ($443,000 net of impairment) and $657,000 ($582,000 net of impairment), respectively.

The following table sets forth the components of Salisbury's fully tax-equivalent (“FTE”) net interest income and yields on average interest-earning assets and interest-bearing liabilities.

Three months ended June 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2016		2015		2016		2015		2016		2015
Loans (a)(d)	$	743,479	$	683,166	$	8,121	$	7,953		4.35	%	4.64	%
Securities (c)(d)		76,185		76,791		646		843		3.39		4.39
FHLBB stock		3,392		3,515		29		15		3.42		1.74
Short term funds (b)		24,123		41,578		31		25		0.51		0.24
Total interest-earning assets		847,179		805,050		8,827		8,836		4.16		4.38
Other assets		54,821		61,258
Total assets	$	902,000	$	866,308
Interest-bearing demand deposits	$	122,016	$	118,297		79		77		0.26		0.26
Money market accounts		194,406		172,950		139		115		0.29		0.27
Savings and other		124,975		127,137		56		55		0.18		0.17
Certificates of deposit		124,161		138,792		255		206		0.83		0.59
Total interest-bearing deposits		565,558		557,176		529		453		0.38		0.33
Repurchase agreements		2,824		3,803		1		2		0.14		0.21
Note payable		366		—		6		—		6.56		—
Subordinated debt		9,773		—		156		—		6.38		—
Capital lease		420		423		17		17		16.19		16.08
FHLBB advances		37,548		28,142		245		280		2.61		3.98
Total interest-bearing liabilities		616,489		589,544		954		752		0.62		0.51
Demand deposits		183,953		164,372
Other liabilities		9,367		8,380
Shareholders’ equity		92,191		104,012
Total liabilities & shareholders’ equity	$	902,000	$	866,308
Net interest income					$	7,873	$	8,084
Spread on interest-bearing funds										3.54		3.87
Net interest margin (e)										3.71		4.01

	(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 benefit of $314,000 and $291,000, respectively, for 2016 and 2015 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis.
	(e)	Net interest income divided by average interest-earning assets.

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

Three months ended June 30, (in thousands)	2016 versus 2015
Change in interest due to		Volume			Rate			Net
Interest-earning assets
Loans	$	681		($	513	)	$	168
Securities		(6	)		(191	)		(197	)
FHLBB stock		(1	)		15			14
Short term funds		(17	)		23			6
Total		657			(666	)		(9	)
Interest-bearing liabilities
Deposits		(10	)		86			76
Repurchase agreements		—			(1	)		(1	)
Note payable		4			2			6
Subordinated debt		78			78			156
Capital lease		—			—			—
FHLBB advances		78			(113	)		(35	)
Total		150			52			202
Net change in net interest and dividend income	$	507		($	718	)	($	211	)

Interest Income
Interest income (FTE) on loans increased $168,000 due to the $60.3 million or 8.8% increase in average volume to $743.5 million for the second quarter of 2016 compared to $683.2 million for the second quarter of 2015. The favorable impact on interest income (FTE) of the average loan growth was partially offset by the 29 basis point decrease in the loan yield from 4.64% for the second quarter of 2015 to 4.35% for the second quarter of 2016. Interest income (FTE) on securities decreased $197,000 due primarily to the 100 basis point decrease in yield from 4.39% for the second quarter of 2015 to 3.39% for the second quarter of 2016. The decrease in the yield of securities reflects the replacement of securities at lower rates than those securities which matured, prepaid or were called.

Interest Expense
Interest expense increased $202,000 or 26.9% from $752,000 for the second quarter of 2015 to $954,000 for the second quarter of 2016. Interest expense on the subordinated debt issued in December 2015 was $156,000 for the second quarter of 2016 as compared to no such expense in the second quarter of 2015. The issuance of this debt, along with cash on hand, was used to fully redeem $16.0 million of outstanding Series B Preferred Stock, which was issued pursuant to the participation in the U. S. Treasury‘s SBLF program. Interest expense on interest bearing deposits increased $76,000 or 16.8% from $453,000 for the second quarter of 2015 to $529,000 for the second quarter of 2016. The increase in interest expense on interest bearing deposits was due to the 5 basis point increase in the average rate from 0.33% to 0.38% due to higher interest rates paid on interest bearing deposits and the change in product mix. The average volume of interest bearing deposits increased $8.4 million or 1.51% increase from $557.2 million for the second quarter of 2015 to $565.6 million for the second quarter of 2016. Interest expense on FHLB borrowings decreased $35,000 or 12.5% as the cost of these funds decreased 137 basis points from 3.98% for the second quarter of 2015 to 2.61% for the second quarter of 2016. The decrease in the average rate is attributable to the increase in short term advances, which on average are at significantly lower rates than longer term advances. The favorable impact on interest expense of the decrease the average rate on these borrowings was partially offset by the $9.4 million or 33.4% increase in the average volume of these borrowings to support loan growth.

