FAIR VALUE OF ASSETS AND LIABILITIES

6 Months Ended

Jun. 30, 2016

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.

Accounting Standards Codification (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 ended June 30, 2016.

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.

• Mortgage servicing assets are accounted for at cost, subject to impairment testing. When the carrying cost exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors; as such, the primary risk inherent in valuing mortgage servicing assets is the impact of fluctuating interest rates on the servicing revenue stream. Mortgage servicing assets are classified within Level 2 of the fair value hierarchy.

Assets measured at fair value are as follows:

	Fair Value Measurements Using						Assets at
(in thousands)	Level 1		Level 2		Level 3		fair
							value
June 30, 2016
Assets at fair value on a recurring basis
U.S. Treasury notes	$	—	$	10,015	$	—	$	10,015
Municipal bonds		—		20,949		—		20,949
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		38,641		—		38,641
Collateralized mortgage obligations:
U.S. Government agencies		—		1,740		—		1,740
Non-agency		—		4,312		—		4,312
SBA bonds		—		2,654		—		2,654
CRA mutual funds		—		788		—		788
Corporate bonds		—		997		—		997
Preferred stock		342		—		—		342
Securities available-for-sale	$	342	$	80,096	$	—	$	80,438
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans		—		—		13,743		13,743
Mortgage servicing rights		—		961		—		961
December 31, 2015
Assets at fair value on a recurring basis
U.S. Treasury notes	$	—	$	2,541	$	—	$	2,541
U.S. Government agency notes		—		498		—		498
Municipal bonds		—		30,385		—		30,385
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		32,202		—		32,202
Collateralized mortgage obligations:
U.S. Government agencies		—		2,014		—		2,014
Non-agency		—		4,948		—		4,948
SBA bonds		—		3,096		—		3,096
CRA mutual funds		—		764		—		764
Preferred stock		246		—		—		246
Securities available-for-sale	$	246	$	76,448	$	—	$	76,694
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans		—		—		15,211		15,211
Mortgage servicing rights		—		1,315				1,315

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
June 30, 2016
Financial Assets
Cash and cash equivalents	$	31,498	$	31,498	$	31,498	$	—	$	—
Securities available-for-sale		80,438		80,438		342		80,096		—
Federal Home Loan Bank stock		3,436		3,436		—		3,436		—
Loans receivable, net		749,523		754,270		—		—		754,270
Accrued interest receivable		2,217		2,217		—		—		2,217
Cash surrender value of life insurance		13,862		13,862		13,862		—		—
Mortgage servicing rights		391		961		—		961		—
Financial Liabilities
Demand (non-interest-bearing)	$	189,182	$	189,182	$	—	$	—	$	189,182
Demand (interest-bearing)		120,142		120,142		—		—		120,142
Money market		197,869		197,869		—		—		197,869
Savings and other		124,019		124,019		—		—		124,019
Certificates of deposit		123,259		124,556		—		—		124,556
Deposits		754,471		755,768		—		—		755,768
Repurchase agreements		3,355		3,355		—		—		3,355
FHLBB advances		47,083		49,154		—		—		49,154
Subordinated debt		9,776		10,162		—		—		10,162
Note payable		358		385		—		—		385
Capital lease liability		420		903		—		—		903
Accrued interest payable		118		118		—		—		118
December 31, 2015
Financial Assets
Cash and cash equivalents	$	62,118	$	62,118	$	62,118	$	—	$	—
Securities available-for-sale		76,694		76,694		246		76,448		—
Federal Home Loan Bank stock		3,176		3,176		—		3,176		—
Loans held-for-sale		763		778		—		—		778
Loans receivable, net		699,018		707,154		—		—		707,154
Accrued interest receivable		2,307		2,307		—		—		2,307
Cash surrender value of life insurance		13,685		13,685		13,685		—		—
Mortgage servicing rights		597		1,383		—		1,383		—
Financial Liabilities
Demand (non-interest-bearing)	$	201,340	$	201,340	$	—	$	—	$	201,340
Demand (interest-bearing)		125,465		125,465		—		—		125,465
Money market		183,783		183,783		—		—		183,783
Savings and other		119,651		119,651		—		—		119,651
Certificates of deposit		124,294		125,437		—		—		125,437
Deposits		754,533		755,676		—		—		755,676
Repurchase agreements		3,914		3,914		—		—		3,914
FHLBB advances		26,979		28,559		—		—		28,559
Subordinated debt		9,764		9,764		—		—		9,764
Note payable		376		405		—		—		405
Capital lease liability		422		870		—		—		870
Accrued interest payable		150		150		—		—		150

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