NOTE 3 - LOANS

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

(in thousands)	June 30, 2011			December 31, 2010
Residential 1-4 family	$	182,764		$	173,931
Residential 5+ multifamily		3,068			2,889
Construction of residential 1-4 family		8,046			8,949
Home equity credit		33,657			34,164
Residential real estate		227,535			219,933
Commercial		79,976			75,495
Construction of commercial		4,502			7,312
Commercial real estate		84,478			82,807
Farm land		5,767			5,690
Vacant land		12,687			12,979
Real estate secured		330,467			321,409
Commercial and industrial		30,060			25,123
Municipal		2,768			4,338
Consumer		4,599			4,677
Loans receivable, gross		367,894			355,547
Deferred loan origination fees and costs, net		939			822
Allowance for loan losses		(3,979	)		(3,920	)
Loans receivable, net	$	364,854		$	352,449
Loans held-for-sale
Residential 1-4 family	$	146		$	1,184

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in northwestern Connecticut and nearby New York and Massachusetts towns, which constitute Salisbury's service area. Salisbury offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, equipment loans, and a variety of consumer loans, including home equity lines of credit, and installment and collateral loans. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability of single family residential mortgage loan and consumer loan 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.

Credit Quality

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

June 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Residential 1-4 family	$	163,345	$	13,210	$	6,209	$	-	$	-	$	182,764
Residential 5+ multifamily		2,538		530		-		-		-		3,068
Construction of residential 1-4 family		3,971		416		3,659		-		-		8,046
Home equity credit		30,960		1,465		1,232		-		-		33,657
Residential real estate		200,814		15,621		11,100		-		-		227,535
Commercial		60,896		6,101		12,979		-		-		79,976
Construction of commercial		3,840		191		471		-		-		4,502
Commercial real estate		64,736		6,292		13,450		-		-		84,478
Farm land		3,139		1,779		849		-		-		5,767
Vacant land		7,603		894		4,190		-		-		12,687
Real estate secured		276,292		24,586		29,589		-		-		330,467
Commercial and industrial		20,030		8,315		1,715		-		-		30,060
Municipal		2,768		-		-		-		-		2,768
Consumer		4,330		196		73		-		-		4,599
Loans receivable, gross	$	303,420	$	33,097	$	31,377	$	-	$	-	$	367,894

Credit quality segments of loans receivable by risk rating grade are as follows:

June 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Performing loans	$	303,151	$	33,097	$	-	$	-	$	-	$	336,248
Potential problem loans		-		-		15,154		-		-		15,154
Troubled debt restructurings – accruing		269		-		1,661		-		-		1,930
Troubled debt restructuring - non-accrual		-		-		7,691		-		-		7,691
All other non-accrual loans		-		-		6,871		-		-		6,871
Impaired loans		269		-		16,223		-		-		16,492
Loans receivable, gross	$	303,420	$	33,097	$	31,377	$	-	$	-	$	367,894

Potential problem loans are performing loans risk rated substandard that are not classified as impaired. Impaired loans are 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.

The components of impaired loans are as follows:

(in thousands)	June 30, 2011		December 31, 2010
Troubled debt restructurings – accruing	$	1,930	$	5,330
Troubled debt restructuring - non-accrual		7,691		4,254
All other non-accrual loans		6,871		5,791
Impaired loans	$	16,492	$	15,375
Commitments to lend additional amounts to impaired borrowers	$	-	$	-

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

June 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Current	$	301,609	$	30,228	$	20,121	$	-	$	-	$	351,958
Past due 001-029		1,726		1,950		3,571		-		-		7,247
Past due 030-059		69		731		376		-		-		1,176
Past due 060-089		16		188		925		-		-		1,129
Past due 090-179		-		-		1,038		-		-		1,038
Past due 180+		-		-		5,346		-		-		5,346
Loans receivable, gross	$	303,420	$	33,097	$	31,377	$	-	$	-	$	367,894

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

			Past due
June 30, 2011 (in thousands)	Current		1-29 days		30-59 days		60-89 days		90-179 days		180 days and over		30 days and over		Accruing 90 days and over		Non- accrual
Residential 1-4 family	$	176,930	$	3,748	$	445	$	303	$	504	$	834	$	2,086	$	-	$	6,288
Residential 5+ multifamily		2,794		-		274		-		-		-		274		-		-
Residential 1-4 family construction		8,046		-		-		-		-		-		-		-		-
Home equity credit		32,850		645		37		86		14		24		161		-		200
Residential real estate		220,620		4,393		756		389		518		858		2,521		-		6,488
Commercial		76,815		1,717		283		125		495		541		1,444		-		3,134
Construction of commercial		4,482		21		-		-		-		-		-		-		-
Commercial real estate		81,297		1,738		283		125		495		541		1,444		-		3,134
Farm land		5,334		433		-		-		-		-		-		-		-
Vacant land		8,645		16		64		565		-		3,397		4,026		-		3,933
Real estate secured		315,896		6,580		1,103		1,079		1,013		4,796		7,991		-		13,555
Commercial and industrial		28,842		590		20		34		25		550		629		-		1,008
Municipal		2,768		-		-		-		-		-		-		-		-
Consumer		4,452		77		53		16		-		-		69		-		-
Loans receivable, gross	$	351,958	$	7,247	$	1,176	$	1,129	$	1,038	$	5,346	$	8,689	$	-	$	14,563