The $19.6 million or 11.9% increase in the average volume of non-interest bearing demand deposits for the second quarter of 2016 compared to the second quarter of 2015 and the $26.9 million or 4.6% increase in interest bearing liabilities were used to support the increased average loan growth.

Provision and Allowance for Loan Losses

The provision for loan losses was $525,000 for second quarter 2016, compared with $196,000 for second quarter 2015. Included in the provision are impairments related to ASC 310-30 purchased loans of $357,000 and $75,000 for the second quarter of 2016 and 2015, respectively. Net loan charge-offs were $684,000 and $320,000 for the respective quarters.

The following table details the principal categories of credit quality ratios:

Three months ended June 30,	2016		2015
Net charge-offs to average loans receivable, gross	0.37	%	0.19	%
Non-performing loans to loans receivable, gross	1.93		2.16
Accruing loans past due 30-89 days to loans receivable, gross	0.47		0.41
Allowance for loan losses to loans receivable, gross	0.76		0.74
Allowance for loan losses to non-performing loans	39.22		34.35
Non-performing assets to total assets	1.60		1.74

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, increased to 0.76% at June 30, 2016 compared to 0.74% at June 30, 2015.

During the second quarter of 2016, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) amounted to $14.6 million, which represents a decline at 1.93% of gross loans receivable at June 30, 2016 compared to 2.16% at June 30, 2015. Accruing loans past due 30-89 days increased $0.8 million to $3.6 million, or 0.47% of gross loans receivable from 0.41% at June 30, 2015. See “Financial Condition – Loan Credit Quality” above for further discussion and analysis.

The allowance for loan losses represents management’s estimate of the probable credit losses inherent in the loan portfolio as of the reporting date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by loan charge-offs. Loan charge-offs are recognized when management determines a loan, or portion of a loan, to be uncollectible. The allowance for loan losses is computed by segregating the portfolio into three components: (1) loans collectively evaluated for impairment: general loss allocation factors for non-impaired loans are segmented into pools of loans based on similar risk characteristics such as loan product, collateral type and loan-to-value, loan risk rating, historical loss experience, delinquency factors and other similar economic indicators, (2) loans individually evaluated for impairment: individual loss allocations for loans deemed to be impaired based on discounted cash flows or collateral value, and (3) unallocated: general loss allocations for other environmental factors.

Impaired loans and certain potential problem loans, when warranted, are individually evaluated for impairment. Impairment is measured for each individual loan, or for a borrower’s aggregate loan exposure, using either the fair value of the collateral, less estimated costs to sell if the loan is collateral dependent, or the present value of expected future cash flows discounted at the loan’s effective interest rate. A specific allowance is generally established when the collateral value or discounted cash flows of the loan is lower than the carrying value of that loan.

The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and then applying management’s general loss allocation factors. The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment. There were no significant changes in Salisbury’s policies or methodology pertaining to the general component of the allowance for loan losses during the first six months of 2016.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. It reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. Additionally reserves are established for off balance sheet exposures.

Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans 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, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at June 30, 2016.

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, the Bank is examined annually on a rotational basis by one of its two primary regulatory agencies, the FDIC and CTDOB. As an integral part of their examination process, the FDIC and CTDOB review the adequacy and methodology of the Bank's credit risk ratings and allowance for loan losses.

Non-Interest Income

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

Three months ended June 30, (dollars in thousands)		2016		2015		2016 vs. 2015
Trust and wealth advisory fees	$	884	$	890	$	(6	)	(0.67)	%
Service charges and fees		785		778		7		0.90	%
Gains on sales of mortgage loans, net		57		87		(30	)	(34.48)	%
Mortgage servicing, net		21		20		1		5.00	%
Gains on sales and calls of available-for-sale securities, net		146		11		135		1,227.27	%
Other		116		114		2		1.75	%
Total non-interest income	$	2,009	$	1,900	$	109		5.74	%

