NOTE 13 – FAIR VALUE OF ASSETS AND LIABILITIES

9 Months Ended

Sep. 30, 2022

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:

• 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.

• 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.

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 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.

• 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.

• 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 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 at
(in thousands)	Level 1		Level 2		Level 3		fair value
September 30, 2022
Assets at fair value on a recurring basis
U.S. Treasury	$	—	$	16,977	$	—	$	16,977
U.S. Government Agency notes		—		27,924		—		27,924
Municipal bonds		—		44,610		—		44,610
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		63,480		—		63,480
Collateralized mortgage obligations:
U.S. Government agencies		—		22,591		—		22,591
Corporate bonds		—		13,579		—		13,579
Securities available-for-sale	$	—	$	189,161	$	—	$	189,161
Mutual funds		1,882		—		—		1,882
Derivative financial instruments		—		—		—		—

December 31, 2021
Assets at fair value on a recurring basis
U.S. Treasury	$	—	$	15,131	$	—		$         15,131
U.S. Government Agency notes		—		31,604		—		31,604
Municipal bonds		—		47,822		—		47,822
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		74,541		—		74,541
Collateralized mortgage obligations:
U.S. Government agencies		—		20,898		—		20,898
Corporate bonds		—		12,400		—		12,400
Securities available-for-sale	$	—	$	202,396	$	—	$	202,396
Mutual fund		901		—		—		901
Derivative financial instruments		—		18		—		18
Assets at fair value on a non-recurring basis
Assets held for sale 1	$	700	$	—	$	—	$	700

¹ Prior to December 31, 2021, the Bank entered into an agreement with a third party to sell the building that housed its Poughkeepsie, New York retail branch and relocate the branch to leased space nearby. This sale was completed in January 2022. At September 30, 2022, 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, 2022
Financial Assets
Cash and cash equivalents	$	56,297	$	56,297	$	56,297	$	—	$	—
Securities available-for-sale, net		189,161		189,161		—		189,161		—
Mutual funds		1,882		1,882		1,882		—		—
Federal Home Loan Bank of Boston stock		1,487		1,487		—		1,487		—
Loans receivable, net		1,176,493		1,154,834		—		—		1,154,834
Accrued interest receivable		6,012		6,012		—		6,012		—
Cash surrender value of life insurance policies		30,187		30,187		—		30,187		—
Financial Liabilities
Demand (non-interest-bearing)	$	413,584	$	413,584	$	—	$	413,584	$	—
Demand (interest-bearing)		241,236		241,236		—		241,236		—
Money market		313,987		313,987		—		313,987		—
Savings and other		246,538		246,538		—		246,538		—
Certificates of deposit		109,859		109,536		—		109,536		—
Deposits		1,325,204		1,324,881		—		1,324,881		—
Repurchase agreements		7,109		7,109		—		7,109		—
FHLBB advances		20,000		20,000		—		20,000		—
Subordinated debt		24,517		21,514		—		21,517		—
Note payable		139		135		—		135		—
Finance lease obligation		4,296		3,916		—		—		3,916
Accrued interest payable		18		18		—		18		—

December 31, 2021
Financial Assets
Cash and cash equivalents	$	175,335	$	175,335	$	175,335	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale		202,396		202,396		—		202,396		—
Mutual funds		901		901		901		—		—
Federal Home Loan Bank of Boston stock		1,397		1,397		—		1,397		—
Loans held-for-sale		2,684		2,721		—		—		2,721
Loans receivable, net		1,066,750		1,066,733		—		—		1,066,733
Accrued interest receivable		6,260		6,260		—		6,260		—
Cash surrender value of life insurance policies		27,738		27,738		—		27,738		—
Derivative financial instruments		18		18		—		18		—
Financial Liabilities
Demand (non-interest-bearing)	$	416,073	$	416,073	$	—	$	416,073	$	—
Demand (interest-bearing)		233,600		233,600		—		233,600		—
Money market		330,436		330,436		—		330,436		—
Savings and other		237,075		237,075		—		237,075		—
Certificates of deposit		119,009		119,716		—		119,716		—
Deposits		1,336,193		1,336,900		—		1,336,900		—
Repurchase agreements		11,430		11,430		—		11,430		—
FHLBB advances		7,656		7,714		—		7,714		—
Subordinated debt		24,474		24,409		—		24,409		—
Note payable		170		171		—		171		—
Finance lease liability		4,107		4,223		—		—		4,223
Accrued interest payable		49		49		—		49		—

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.