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Three months ended June 30												Six months ended June 30
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance
2011 Periods
Residential	$	1,462	$	139		$	(20	)	$	2	$	1,583	$	1,504	$	197		$	(121	)	$	3	$	1,583
Commercial		1,343		(9	)		(96	)		-		1,238		1,132		282			(175	)		-		1,239
Land		296		(25	)		-			-		271		392		(42	)		(79	)		-		271
Real estate		3,101		105			(116	)		2		3,092		3,028		437			(375	)		3		3,093
Commercial & industrial		531		79			(89	)		-		521		541		69			(89	)		-		521
Municipal		55		(27	)		-			-		28		51		(23	)		-			-		28
Consumer		167		70			(159	)		13		91		164		86			(179	)		19		92
Unallocated		124		123			-			-		247		136		111			-			-		245
Totals	$	3,978	$	350		$	(364	)	$	15	$	3,979	$	3,920	$	680		$	(643	)	$	22	$	3,979
2010 Periods
Totals	$	3,649	$	260		$	(149	)	$	8	$	3,768	$	3,473	$	440		$	(159	)	$	14	$	3,768

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

	Collectively evaluated				Individually evaluated				Total portfolio
June 30, 2011 (in thousands)	Loan balance		Allowance		Loan balance		Allowance		Loan balance		Allowance
Residential 1-4 family	$	177,466	$	749	$	5,299	$	427	$	182,764	$	1,176
Residential 5+ multifamily		3,068		20		-		-		3,068		20
Construction of residential 1-4 family		4,387		16		3,659		-		8,046		16
Home equity credit		33,418		371		239		-		33,657		371
Residential real estate		218,339		1,156		9,197		427		227,535		1,583
Commercial		71,895		908		8,081		280		79,976		1,188
Construction of commercial		4,502		51		-		-		4,502		51
Commercial real estate		76,397		959		8,081		280		84,478		1,239
Farm land		5,767		56		-		-		5,767		56
Vacant land		8,599		101		4,088		114		12,687		215
Real estate secured		309,102		2,272		21,366		821		330,467		3,093
Commercial and industrial		28,623		390		1,437		131		30,060		521
Municipal		2,768		28		-		-		2,768		28
Consumer		4,476		46		122		46		4,599		92
Unallocated allowance		-		-		-		-		-		245
Totals	$	344,969	$	2,736	$	22,925	$	998	$	367,894	$	3,979

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

	Collectively evaluated				Individually evaluated				Total portfolio
June 30, 2011 (in thousands)	Loan balance		Allowance		Loan balance		Allowance		Loan balance		Allowance
Performing loans	$	335,708	$	2,386	$	540	$	46	$	336,247	$	2,432
Potential problem loans		9,261		350		5,893		462		15,155		812
Impaired loans		-		-		16,492		490		16,492		490
Unallocated allowance		-		-		-		-		-		245
Totals	$	344,969	$	2,736	$	22,925	$	998	$	367,894	$	3,979

Certain data with respect to impaired loans individually evaluated is as follows:

	Impaired loans with specific allowance										Impaired loans with no specific allowance
June 30, 2011	Loan balance						Specific		Income		Loan balance						Income
(in thousands)	Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
Residential 1-4 family	$	889	$	922	$	1,473	$	142	$	9	$	5,400	$	5,459	$	4,453	$	42
Home equity credit		-		-		-		-		-		200		203		265		1
Residential real estate		889		922		1,473		142		9		5,600		5,662		4,718		43
Commercial		2,671		2,790		2,657		154		61		2,123		2,581		2,137		14
Vacant land		669		774		735		64		-		3,263		3,627		3,215		-
Real estate secured		4,229		4,486		4,865		360		70		10,986		11,870		10,070		57
Commercial and industrial		154		155		333		130		2		1,123		1,744		778		1
Consumer		-		-		-		-		-		-		143		29		-
Totals	$	4,383	$	4,641	$	5,198	$	490	$	72	$	12,109	$	13,757	$	10,877	$	58