Non-interest income for second quarter 2016 increased $109,000 versus second quarter 2015. Trust and wealth advisory revenues decreased $6,000 versus second quarter 2015. Service charges and fees increased $7,000 versus second quarter 2015. The second quarter increase was a result of higher fees due to increased transactional volume, mainly attributable to interchange fees. Income from sales and servicing of mortgage loans decreased $29,000 versus second quarter 2015 due to a lower volume of mortgages sold and a decrease in servicing values as a result of a decline in the discount rate. Second quarter 2016 mortgage loan sales totaled $2.5 million versus $3.0 million for second quarter 2015. Second quarter 2016, and second quarter 2015 included mortgage servicing amortization and periodic impairment charges (net) of $65,000, and $71,000, respectively. Gain on sales and calls of securities for the second quarter 2016, and second quarter 2015 totaled $146,000 and $11,000, respectively. Other income includes bank owned life insurance income and rental income.

Non-Interest Expense

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

Three months ended June 30, (dollars in thousands)		2016		2015		2016 vs. 2015
Salaries	$	2,687	$	2,449	$	238		9.72	%
Employee benefits		910		960		(50	)	(5.21)	%
Premises and equipment		844		913		(69	)	(7.56)	%
Data processing		449		398		51		12.81	%
Professional fees		564		593		(29	)	(4.89)	%
Collections, OREO and loan related		125		228		(103	)	(45.18)	%
FDIC insurance		176		133		43		32.33	%
Marketing and community support		180		180		—		0.00	%
Amortization of intangible assets		152		164		(12	)	(7.32)	%
Other		552		522		30		5.75	%
Non-interest expense	$	6,639	$	6,540	$	99		1.51	%

Non-interest expense for second quarter 2016 increased $99,000 versus second quarter 2015. Total compensation expense increased $188,000 versus second quarter 2015, which reflects increased staffing levels, market and merit adjustments. Premises and equipment expense decreased $69,000 versus second quarter 2015. The year-over-year decrease is mainly related to lower fuel, utilities, and building repair costs. Data processing increased $51,000 versus second quarter 2015. The increase is mainly due to expenses related to a terminated contract and imaging set-up fees. Loan related expenses decreased $103,000 versus second quarter 2015 mainly due to the write-down of OREO properties in second quarter 2015. Professional fees decreased $29,000 versus second quarter 2015. Second quarter 2016 included third party imaging, trust and wealth advisory client related tax preparation fees and increased loan review fees. Other expense increased $30,000 versus second quarter 2015 primarily as a result of expenses related to loans serviced for others.

Income Taxes

The effective income tax rates for second quarter 2016, first quarter 2016 and second quarter 2015 were 27.83%, 25.86% and 29.93%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury’s effective tax rate is generally less than the 34% federal statutory rate due to holdings of tax-exempt municipal bonds, some tax-exempt loans and bank owned life insurance.

Salisbury did not incur Connecticut income tax in 2016 (to date) or 2015, 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 the Bank 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, 2016 and 2015

Overview

Net income available to common shareholders was $3.2 million, or $1.18 per common share, for the six month period ended June 30, 2016 (six month period 2016), compared with $4.2 million, or $1.55 per common share, for the six month period ended June 30, 2015 (six month period 2015).

	•	During the six (6) month period ended June 30, 2016, total shareholders’ equity increased to $92.6 million from $90.6 million at December 31, 2015.

	•	Net Loans increased $50.5 million, or 7.2%, in the first six months of 2016 to $749.5 million and increased $71.8 million, or 10.6% versus the second quarter 2015.

	•	Book value per common share increased $0.44 to $33.57 at June 30, 2016 from $33.13 at December 31, 2015, and $1.31 as compared to $32.26 at June 30, 2015.

	•	Tangible book value per common share of $28.28 at June 30, 2016 increased $0.59 from $27.69 at December 31, 2015, and $1.59 as compared to $26.69 at June 30, 2015.

Net Interest Income

Tax equivalent net interest income for the six month period ended June 30, 2016 decreased $440,000, or 2.7%, versus the six month period ended June 30, 2015. The net interest margin decreased 29 basis points to 3.77% from 4.06%.

The following table sets forth the components of Salisbury's fully tax-equivalent (“FTE”) net interest and dividend income and yields on average interest-earning assets and interest-bearing liabilities.

