NOTE 3 - LOANS

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

(in thousands)	September 30, 2011			December 31, 2010
Residential 1-4 family	$	180,215		$	173,931
Residential 5+ multifamily		2,798			2,889
Construction of residential 1-4 family		8,065			8,949
Home equity credit		34,632			34,164
Residential real estate		225,710			219,933
Commercial		81,458			75,495
Construction of commercial		5,802			7,312
Commercial real estate		87,260			82,807
Farm land		5,719			5,690
Vacant land		12,685			12,979
Real estate secured		331,374			321,409
Commercial and industrial		27,460			25,123
Municipal		2,549			4,338
Consumer		4,578			4,677
Loans receivable, gross		365,961			355,547
Deferred loan origination fees and costs, net		945			822
Allowance for loan losses		(4,027	)		(3,920	)
Loans receivable, net	$	362,879		$	352,449
Loans held-for-sale
Residential 1-4 family	$	1,057		$	1,184

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate secured loans located principally in northwestern Connecticut and adjacent 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 credit risk rating is as follows:

September 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Residential 1-4 family	$	161,987	$	12,556	$	5,672	$	-	$	-	$	180,215
Residential 5+ multifamily		2,272		526		-		-		-		2,798
Construction of residential 1-4 family		3,932		415		3,718		-		-		8,065
Home equity credit		31,850		1,502		1,280		-		-		34,632
Residential real estate		200,041		14,999		10,670		-		-		225,710
Commercial		63,923		5,252		12,283		-		-		81,458
Construction of commercial		5,136		195		471		-		-		5,802
Commercial real estate		69,059		5,447		12,754		-		-		87,260
Farm land		3,105		1,774		840		-		-		5,719
Vacant land		7,686		888		4,111		-		-		12,685
Real estate secured		279,891		23,108		28,375		-		-		331,374
Commercial and industrial		19,551		6,320		1,589		-		-		27,460
Municipal		2,549		-		-		-		-		2,549
Consumer		4,314		199		65		-		-		4,578
Loans receivable, gross	$	306,305	$	29,627	$	30,029	$	-	$	-	$	365,961

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

September 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Performing loans	$	306,039	$	29,460	$	-	$	-	$	-	$	335,499
Potential problem loans		-		-		14,499		-		-		14,499
Troubled debt restructurings – accruing		266		167		1,619		-		-		2,052
Troubled debt restructurings - non-accrual		-		-		7,360		-		-		7,360
Other non-accrual loans		-		-		6,551		-		-		6,551
Impaired loans		266		167		15,530		-		-		15,963
Loans receivable, gross	$	306,305	$	29,627	$	30,029	$	-	$	-	$	365,961

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)	September 30, 2011		December 31, 2010
Troubled debt restructurings – accruing	$	2,052	$	5,330
Troubled debt restructurings - non-accrual		7,360		4,254
All other non-accrual loans		6,551		5,791
Impaired loans	$	15,963	$	15,375
Commitments to lend additional amounts to impaired borrowers	$	-	$	-

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

September 30, 2011 (in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
Current	$	303,894	$	26,668	$	17,490	$	-	$	-	$	348,052
Past due 001-029		1,606		2,386		4,769		-		-		8,761
Past due 030-059		306		364		1,323		-		-		1,993
Past due 060-089		499		209		141		-		-		849
Past due 090-179		-		-		729		-		-		729
Past due 180+		-		-		5,577		-		-		5,577
Loans receivable, gross	$	306,305	$	29,627	$	30,029	$	-	$	-	$	365,961

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

			Past due
September 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	$	174,697	$	4,210	$	382	$	122	$	96	$	709	$	1,309	$	-	$	5,752
Residential 5+ multifamily		2,640		-		158		-		-		-		158		-		-
Residential 1-4 family construction		7,366		-		699		-		-		-		699		-		-
Home equity credit		33,533		768		147		93		52		39		331		-		248
Residential real estate		218,236		4,978		1,386		215		148		748		2,497		-		6,000
Commercial		76,590		2,735		507		623		120		883		2,133		-		3,084
Construction of commercial		5,801		-		-		-		-		-		-		-		-
Commercial real estate		82,391		2,735		507		623		120		883		2,133		-		3,084
Farm land		5,276		443		-		-		-		-		-		-		-
Vacant land		8,600		227		-		-		461		3,397		3,858		-		3,858
Real estate secured		314,503		8,383		1,893		838		729		5,028		8,488		-		12,942
Commercial and industrial		26,626		220		65		-		-		549		614		-		969
Municipal		2,549		-		-		-		-		-		-		-		-
Consumer		4,374		158		35		11		-		-		46		-		-
Loans receivable, gross	$	348,052	$	8,761	$	1,993	$	849	$	729	$	5,577	$	9,148	$	-	$	13,911

