Financial Derivative Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Bank uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income.

The Bank recognizes its derivative instruments in the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Bank designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss. Any ineffective portion is recorded in earnings. The Bank discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.

The details of the interest rate swap agreements are as follows:



						September 30, 2019					December 31, 2018
Effective Date	Maturity Date	Variable Index Received	Fixed Rate Paid		Presentation on Consolidated Balance Sheet	Notional Amount		Fair Value			Notional Amount		Fair Value
06/27/2016	06/27/2021	1-Month USD LIBOR	0.893	%	Other Assets	$	20,000,000	$	214,000		$	20,000,000	$	763,000
06/28/2016	06/28/2021	1-Month USD LIBOR	0.940	%	Other Assets	30,000,000		296,000			30,000,000		1,110,000
06/05/2018	12/05/2019	1-Month USD LIBOR	2.466	%	Other Liabilities/Other Assets	25,000,000		(23,000		)	25,000,000		16,000
06/05/2018	06/05/2020	1-Month USD LIBOR	2.547	%	Other Liabilities	25,000,000		(140,000		)	25,000,000		(9,000		)
06/05/2018	12/05/2020	1-Month USD LIBOR	2.603	%	Other Liabilities	25,000,000		(300,000		)	25,000,000		(60,000		)
12/05/2019	12/05/2022	3-Month USD LIBOR	1.779	%	Other Liabilities	25,000,000		(217,000		)	—		—
08/02/2019	08/02/2024	1-Month USD Libor	1.590	%	Other Liabilities	12,500,000		(133,000		)	—		—
08/05/2019	08/05/2024	1-Month USD Libor	1.420	%	Other Liabilities	12,500,000		(32,000		)	—		—
						$	175,000,000	$	(335,000	)	$	125,000,000	$	1,820,000

The Company would reclassify unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings if the interest rate swaps were to become ineffective or the swaps were to terminate. In the next 12 months, the Company does not believe it will be required to reclassify any unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings as a result of ineffectiveness or swap termination. Amounts paid or received under the swaps are reported in interest expense in the statement of income, and in interest paid in the statement of cash flows.

Customer loan derivatives

The Company will enter into interest rate swaps with qualified commercial customers. Through these arrangements, the Bank is able to provide a means for a loan customer to obtain a long-term fixed rate, while it simultaneously contracts with an approved, highly-rated, third-party financial institution as counterparty to swap the fixed rate for a variable rate. Such loan level arrangements are not designated as hedges for accounting purposes, and are recorded at fair value in the Company’s consolidated balance sheet. The Company has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its customer loan swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At September 30, 2019, the Bank posted to the counterparty $3,050,000 of cash as collateral on its customer loan swap contracts.

At September 30, 2019 there was one customer loan swap arrangement in place, detailed below:



		September 30, 2019						December 31, 2018
	Presentation on Consolidated Balance Sheet	Number of Positions	Notional Amount		Fair Value			Number of Positions	Notional Amount	Fair Value
Pay Fixed, Receive Variable	Other Liabilities	1	$	12,914,000	$	(1,643,000	)	—	—	—
Receive Fixed, Pay Variable	Other Assets	1	12,914,000		1,643,000			—	—	—
Total		2	$	25,828,000	—			—	—	—

The Company is aware that LIBOR may no longer be published after December 31, 2021 and is monitoring the introduction and market acceptance of replacement indices. Five of the interest rate swap contracts the Company has in place are set to mature by December 31, 2021, three contracts have maturity dates beyond December 31, 2021. The one customer loan swap contract has a maturity date of October 1, 2039.