Six months ended June 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2016		2015		2016		2015		2016		2015
Loans (a)(d)	$	732,548	$	682,225	$	16,220	$	15,982		4.41	%	4.68	%
Securities (c)(d)		74,575		80,553		1,402		1,765		3.76		4.38
FHLBB stock		3,274		3,515		56		31		3.43		1.76
Short term funds (b)		32,871		37,204		78		42		0.48		0.23
Total interest earning assets		843,268		803,497		17,756		17,820		4.20		4.43
Other assets		56,950		61,169
Total assets	$	900,218	$	864,666
Interest-bearing demand deposits	$	123,874	$	117,748		156		152		0.25		0.26
Money market accounts		191,787		173,108		273		229		0.29		0.27
Savings and other		124,137		127,128		109		109		0.18		0.17
Certificates of deposit		123,684		140,173		499		407		0.81		0.58
Total interest-bearing deposits		563,482		558,157		1,037		897		0.37		0.32
Repurchase agreements		2,953		3,606		2		3		0.15		0.17
Note payable		370		—		11		—		5.95		0.00
Subordinated debt		9,770		—		312		—		6.38		0.00
Capital lease		420		423		35		35		16.67		16.57
FHLBB advances		32,275		28,342		476		562		2.95		3.95
Total interest-bearing liabilities		609,270		590,528		1,873		1,497		0.62		0.51
Demand deposits		190,082		162,359
Other liabilities		9,148		8,227
Shareholders’ equity		91,718		103,552
Total liabilities & shareholders’ equity	$	900,218	$	864,666
Net interest and dividend income					$	15,883	$	16,323
Spread on interest-bearing funds										3.58		3.92
Net interest margin (e)										3.77		4.06

(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 benefit of $665,000 and $604,000, respectively for 2016 and 2015 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis.

(e)

Net interest income divided by average interest-earning assets.

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

Six months ended June 30, (in thousands)	2016 versus 2015
Change in interest due to		Volume			Rate			Net
Interest-earning assets
Loans	$	1,147		($	909	)	$	238
Securities		(122	)		(241	)		(363	)
FHLBB stock		(3	)		28			25
Short term funds		(8	)		44			36
Total		1,014			(1,078	)		(64	)
Interest-bearing liabilities
Deposits		(26	)		166			140
Repurchase agreements		—			(1	)		(1	)
Note payable		6			5			11
Subordinated debt		156			156			312
Capital lease		—			—			—
FHLBB advances		68			(154	)		(86	)
Total		204			172			376
Net change in net interest and dividend income	$	810		($	1,250	)	($	440	)

Interest Income

Interest income (FTE) on loans increased $238,000 or 1.5% due to the $50.3 million or 7.4% increase in average volume from $682.2 million for the six months of 2015 compared to $732.5 million for the six months of 2016. The favorable impact on interest income (FTE) due to the increase in the average loan growth was partially offset by the 27 basis point decrease in the loan yield on a tax equivalent basis from 4.68% for the six months of 2015 to 4.41% for the six months of 2016. Interest income (FTE) on securities decreased $363,000 due both to the $6.0 million or 7.4% decrease in average volume and the 62 basis point reduction in average yield from 4.38% for the six months of 2015 to 3.76% for the six months of 2016. The decrease in the yield on securities reflects the replacement of securities at lower rates than those securities which matured, prepaid or were called.

Interest Expense

Interest expense increased $376,000 or 25.1% from $1,497,000 for the six months of 2015 to $1,873,000 for the six months of 2016. Interest expense on the subordinated debt issued in December 2015 was $312,000 for the six months of 2016 as compared to no such expense in the six months of 2015. The issuance of this debt, along with cash on hand, was used to fully redeem $16.0 million of outstanding Series B Preferred Stock, which was issued pursuant to the participation in the U. S. Treasury‘s SBLF program. Interest expense on interest bearing deposits increased $140,000 or 15.6% from $897,000 for the six months of 2015 to $1,037,000 for the six months of 2016. The increase in interest expense on interest bearing deposits was due to the 5 basis point increase in the average rate of these deposits from 0.32% to 0.37% resulting from the higher interest rates paid on interest bearing deposits and the change in product mix. The average volume of interest bearing deposits increased $5.3 million or 0.95% from $558.2 million for the six months of 2015 to $563.5 million for the six months of 2016. Interest expense on FHLB borrowings decreased $86,000 or 15.3% as the cost of these funds decreased 100 basis points from 3.95% for the six months of 2015 to 2.95% for the six months of 2016. The decrease in the average rate is attributable to the increase in short term advances, which on average, are at significantly lower rates than longer term advances The decrease also reflects a third quarter 2015 advance modification on $21.0 million of advances, in accordance with ASC 470-50, which extended maturities to a weighted average 39 months and lowered the effective rate. The favorable impact on interest expense due to the lower rate on these borrowings was partially offset by the $3.9 million or 13.9% increase in average volume.

