Derivative Financial Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging Activities

Derivative Financial Instruments and Hedging ActivitiesWe entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest

payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates.

Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.

As of December 31, 2020, we had four interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032 and October 2037. In December 2020, one interest rate swap, scheduled to mature in August 2037, was terminated as the hedged loan was paid off. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled $11 thousand and $6 thousand as of December 31, 2020 and 2019, respectively. Information on our derivatives follows:


	Asset derivatives				Liability derivatives
(in thousands)	December 31, 2020		December 31, 2019		December 31, 2020		December 31, 2019
Fair value hedges:
Interest rate contracts notional amount	$	—	$	—	$	13,991	$	16,956
Interest rate contracts fair value 1	$	—	$	—	$	1,912	$	1,178

1 Refer to Note 9, Fair Value of Assets and Liabilities, for valuation methodology.

The following table presents the carrying amount associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of December 31, 2020 and 2019:


	Carrying Amounts of Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands)	December 31, 2020		December 31, 2019		December 31, 2020		December 31, 2019
Loans	$	15,745	$	17,900	$	1,753	$	944

The following table presents the net gains (losses) recognized in interest income on loans on the consolidated statements of comprehensive income related to our derivatives designated as fair value hedges:


	Years ended December 31,
(in thousands)	2020		2019		2018
Interest and fees on loans 1	$	84,674	$	84,331	$	79,527
(Decrease) increase in value of designated interest rate swaps due to LIBOR interest rate movements	$	(734)	$	(964)	$	452
Payment on interest rate swaps	(360)		(90)		(149)
Increase (decrease) in value of hedged loans	809		938		(425)
Decrease in value of yield maintenance agreement	(12)		(13)		(14)
Net losses on fair value hedging derivatives recognized in interest income	$	(297)	$	(129)	$	(136)

1 Represents the income line item in the statements of comprehensive income in which the effects of fair value hedges are recorded.

Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes.

Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:


Offsetting of Financial Liabilities and Derivative Liabilities
							Gross Amounts Not Offset in the Statements of Condition
			Gross Amounts		Net Amounts of
	Gross Amounts		Offset in the		Liabilities Presented
	of Recognized		Statements of		in the Statements of		Financial		Cash Collateral
(in thousands)	Liabilities1		Condition		Condition1		Instruments		Pledged	Net Amount
December 31, 2020
Derivatives by Counterparty:
Counterparty A	$	1,912	$	—	$	1,912	$	—	(1,912)	$	—


December 31, 2019
Derivatives by Counterparty:
Counterparty A	$	1,178	$	—	$	1,178	$	—	(1,178)	$	—

1 Amounts exclude accrued interest on swaps.