FAIR VALUE OF ASSETS AND LIABILITIES

3 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

FAIR VALUE OF ASSETS AND LIABILITIES

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.

ASC 820-10, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value under GAAP. This guidance provided 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. However, Salisbury did not elect fair value treatment for any financial assets or liabilities upon adoption of such ASC.

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 first 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.

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 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 first-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.

Assets measured at fair value are as follows:

	Fair Value Measurements Using
(in thousands)		Level 1		Level 2		Level 3		Assets at fair value
September 30, 2013
Assets measured at fair value on a recurring basis
U.S. Treasury notes	$	-	$	2,670	$	-	$	2,670
U.S. Government agency notes		-		2,619		-		2,619
Municipal bonds		-		42,573		-		42,573
Mortgage-backed securities:
U.S. Government agencies		-		36,314		-		36,314
Collateralized mortgage obligations:
U.S. Government agencies		-		3,848		-		3,848
Non-agency		-		8,895		-		8,895
SBA bonds		-		2,361		-		2,361
Preferred stocks		536		-		-		536
Securities available-for-sale	$	536	$	99,280	$	-	$	99,816
Assets measured at fair value on a non-recurring basis
Collateral dependent impaired loans	$	-	$	-	$	6,547	$	6,547
Other real estate owned		-		-		571		571
December 31, 2012
Assets measured at fair value on a recurring basis
U.S. Treasury notes	$	-	$	2,733	$	-	$	2,733
U.S. Government agency notes		-		7,726		-		7,726
Municipal bonds		-		47,365		-		47,365
Mortgage-backed securities:
U.S. Government agencies		-		48,729		-		48,729
Collateralized mortgage obligations:
U.S. Government agencies		-		5,197		-		5,197
Non-agency		-		11,507		-		11,507
SBA bonds		-		2,863		-		2,863
Preferred stocks		167		-		-		167
Securities available-for-sale	$	167	$	126,120	$	-	$	126,287
Assets measured at fair value on a non-recurring basis
Collateral dependent impaired loans	$		$		$	8,434	$	8,434
Other real estate owned		-		-		244		244

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

					Fair value measurements using
(in thousands)		Carrying value		Estimated fair value		Level 1		Level 2		Level 3
September 30, 2013
Financial Assets
Cash and due from banks	$	23,719	$	23,719	$	23,719	$	-	$	-
Interest-bearing time deposits		5,220		5,220		-		-		5,220
Securities available-for-sale		99,816		99,816		536		99,280		-
Federal Home Loan Bank stock		5,340		5,340		-		5,340		-
Loans held-for-sale		708		713		-		-		713
Loans receivable net		420,306		413,809		-		-		413,809
Accrued interest receivable		1,823		1,823		-		-		1,823
Financial Liabilities
Demand (non-interest-bearing)	$	83,892	$	83,892	$	-	$	-	$	83,892
Demand (interest-bearing)		79,232		79,232		-		-		79,232
Money market		125,070		125,070		-		-		125,070
Savings and other		107,380		107,380		-		-		107,380
Certificates of deposit		84,295		84,950		-		-		84,950
Deposits		479,869		480,524		-		-		480,524
FHLBB advances		30,801		33,692		-		-		33,692
Repurchase agreements		3,870		3,870		-		-		3,870
Accrued interest payable		166		166		-		-		166
December 31, 2012
Financial Assets
Cash and due from banks	$	43,574	$	43,574	$	43,574	$	-	$	-
Securities available-for-sale		126,287		126,287		167		126,120		-
Federal Home Loan Bank stock		5,747		5,747		-		5,747		-
Loans held-for-sale		1,879		1,893		-		-		1,893
Loans receivable net		388,758		389,292		-		-		389,292
Accrued interest receivable		1,818		1,818		-		-		1,818
Financial Liabilities
Demand (non-interest-bearing)	$	98,850	$	98,850	$	-	$	-	$	98,850
Demand (interest-bearing)		65,991		65,991		-		-		65,991
Money market		128,501		128,501		-		-		128,501
Savings and other		103,985		103,985		-		-		103,985
Certificates of deposit		93,888		94,894		-		-		94,894
Deposits		491,215		492,221		-		-		492,221
FHLBB advances		31,980		35,363		-		-		35,363
Repurchase agreements		1,784		1,784		-		-		1,784
Accrued interest payable		196		196		-		-		196

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