The $27.7 million or 17.1% increase in the average volume of non-interest bearing demand deposits and the $18.7 million or 3.2% increase in the average volume of interest bearing liabilities for the six months of 2016 compared to the six months of 2015 were used to help fund the $50.3 milion or 7.4% increase in the average loan volume over this same period.

Provision and Allowance for Loan Losses

The provision (benefit) for loan losses was $988,000 for the six month period ended June 30, 2016 and ($4,000) for the six month period ended June 30, 2015. Included in the provision are impairments related to ASC 310-30 purchased loans of $500,000 and $75,000 for the six months ended June 30, 2016 and 2015, respectively. Net loan charge-offs were $986,000 and $296,000 for the respective periods.

Reserve coverage at June 30, 2016, as measured by the ratio of allowance for loan losses to gross loans, at 0.76%, compares with 0.74% a year ago at June 30, 2015. During the first six months of 2016, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $1.7 million to $14.6 million. Such amount represents 1.93% of gross loans receivable, a decrease from 2.31% at December 31, 2015. At June 30, 2016, accruing loans past due 30-89 days decreased $0.9 million to $3.6 million or 0.47% of gross loans receivable from 0.64% at December 31, 2015. See “Financial Condition – Loan Credit Quality” for further discussion and analysis.

Non-interest income

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

Six months ended June 30, (dollars in thousands)		2016		2015			2016 vs. 2015
Trust and wealth advisory fees	$	1,668	$	1,712		$	(44	)	(2.57)	%
Service charges and fees		1,515		1,509			6		0.40	%
Gains on sales of mortgage loans, net		96		181			(85	)	(46.96)	%
Mortgage servicing, net		33		(20	)		53		265.00	%
Gains on sales and calls of available-for-sale securities, net		148		186			(38	)	(20.43)	%
Other		233		228			5		2.19	%
Total non-interest income	$	3,693	$	3,796		$	(103	)	(2.71)	%

Non-interest income for the six month period ended June 30, 2016 decreased $103,000 versus the same period in 2015. Trust and wealth advisory revenues decreased $44,000 mainly due to fewer estate fees collected in 2016 and partially offset by higher asset management fees. Service charges and fees increased $6,000. Income from sales and servicing of mortgage loans decreased $32,000 due to the volume of fixed rate residential mortgage loan sales and mortgage servicing valuations. Mortgage loans sales totaled $4.2 million for the six month period ended June 30, 2016 and $5.1 million for the six month period ended June 30, 2015. The six month periods ended June 30, 2016 and 2015 included mortgage servicing amortization of $116,000 and $197,000, respectively. Other income includes bank owned life insurance income and rental income.

Non-interest expense

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

Six months ended June 30, (dollars in thousands)		2016		2015		2016 vs. 2015
Salaries	$	5,261	$	4,989	$	272		5.45	%
Employee benefits		1,998		1,965		33		1.68	%
Premises and equipment		1,739		1,821		(82	)	(4.50)	%
Data processing		896		872		24		2.75	%
Professional fees		944		1,243		(299	)	(24.05)	%
Collections, OREO and loan related		311		472		(161	)	(34.11)	%
FDIC insurance		310		331		(21	)	(6.34)	%
Marketing and community support		380		290		90		31.03	%
Amortization of intangible assets		307		333		(26	)	(7.81)	%
Other		1,334		1,059		275		25.97	%
Non-interest expense	$	13,480	$	13,375	$	105		0.79	%

Non-interest expense for the six month period ended June 30, 2016 increased $105,000 versus the same period in 2015. Salaries and benefits increased $305,000 primarily due to increased staffing levels, market and merit adjustments. Premises and equipment decreased $82,000 mainly due to lower fuel, utilities, and building repair costs. Data processing increased $24,000 mainly due to expenses related to a terminated contract and imaging set-up fees. Professional fees decreased $299,000 versus second quarter 2015 fees, which included due diligence on core data processing providers, IT support and the reclassification of trust tax filings from data processing to consulting. Collections, OREO and loan related expense decreased $161,000 due primarily to write-down of OREO in 2015. Salisbury had two foreclosed properties at June 30, 2015 and none at June 30, 2016. FDIC insurance decreased $21,000 due to a refund of a 2015 overpayment. Marketing and community support increased $90,000 due primarily to an increase in contributions and general marketing campaigns. Amortization of intangible assets decreased $26,000 due to the completion of the People’s branch amortization. Other expenses increased $275,000 mainly due to expenses related to loans serviced for others.