Troubled Debt Restructurings

Troubled debt restructurings occurring during the periods are as follows:

	Three month period						Nine month period
Periods ended September 30, 2011 (in thousands)	Quantity		Pre- modification balance		Post- modification balance		Quantity		Pre- modification balance		Post- modification balance
Residential real estate		-	$	-	$	-		2	$	1,233	$	1,260
Commercial real estate		-		-		-		1		20		55
Commercial and industrial		-		-		-		2		262		273
Troubled debt restructurings		-	$	-	$	-		5	$	1,515	$	1,588

There were no troubled debt restructurings during third quarter 2011 and five during year-to-date 2011. There were no defaults during third quarter 2011 or year-to-date 2011 of loans restructured within the past twelve months.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Three months ended September 30												Nine months ended September 30
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision			Charge -offs			Reco- veries		Ending balance
2011 Periods
Residential	$	1,583	$	73		$	(50	)	$	-	$	1,606	$	1,504	$	269		$	(170	)	$	3	$	1,606
Commercial		1,239		(145	)		(30	)		1		1,065		1,132		138			(206	)		1		1,065
Land		271		179			(75	)		-		375		392		137			(154	)		-		375
Real estate		3,093		107			(155	)		1		3,046		3,028		544			(530	)		4		3,046
Commercial & industrial		521		(92	)		-			29		458		541		(22	)		(89	)		29		459
Municipal		28		(3	)		-			-		25		51		(26	)		-			-		25
Consumer		90		8			(10	)		3		91		164		94			(189	)		22		91
Unallocated		247		160			-			-		407		136		270			-			0		406
Totals	$	3,979	$	180		$	(165	)	$	33	$	4,027	$	3,920	$	860		$	(808	)	$	55	$	4,027
2010 Periods
Totals	$	3,768	$	180		$	(109	)	$	8	$	3,847	$	3,473	$	620		$	(268	)	$	22	$	3,847

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

	Collectively evaluated				Individually evaluated				Total portfolio
September 30, 2011 (in thousands)	Loan balance		Allowance		Loan balance		Allowance		Loan balance		Allowance
Residential 1-4 family	$	175,177	$	721	$	5,038	$	473	$	180,215	$	1,194
Residential 5+ multifamily		2,798		19		-		-		2,798		19
Construction of residential 1-4 family		4,422		15		3,643		-		8,065		15
Home equity credit		34,345		378		287		-		34,632		378
Residential real estate		216,742		1,133		8,968		473		225,711		1,606
Commercial		73,484		835		7,974		166		81,458		1,001
Construction of commercial		5,802		64		-		-		5,802		64
Commercial real estate		79,286		899		7,974		166		87,260		1,065
Farm land		4,879		39		840		150		5,719		189
Vacant land		8,675		101		4,010		85		12,685		186
Real estate secured		309,582		2,172		21,792		874		331,374		3,046
Commercial and industrial		26,072		342		1,388		117		27,460		459
Municipal		2,549		25		-		-		2,549		25
Consumer		4,417		44		161		47		4,578		91
Unallocated allowance		-		-		-		-		-		406
Totals	$	342,620	$	2,583	$	23,341	$	1,038	$	365,961	$	4,027

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

	Collectively evaluated				Individually evaluated				Total portfolio
September 30, 2011 (in thousands)	Loan balance		Allowance		Loan balance		Allowance		Loan balance		Allowance
Performing loans	$	334,822	$	2,342	$	677	$	47	$	335,499	$	2,390
Potential problem loans		7,798		241		6,701		506		14,499		747
Impaired loans		-		-		15,963		484		15,963		484
Unallocated allowance		-		-		-		-		-		406
Totals	$	342,620	$	2,583	$	23,341	$	1,037	$	365,961	$	4,027

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

	Impaired loans with specific allowance										Impaired loans with no specific allowance
September 30, 2011	Loan balance						Specific		Income		Loan balance						Income
(in thousands)	Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
Residential 1-4 family	$	2,271	$	2,420	$	1,565	$	187	$	16	$	3,649	$	3,674	$	4,398	$	59
Home equity credit		-		-		-		-		-		248		254		246		1
Residential real estate		2,271		2,420		1,565		187		16		3,897		3,928		4,644		60
Commercial		2,482		2,650		2,618		146		68		2,221		2,699		2,156		25
Vacant land		594		774		701		35		-		3,263		3,627		3,233		-
Real estate secured		5,347		5,844		4,884		368		84		9,381		10,254		10,033		85
Commercial and industrial		140		144		263		116		2		1,095		1,724		898		6
Consumer		-		-		-		-		-		-		143		18		-
Totals	$	5,487	$	5,988	$	5,147	$	484	$	86	$	10,476	$	12,121	$	10,949	$	91