NOTE 7 - DERIVATIVES AND HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

NOTE 7 - DERIVATIVES AND HEDGING ACTIVITIES

NOTE 7 - DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

Salisbury is exposed to certain risk arising from both its business operations and economic conditions. The Bank principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Bank manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Bank enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Bank uses derivative financial instruments to manage differences in the amount, timing, and duration of the Bank's known or expected cash receipts and its known or expected cash payments principally related to its portfolio of loans to first-time home buyers.

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain pools of its pre-payable fixed-rate assets due to changes in benchmark interest rates. Salisbury uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, Federal Funds. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for Salisbury receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

As of September 30, 2020, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:

Line Item in the Statement of Financial Position in Which the Hedged Item is Included		Carrying Amount of the Hedged Assets/(Liabilities)						Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
(in thousands)	September 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019
Loans receivable(1)		$	10,003		$	—		$	3		$	—
Total		$	10,003		$	—		$	3		$	—

⁽¹⁾ These amounts include the amortized cost basis of closed portfolios used to designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At September 30, 2020, the amortized cost basis of the closed portfolios used in these hedging relationships was $52.8 million; the cumulative basis adjustment associated with these hedging relationships was $3 thousand; and the amount of the designated hedged item was $10.0 million. Salisbury did not use derivatives as a fair value hedge prior to third quarter 2020.

The table below presents the fair value of Salisbury's derivative financial instrument and its classification on the Balance Sheet as of September 30, 2020. Salisbury did not use derivative financial instruments prior to third quarter 2020.

	As of September 30, 2020
(in thousands)	Notional Amount		Balance Sheet Location	Fair Value
Derivatives designated as hedge instruments
Interest Rate Products	$	10,000	Other liabilities	$	3
Total Derivatives designated as hedge instruments				$	3

The table below presents the effect of the Company's derivative financial instruments on the Income Statement as of September 30, 2020. Salisbury did not use derivative financial instruments prior to third quarter 2020.

	Three months ended September 30, 2020
(in thousands)	Interest Income			Interest Expense
Total amounts of income and expense line items presented in the
statement of financial performance in which the effects of fair value or
cash flow hedges are recorded	$	—		$	—
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items		3			—
Derivatives designated as hedging instruments	$	(3	)	$	—

Credit-Risk Related Contingent Features

Salisbury has an agreement with its derivative counterparty that contains a provision where if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations.

The agreement also contains a provision where if the Bank fails to maintain its status as a well / adequate capitalized institution, then Salisbury could be required to post cash or certain marketable securities issued by the U.S. Treasury or U.S. Government-sponsored enterprises as collateral. The minimum amount that Salisbury would have to post as collateral is $250 thousand.

As of September 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3 thousand. As of September 30, 2020, Salisbury has not posted any collateral related to these agreements. If Salisbury had breached any of these provisions at September 30, 2020, the Bank could have been required to settle its obligations under the agreements at their termination value of $3 thousand.