Income taxes

The effective income tax rates for the six month periods ended June 30, 2016 and June 30, 2015 were 26.92% and 29.92%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury’s effective tax rate is generally less than the 34% federal statutory rate due to holdings of tax-exempt municipal bonds, tax-exempt loans and bank owned life insurance.

CAPITAL RESOURCES

Shareholders’ equity was $92.6 million at June 30, 2016, up $2.0 million from December 31, 2015. Book value and tangible book value per common share were $33.57 and $28.28, respectively, compared with $33.13 and $27.69, respectively, at December 31, 2015. Contributing to the increase in shareholders’ equity for year-to-date 2016 was net income of $3.2 million and issued stock of $0.3 million, partially offset by other common stock dividends of $1.5 million. Accumulated other comprehensive income consists of unrealized gains on securities available-for-sale, net of tax, of $1.1 million as of June 30, 2016.

In August 2011, Salisbury issued to the Treasury $16 million of its Series B Preferred Stock under the SBLF program. The SBLF program is a $30 billion fund established under the Small Business Jobs Act of 2010 to encourage lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. The Preferred Stock qualified as Tier 1 capital for regulatory purposes and ranked senior to the Common Stock.

The Series B Preferred Stock paid noncumulative dividends. The dividend rate on the Series B Preferred Stock for the initial quarterly dividend period ended September 30, 2011, and each of the next nine quarterly dividend periods the Series B Preferred Stock was outstanding, was determined each quarter based on the increase in the Bank’s Qualified Small Business Lending. The dividend rate for the quarterly dividend period ended December 31, 2015, was 1.0%. For the eleventh quarterly dividend period through four and one-half years after its issuance, the dividend rate on the Series B Preferred Stock was 1.0% and after four and one-half years from its issuance the dividend rate would have been fixed at 9.0% per annum. In December 2015, Salisbury issued $10 million of subordinated debentures and used the proceeds along with other cash-on-hand to redeem all of the Series B Preferred Stock.

On February 16, 2016, 1,350 shares of stock options were exercised at $21.48 per share by one former Riverside Bank executive.

On January 26, 2016, 2,700 shares of stock options were exercised at $21.48 per share by two former Riverside Bank executives.

On September 28, 2015, 2,700 shares of stock options were exercised at $21.48 per share by one former Riverside Bank executive.

On February 17, 2015 and February 25, 2015, 1,350 and 5,400 shares of stock options were exercised, respectively, at $18.52 per share by two former Riverside Bank executives.

On January 29, 2016, Salisbury granted a total of 15,800 shares of restricted stock pursuant to its 2011 Long Term Incentive Plan, which was approved by shareholders at the 2011 Annual Meeting, to 42 employees, including 6,000 shares to three Named Executive Officers. Richard J. Cantele, Jr., President and Chief Executive Officer received 5,000 and John Davies, President New York Region and Chief Lending Officer and Donald E. White, Chief Financial Officer each received 500 shares. The fair value of the stock as of the grant date was determined to be $466,000 and the stock will be vested three years from the grant date.

Capital Requirements

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’s 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.

Salisbury and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. 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.

Under current regulatory definitions, Salisbury and the Bank meet all capital adequacy requirements to which they are subject and the Bank is considered to be well-capitalized. As a result, the Bank pays lower federal deposit insurance premiums than those banks that are not “well- capitalized.” Requirements for classification as a well-capitalized institution and for minimum capital adequacy along with Salisbury’s and the Bank's regulatory capital ratios are as follows:

	June 30, 2016					December 31, 2015
		Salisbury		Bank			Salisbury		Bank
Total Capital (to risk-weighted assets)		13.08	%	12.70	%		13.51	%	13.10	%
Tier 1 Capital (to risk-weighted assets)		10.86		11.87			11.17		12.23
Common Equity Tier 1 Capital (to risk-weighted assets)		10.86		11.87			11.17		12.23
Tier 1 Capital (to average assets)		8.77		9.58			8.56		9.37

A well-capitalized institution, which is the highest capital category for an institution as defined by the Prompt Corrective Action 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 8% or above, a Common Equity to Tier 1 ratio of 6.5% 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.

