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NOTE 13 - FAIR VALUE OF ASSETS AND LIABILITIES

9 Months Ended

Sep. 30, 2021

Fair Value Disclosures [Abstract]

NOTE 13 - FAIR VALUE OF ASSETS AND LIABILITIES

NOTE 13 - 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 and the CRA mutual fund 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 assets and 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. 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:

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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 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.

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.

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Securities available-for-sale and the CRA mutual fund. Securities available-for-sale and the CRA mutual fund 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.

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Derivative financial instruments. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

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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.

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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.

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Assets held for sale. The fair value of assets held for sale is based on independent market prices, appraised values or the contractual selling price.

Assets measured at fair value are as follows:


		Fair Value Measurements Using												Assets and Liabilities at
(in thousands)		Level 1				Level 2				Level 3				fair
														value
September 30, 2021
Assets at fair value on a recurring basis
U.S. Treasury		$	-			$	10,302			$	-			$	10,302
U.S. Government Agency notes			-				32,274				-				32,274
Municipal bonds			-				39,605				-				39,605
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises			-				67,179				-				67,179
Collateralized mortgage obligations:
U.S. Government agencies			-				15,011				-				15,011
Corporate bonds			-				11,197				-				11,197
Securities available-for-sale		$	-			$	175,568			$	-			$	175,568
CRA mutual funds		$	907			$	-			$	-			$	907
Derivative financial instruments		$	-			$	4			$	-			$	4
Assets at fair value on a non-recurring basis
Assets held for sale ¹		$	700			$	-			$	-			$	700


December 31, 2020
Assets at fair value on a recurring basis
U.S. Government Agency notes		$	-			$	7,851			$	-			$	7,851
Municipal bonds			-				27,617				-				27,617
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises			-				36,573				-				36,573
Collateralized mortgage obligations:
U.S. Government agencies			-				17,454				-				17,454
Corporate bonds			-				8,916				-				8,916
Securities available-for-sale		$	-			$	98,411			$	-			$	98,411
CRA mutual funds		$	917			$	-			$	-			$	917
Derivative financial instruments		$	-			$	4			$	-			$	4

¹ The Bank is in the process of relocating its retail branch in Poughkeepsie, New York to a leased facility nearby. As part of this relocation, the Bank entered into an agreement with a third party to sell the building that houses its Poughkeepsie, New York retail branch. This agreement resulted in a pre-tax loss of $144 thousand in third quarter 2021. At December 30, 2020, Salisbury did not have any assets measured at fair value on a non-recurring basis.

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, 2021
Financial Assets
Cash and cash equivalents		$	166,295			$	166,295			$	166,295			$	-			$	-
Interest bearing time deposits with financial institutions			750				750				750				-				-
Securities available-for-sale			175,568				175,568				-				175,568				-
CRA mutual fund			907				907				907				-				-
Federal Home Loan Bank of Boston stock			1,504				1,504				1,504				-				-
Loans held-for-sale			639				649				-				-				649
Loans receivable, net			1,057,451				1,051,127				-				-				1,051,127
Accrued interest receivable			5,932				5,932				5,932				-				-
Derivative financial instruments			4				4				-				4				-
Cash surrender value of life insurance policies			25,067				25,067				25,067				-				-
Financial Liabilities
Demand (non-interest-bearing)		$	392,322			$	392,322			$	-			$	392,322			$	-
Demand (interest-bearing)			220,533				220,533				-				220,533				-
Money market			328,392				328,392				-				328,392				-
Savings and other			224,286				224,286				-				224,286				-
Certificates of deposit			124,095				124,946				-				124,946				-
Deposits			1,289,628				1,290,747				-				1,290,747				-
Repurchase agreements			10,450				10,450				-				10,450				-
FHLBB advances			8,905				9,000				-				9,000				-
Subordinated debt			24,460				24,276				-				24,276				-
Note payable			180				181				-				181				-
Finance lease liability			1,631				1,732				-				-				1,732
Accrued interest payable			34				34				34				-				-


December 31, 2020
Financial Assets
Cash and cash equivalents		$	93,162			$	93,162			$	93,162			$	-			$	-
Interest bearing time deposits with financial institutions			750				750				750				-				-
Securities available-for-sale			98,411				98,411				-				98,411				-
CRA mutual fund			917				917				917				-				-
Federal Home Loan Bank of Boston stock			1,713				1,713				1,713				-				-
Loans held-for-sale			2,735				2,790				-				-				2,790
Loans receivable, net			1,027,738				1,057,234				-				-				1,057,234
Accrued interest receivable			6,373				6,373				6,373				-				-
Cash surrender value of life insurance policies			21,182				21,182				21,182				-				-
Derivative financial instruments			4				4				-				4				-
Financial Liabilities
Demand (non-interest-bearing)		$	310,769			$	310,769			$	-			$	310,769			$	-
Demand (interest-bearing)			218,869				218,869				-				218,869				-
Money market			278,146				278,146				-				278,146				-
Savings and other			189,776				189,776				-				189,776				-
Certificates of deposit			131,514				132,875				-				132,875				-
Deposits			1,129,074				1,130,435				-				1,130,435				-
Repurchase agreements			7,116				7,116				-				7,116				-
FHLBB advances			12,639				12,786				-				12,786				-
Subordinated debt			9,883				10,027				-				10,027				-
Note payable			208				212				-				212				-
Finance lease liability			1,673				1,920				-				-				1,920
Accrued interest payable			43				43				43				-				-

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 other assets and other liabilities. During the three months ended March 31, 2021, Salisbury issued new subordinated debt, and during the three months ended June 30, 2021 paid off its previously issued subordinated debt in its entirety. Salisbury categorized its new subordinated debt within level 2 of the fair value hierarchy.

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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