FAIR VALUE OF ASSETS AND LIABILITIES

9 Months Ended

Sep. 30, 2011

Fair Value of Assets and Liabilities [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.

Salisbury adopted ASC 820-10, “Fair Value Measurements and Disclosures,” which provides a framework for measuring fair value under generally accepted accounting principles, in 2008. 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, and 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 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, 2011
Assets at fair value on a recurring basis
Securities available-for-sale	$	164	$	151,078	$	-	$	151,078
Assets at fair value on a non-recurring basis
Impaired loans		-		-		5,003		5,003
Other real estate owned		-		-		37		37

Changes in Level 3 assets measured at fair value are as follows:

(in thousands)	Securities available-for- sale		Impaired Loans		Other real estate owned			Level 3 assets at fair value
Balance, December 31, 2010	$	-	$	4,768	$	557		$	5,325
Gains and losses (realized/unrealized)
Included in earnings		-		-		-			-
Included in other comprehensive income		-		-		-			-
Principal pay-downs of securities, net of accretion		-		-		-			-
Write-down of other real estate owned						(157	)		(157	)
Transfers in and/or out of Level 3		-		235		(363	)		(128	)
Balance, September 30, 2011	$	-	$	5,003	$	37		$	5,040
Amount of total gains or losses for the period
attributable to the change in unrealized gains or losses
Relating to assets still held at the reporting date	$	-	$	-	$	-		$	-

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

	September 30, 2011				December 31, 2010
(in thousands)	Carrying Value		Estimated fair value		Carrying Value		Estimated fair value
Financial Assets
Cash and due from banks	$	65,517	$	65,517	$	26,908	$	26,908
Interest bearing time deposits with other banks		-		-		5,000		5,000
Securities available-for-sale		151,078		151,078		147,422		147,422
Security held-to-maturity		52		54		56		58
Federal Home Loan Bank stock		6,032		6,032		6,032		6,032
Loans held-for-sale		1,057		1,065		1,184		1,193
Loans receivable net		362,879		362,491		352,449		351,628
Accrued interest receivable		2,042		2,042		2,132		2,132
Financial Liabilities
Demand (non-interest-bearing)		82,425		82,425		71,565		71,565
Demand (interest-bearing)		71,303		71,303		63,258		63,258
Money market		122,184		122,184		77,089		77,089
Savings and other		97,405		97,405		93,324		93,324
Certificates of deposit		105,274		106,165		125,053		125,172
Deposits		478,591		479,482		430,289		430,408
FHLBB advances		55,033		59,617		72,812		78,317
Repurchase agreements		14,787		14,787		13,190		13,190
Accrued interest payable		284		284		435		435

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