The FRB and FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for bank holding companies and their bank subsidiaries. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Bank and Company. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer was initially phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each subsequent year by an additional 0.625% until reaching its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

As of June 30, 2016, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s category.

Dividends

During the six month period ended June 30, 2016, Salisbury paid $1,542,000 in common stock dividends.

On July 29, 2016, the Board of Directors of Salisbury declared a common stock dividend of $0.28 per common share payable on August 26, 2016 to shareholders of record on August 12, 2016. Common stock dividends, when declared, will generally be paid the last Friday 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 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.

FRB Supervisory Letter SR 09-4, February 24, 2009, revised December 31, 2015, states 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 Federal Reserve 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 position.

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 and related notes thereto presented elsewhere in this Form 10-Q are prepared in conformity with GAAP, which 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 some other types of companies, the financial nature of Salisbury’s consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect Salisbury to some extent because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. There is no precise method, however, to measure the effects of inflation on Salisbury’s consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation. 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 the 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 Reform 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 affect the operation, performance, development and results of Salisbury’s and the 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 the Bank through increased operating expenses;

(c)

increased competition from other financial and non-financial institutions;

(d)

the impact of technological advances and cybersecurity matters;

(e)

interest rate fluctuations; and

(f)

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 DISCLOSURES ABOUT 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 a negative impact 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. In management’s June 30, 2016 analysis, three of the simulations incorporate static 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. The fourth simulation incorporates management’s balance sheet growth assumptions. 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 vary 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.

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, 2016, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates – immediate parallel upward shift in market interest rates ranging from 300 basis points for short term rates to 300 basis points for the 10-year Treasury; (3) immediately falling interest rates – immediate non-parallel downward shift in market interest rates ranging from 57 basis points for short term rates to 107 basis points for the 10-year Treasury; and (4) immediately rising interest rates – immediate parallel upward shift in market interest rates ranging from 200 basis points for short term rates to 200 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. Income simulations do not reflect adjustments in strategy that the ALCO could implement in response to rates. As of June 30, 2016, 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, 2016:

As of June 30, 2016	Months 1-12		Months 13-24
Immediately rising interest rates (static growth assumptions)	(7.04	)%	1.91	%
Immediately falling interest rates (static growth assumptions)	(1.48	)	(3.80	)
Immediately rising interest rates (static growth with assumption sensitivity stress testing)	(3.88	)	2.72

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 Salisbury’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The assumed relationship between short-term interest rate changes and core deposit rate and balance changes used in income simulation may differ from the ALCO’s estimates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.

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

The following table summarizes the potential change in market value of available-for-sale debt securities resulting from immediate parallel rate shifts:

As of June 30, 2016 (in thousands)		Rates up 100bp			Rates up 200bp
U.S. Treasury notes	$	(14	)	$	(27	)
U.S. Government agency notes		—			—
Municipal bonds		(296	)		(552	)
Mortgage backed securities		(698	)		(1,762	)
Collateralized mortgage obligations		(101	)		(216	)
SBA pools		(6	)		(12	)
Other		(85	)		(160	)
Total available-for-sale debt securities	$	(1,200	)	$	(2,729	)

Item 4.

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 Salisbury’s disclosure controls and procedures as of June 30, 2016. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of June 30, 2016.

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, as amended (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 principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

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, 2016 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 involved in various claims and legal proceedings, which are not material, arising in the ordinary course of business.

As previously disclosed, the Bank, individually and in its capacity as a former Co-Trustee of the Erling C. Christophersen Revocable Trust (the “Trust”), was named as a defendant in litigation filed in the Connecticut Complex Litigation Docket in Stamford, captioned John Christophersen v. Erling Christophersen, et al., X08-CV-08-5009597S (the “First Action”). The Bank also was a counterclaim-defendant in related mortgage foreclosure litigation in the Connecticut Complex Litigation Docket in Stamford, captioned Salisbury Bank and Trust Company v. Erling C. Christophersen, et al., X08-CV-10-6005847-S (the “Foreclosure Action,” together with the First Action, the “Actions”). The other parties to the Actions were John R. Christophersen; Erling C. Christophersen, individually and as Co-Trustee of the Trust; Bonnie Christophersen and Elena Dreiske, individually and as Co-Trustees of the Mildred B. Blount Testamentary Trust; People’s United Bank; Law Offices of Gary Oberst, P.C.; Rhoda Rudnick; and Hinckley Allen & Snyder LLP.

