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FAIR VALUE OF ASSETS AND LIABILITIES

9 Months Ended

Sep. 30, 2018

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.

Salisbury adopted ASC 820-10, “Fair Value Measurement - Overall,” which provides a framework for measuring fair value under generally accepted accounting principles. 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:

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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 may also include 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.

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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.

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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.

Salisbury adopted ASC 2016-01, “Financial Instruments – overall (subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities”, which requires the exit price notion to be used when measuring the fair value of financial instruments for disclosure. Salisbury estimated the fair value of its loan portfolio based on a loan-level assessment that incorporated probabilities of default by loan type and internal risk rating, product-level loss given defaults and prepayment rates as well as discount rates.

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 nine month period ended September 30, 2018.

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, 2018
Assets at fair value on a recurring basis
U.S. Government Agency notes		$	—			$	4,963			$	—			$	4,963
Municipal bonds			—				5,390				—				5,390
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises			—				34,399				—				34,399
Collateralized mortgage obligations:
U.S. Government agencies			—				17,852				—				17,852
Non-agency			—				1,797				—				1,797
SBA bonds			—				27,850				—				27,850
Corporate bonds			—				3,529				—				3,529
Securities available-for-sale		$	—			$	95,780			$	—			$	95,780
CRA mutual funds			823				—				—				823
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans		$	—			$	—			$	6,002			$	6,002
Other real estate owned		$	—			$	—			$	340			$	340
December 31, 2017
Assets at fair value on a recurring basis
Municipal bonds		$	—			$	3,486			$	—			$	3,486
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises			—				45,868				—				45,868
Collateralized mortgage obligations:
U.S. Government agencies			—				10,377				—				10,377
Non-agency			—				2,664				—				2,664
SBA bonds			—				12,267				—				12,267
Corporate bonds			—				3,550				—				3,550
Securities available-for-sale		$	—			$	78,212			$	—			$	78,212
CRA mutual funds			835				—				—				835
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans		$	—			$	—			$	5,863			$	5,863
Other real estate owned		$	—			$	—			$	719			$	719

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
September 30, 2018
Financial Assets
Cash and cash equivalents		$	42,220			$	42,220			$	42,220			$	—			$	—
Securities available-for-sale			95,780				95,780				—				95,780				—
CRA mutual fund			823				823				823				—				—
Federal Home Loan Bank of Boston stock			4,988				4,988				—				—				4,988
Loans held-for-sale			589				599				—				—				599
Loans receivable, net¹			898,625				873,397				—				—				873,397
Accrued interest receivable			3,317				3,317				—				—				3,317
Cash surrender value of life insurance policies			14,627				14,627				14,627				—				—
Financial Liabilities
Demand (non-interest-bearing)		$	233,935			$	233,935			$	—			$	—			$	233,935
Demand (interest-bearing)			151,830				151,830				—				—				151,830
Money market			202,308				202,308				—				—				202,308
Savings and other			176,415				176,415				—				—				176,415
Certificates of deposit			137,673				137,648				—				—				137,648
Deposits			902,161				902,136				—				—				902,136
Repurchase agreements			6,658				6,658				—				—				6,658
FHLBB advances			67,596				67,589				—				—				67,589
Subordinated debt			9,829				10,063				—				—				10,063
Note payable			289				297				—				—				297
Capital lease liability			3,114				3,391				—				—				3,391
Accrued interest payable			382				382				—				—				382
December 31, 2017
Financial Assets
Cash and cash equivalents		$	48,486			$	48,486			$	48,486			$	—			$	—
Securities available-for-sale			78,212				78,212				—				78,212				—
CRA mutual fund			835				835				835				—				—
Federal Home Loan Bank of Boston stock			3,813				3,813				—				—				3,813
Loans held-for-sale			669				669				—				—				669
Loans receivable, net¹			801,703				816,451				—				—				816,451
Accrued interest receivable			2,665				2,665				—				—				2,665
Cash surrender value of life insurance policies			14,381				14,381				14,381				—				—
Financial Liabilities
Demand (non-interest-bearing)		$	220,536			$	220,536			$	—			$	—			$	220,536
Demand (interest-bearing)			142,575				142,575				—				—				142,575
Money market			190,953				190,953				—				—				190,953
Savings and other			144,600				144,600				—				—				144,600
Certificates of deposit			116,831				115,290				—				—				115,290
Deposits			815,495				813,954				—				—				813,954
Repurchase agreements			1,668				1,668				—				—				1,668
FHLBB advances			54,422				54,918				—				—				54,918
Subordinated debt			9,811				10,313				—				—				10,313
Note payable			313				341				—				—				341
Capital lease liability			1,835				2,161				—				—				2,161
Accrued interest payable			99				99				—				—				99

¹In accordance with the prospective adoption of ASU No. 2016-01, the fair value of loans as of September 30, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions or are included in accrued interest and other liabilities.

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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