FAIR VALUE OF ASSETS AND LIABILITIES

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

FAIR VALUE 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 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 or nine months ended September 30, 2014.

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.

Assets measured at fair value are as follows:

		Fair Value Measurements Using						Assets at
(in thousands)		Level 1		Level 2		Level 3		fair value
September 30, 2014
Assets measured at fair value on a recurring basis
U.S. Treasury notes	$	—	$	2,620	$	—	$	2,620
U.S. Government agency notes		—		2,517		—		2,517
Municipal bonds		—		38,890		—		38,890
Mortgage-backed securities:
U.S. Government agencies		—		29,001		—		29,001
Collateralized mortgage obligations:
U.S. Government agencies		—		2,874		—		2,874
Non-agency		—		6,927		—		6,927
SBA bonds		—		1,679		—		1,679
Preferred stock		937		—		—		937
Securities available-for-sale	$	937	$	84,508	$	—	$	85,445
Assets measured at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	10,879	$	10,879
Other real estate owned		—		—		333		333
December 31, 2013
Assets measured at fair value on a recurring basis
U.S. Treasury notes	$	—	$	2,657	$	—	$	2,657
U.S. Government agency notes		—		2,590		—		2,590
Municipal bonds		—		40,437		—		40,437
Mortgage-backed securities:
U.S. Government agencies		—		33,892		—		33,892
Collateralized mortgage obligations:
U.S. Government agencies		—		3,580		—		3,580
Non-agency		—		8,308		—		8,308
SBA bonds		—		2,230		—		2,230
Preferred stock		797		—		—		797
Securities available-for-sale	$	797	$	93,694	$	—	$	94,491
Assets measured at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	9,782	$	9,782
Other real estate owned		—		—		377		377

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

		Carrying		Estimated		Fair value measurements using
(in thousands)		value		fair value		Level 1		Level 2		Level 3
September 30, 2014
Financial Assets
Cash and due from banks	$	48,825	$	48,825	$	48,825	$	—	$	—
Securities available-for-sale		85,445		85,445		937		84,508		—
Federal Home Loan Bank stock		3,515		3,515		—		3,515		—
Loans receivable, net		461,913		459,425		—		—		459,425
Accrued interest receivable		1,834		1,834		—		—		1,834
Financial Liabilities
Demand (non-interest-bearing)	$	99,843	$	99,843	$	—	$	—	$	99,843
Demand (interest-bearing)		81,877		81,877		—		—		81,877
Money market		132,471		132,471		—		—		132,471
Savings and other		122,836		122,836		—		—		122,836
Certificates of deposit		85,267		85,972		—		—		85,972
Deposits		522,294		522,999		—		—		522,999
FHLBB advances		29,218		31,191		—		—		31,191
Repurchase agreements		6,500		6,500		—		—		6,500
Capital lease liability		424		925		925		—		—
Accrued interest payable		136		136		—		—		136
December 31, 2013
Financial Assets
Cash and due from banks	$	12,711	$	12,711	$	12,711	$	—	$	—
Interest-bearing time deposits with other banks		738		738		—		—		738
Securities available-for-sale		94,491		94,491		797		93,694		—
Federal Home Loan Bank stock		5,340		5,340		—		5,340		—
Loans held-for-sale		173		175		—		—		175
Loans receivable, net		438,178		430,645		—		—		430,645
Accrued interest receivable		1,760		1,760		—		—		1,760
Financial Liabilities
Demand (non-interest-bearing)	$	84,677	$	84,677	$	—	$	—	$	84,677
Demand (interest-bearing)		81,932		81,932		—		—		81,932
Money market		120,550		120,550		—		—		120,550
Savings and other		107,171		107,171		—		—		107,171
Certificates of deposit		83,039		83,520		—		—		83,520
Deposits		477,369		477,850		—		—		477,850
FHLBB advances		30,411		33,034		—		—		33,034
Repurchase agreements		2,554		2,554		—		—		2,554
Capital lease liability		425		425		425		—		—
Accrued interest payable		140		140		—		—		140

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