The Actions involved a dispute over title to certain real property located in Westport, Connecticut that was conveyed by Erling Christophersen, as grantor, to the Trust on or about August 8, 2007. Subsequent to this conveyance, the Bank loaned $3,387,000 to the Trust, which was secured by a commercial mortgage in favor of the Bank on the Westport property. This mortgage was the subject of the Foreclosure Action brought by the Bank.

Following several years of litigation, the parties submitted briefs to the Appellate Court and oral arguments were heard on January 7, 2016. On March 1, 2016, the Appellate Court affirmed the trial court’s judgment and remanded the case for the setting of new Law Days. Subsequently, the defendant filed an application for review with the Connecticut Supreme Court, which denied Mr. Christophersen’s Petition For Certification on March 23, 2016. The defendant filed motions to open the Judgment which the Bank opposed.

On March 31, 2016 the bank filed a Motion to Set New Law Days and Update Debt in accordance with the order of the Appellate Court, which denied the defendant’s appeal.

The Connecticut Supreme Court denied certiorari and the Bank subsequently took title to the property and filed a Deed of Foreclosure on August 8, 2016. The property is now in OREO held for sale. At this time, given the appraised value and current market conditions, there was no write-down required upon the transfer of this property into OREO.

There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the registrant’s business, to which Salisbury is a party or of which any of its property is subject.

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.	MINE SAFETY DISCLOSURES
	Not Applicable

Item 5.	OTHER INFORMATION
	None

Item 6.

EXHIBITS

3.1

Certificate of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Registrant’s 1998 Registration Statement on Form S-4 filed April 23, 1998, File No.: 33-50857).

3.1.1

Amendment to Article Third of Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed March 11, 2009).

3.1.2

Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed March 19, 2009).

3.1.3

Certificate of Amendment to Certificate of Incorporation for the Series B Preferred Stock (incorporated by reference to Registrant’s Form 8-K filed on August 25, 2011).

3.1.4

Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed October 30, 2014).

3.2

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014).

4.1

Form of Subordinated Note, dated as of December 10, 2015, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1 of Registrant’s Form 8-K filed December 10, 2015).

10.2

2011 Long Term Incentive Plan adopted by the Board on March 25, 2011 and approved by the shareholders at Salisbury’s 2011 Annual Meeting (incorporated by reference to Exhibit 10.9 of Registrant’s Annual Report on Form 10-K filed March 19, 2012).

10.3

Amendment Number One to 2011 Long Term Incentive Plan dated as of January 18, 2013 (incorporated by reference to Exhibit 10.10 of Registrant’s Annual Report on Form 10-K filed March 7, 2013).

10.4

Severance Agreement between Salisbury Bank and Trust and Mr. Richard J. Cantele, Jr. effective as of January 1, 2013 (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed February 15, 2013).

10.5

Non-qualified Deferred Compensation Plan effective as of January 1, 2013 (incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed February 15, 2013).

10.6

Change in Control Agreement with Donald E. White dated April 1, 2013 (incorporated by reference to Exhibit 10.3 of Form 10-Q filed May 14, 2013).

10.7

Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.14 of Form 10-K filed March 28, 2014).

10.8

Salisbury Bancorp, Inc. 2015 Phantom Stock Appreciation Unit and Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Form 8-K filed January 2, 2015).

10.9

Amendment Number One to Salisbury Bancorp, Inc. 2015 Phantom Stock Appreciation Unit and Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Form 8-K filed January 30, 2015).

10.10

Amendment Number Two to 2011 Long Term Incentive Plan dated as of January 29, 2016 (incorporated by reference to Exhibit 10.12 of Registrant’s Annual Report on Form 10-K filed March 30, 2016).

10.11

Form of Split-dollar Life Insurance Agreements with Senior Executive Officers (incorporated by reference to Exhibit 10.13 of Registrant’s Form 10-K filed March 30, 2016).

10.12

Employment Agreement with John M. Davies (incorporated by reference to Exhibit 10.13 of Registrant’s Form 10-K filed March 30, 2016).

10.13

Form of Subordinated Note Purchase Agreement, dated as of December 10, 2015, between Salisbury Bancorp, Inc. and the Purchasers identified therein. (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed December 10, 2015).

31.1

Chief Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Chief Financial Officer Certification Pursuant to 17 CF 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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 12, 2016	By:	/s/ Richard J. Cantele, Jr.
		Richard J. Cantele, Jr.,
		President and Chief Executive Officer

August 12, 2016	By:	/s/ Donald E. White
		Donald E. White,
		Executive Vice President and Chief Financial Officer