FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2011

Fair Value Measurements

FAIR VALUE MEASUREMENTS

NOTE 20 - FAIR VALUE MEASUREMENTS

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, 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
(in thousands)	Level 1		Level 2		Level 3		Assets at fair value
December 31, 2011
Assets at fair value on a recurring basis
U.S. Treasury notes	$	—	$	5,528	$	—	$	5,528
U.S. Government agency notes		—		14,924		—		14,924
Municipal bonds		—		50,796		—		50,796
Mortgage-backed securities:
U.S. Government agencies		—		58,300		—		58,300
Collateralized mortgage obligations:
U.S. Government agencies		—		7,153		—		7,153
Non-agency		—		14,167		—		14,167
SBA bonds		—		3,706		—		3,706
Corporate bonds		—		1,104		—		1,104
Preferred stocks		116		—		—		116
Securities available-for-sale	$	116	$	155,678	$	—	$	155,794
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans		—		—		5,443		5,443
Other real estate owned		—		—		2,744		2,744
December 31, 2010
Assets at fair value on a recurring basis
Securities available-for-sale	$	55	$	147,367	$	—	$	147,422
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans		—		—		4,768		4,768
Other real estate owned		—		—		557		557

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

	December 31, 2011				December 31, 2010
(in thousands)	Carrying  value		Estimated  fair value		Carrying  value		Estimated  fair value
Financial Assets
Cash and due from banks	$	36,886	$	36,886	$	26,908	$	26,908
Interest bearing time deposits with other banks		—		—		5,000		5,000
Securities available-for-sale		155,794		155,794		147,422		147,422
Security held-to-maturity		50		52		56		58
Federal Home Loan Bank stock		6,032		6,032		6,032		6,032
Loans held-for-sale		948		955		1,184		1,193
Loans receivable net		370,766		373,071		352,449		351,628
Accrued interest receivable		2,126		2,126		2,132		2,132
Financial Liabilities
Demand (non-interest-bearing)	$	82,202	$	82,202	$	71,565	$	71,565
Demand (interest-bearing)		66,332		66,332		63,258		63,258
Money market		124,566		124,566		77,089		77,089
Savings and other		94,503		94,503		93,324		93,324
Certificates of deposit		103,703		104,466		125,053		125,172
Total deposits		471,306		472,069		430,289		430,408
FHLBB advances		54,615		58,808		72,812		78,317
Repurchase agreements		12,148		12,148		13,190		13,190
Accrued interest payable		271		271		435		435