NOTE 7 – DERIVATIVES AND HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2022

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.

Salisbury’s fair value hedge matured in third quarter 2022. As of December 31, 2021, 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		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
(in thousands)	December 31, 2021		December 31, 2021
Loans receivable(1)	$	9,982	$	(18	)
Total	$	9,982	$	(18	)

⁽¹⁾ These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship.

The table below presents the fair value of Salisbury’s derivative financial instrument and its classification on the Balance Sheet as of December 31, 2021.

	As of December 31, 2021
(in thousands)	Notional Amount		Balance Sheet Location
Derivatives designated as hedge instruments
Interest Rate Products	$	10,000	Other assets	$	18
Total Derivatives designated as hedge instruments				$	18

The tables below present the effect of the Company’s derivative financial instruments on the Income Statement for the three and nine months ended September 30, 2022 and 2021.

		Three months ended September 30, 2022				Nine months ended September 30, 2022
(in thousands)		Interest Income		Interest Expense		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	$	45	$	—	$	64	$	—
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items		45		—		18		—
Derivatives designated as hedging instruments	$	—	$	—	$	46	$	—

		Three months ended September 30, 2021					Nine months ended September 30, 2021
(in thousands)		Interest Income			Interest Expense		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	$	1		$	—	$	—		$	—
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items		4			—		3			—
Derivatives designated as hedging instruments	$	(3	)	$	—	$	(3	)	$	—