Financial Derivative Instruments

12 Months Ended

Dec. 31, 2020

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 details of the interest rate swap agreements are as follows:


						December 31, 2020				December 31, 2019
Effective Date	Maturity Date	Variable Index Received	Fixed Rate Paid		Presentation on Consolidated Balance Sheet	Notional Amount		Fair Value		Notional Amount		Fair Value
06/27/16	06/27/21	1-Month USD LIBOR	0.893	%	Other Liabilities (Assets)	$	20,000,000	$	(76,000)	$	20,000,000	$	199,000
06/28/16	06/28/21	1-Month USD LIBOR	0.940	%	Other Liabilities (Assets)	30,000,000		(121,000)		30,000,000		278,000

06/05/18	06/05/20	1-Month USD LIBOR	2.547	%	Other Liabilities	—		—		25,000,000		(96,000)
06/05/18	12/05/20	1-Month USD LIBOR	2.603	%	Other Liabilities	—		—		25,000,000		(234,000)
12/05/19	12/05/22	3-Month USD LIBOR	1.779	%	Other Liabilities	—		—		25,000,000		(98,000)
08/02/19	08/02/24	1-Month USD LIBOR	1.590	%	Other Liabilities	12,500,000		(626,000)		12,500,000		(11,000)
08/05/19	08/05/24	1-Month USD LIBOR	1.420	%	Other Liabilities (Assets)	12,500,000		(550,000)		12,500,000		85,000
02/12/20	02/12/23	3-Month USD LIBOR	1.486	%	Other Liabilities	25,000,000		(695,000)		—		—
02/12/20	02/12/24	3-Month USD LIBOR	1.477	%	Other Liabilities	25,000,000		(972,000)		—		—
06/28/21	06/28/26	1-Month USD LIBOR	1.158	%	Other Liabilities	50,000,000		(1,872,000)		—		—
03/13/20	03/13/25	3-Month USD LIBOR	0.855	%	Other Liabilities	25,000,000		(551,000)		—		—
03/13/20	03/13/30	3-Month USD LIBOR	1.029	%	Other Liabilities	20,000,000		(339,000)		—		—
04/07/20	04/07/23	3-Month USD LIBOR	0.599	%	Other Liabilities	20,000,000		(185,000)		—		—
04/07/20	04/07/24	3-Month USD LIBOR	0.643	%	Other Liabilities	20,000,000		(255,000)		—		—
						$	260,000,000	$	(6,242,000)	$	150,000,000	$	123,000

During the first quarter of 2020, the Bank took advantage of market opportunities to restructure several interest rate swap positions and extend funding at favorable interest rates; one-time charges totaling $1,756,000 were incurred and expensed in the first quarter of 2020 in connection with the restructuring.

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 consolidated statement of income, and in interest paid in the consolidated statement of cash flows.

Customer loan derivatives

The Bank 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.

At December 31, 2020 there were five customer loan swap arrangement in place, detailed below:


		December 31, 2020					December 31, 2019
	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	5	$	32,987,000	$	(2,640,000)	2	$	16,374,000	$	(1,205,000)
Receive Fixed, Pay Variable	Other Assets	5	32,987,000		2,640,000		2	16,374,000		1,205,000


Total		10	$	65,974,000	$	—	4	$	32,748,000	$	—

Derivative collateral

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 various 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 December 31, 2020, the Bank had posted to the counterparty $3,100,000 of cash and $10,000,000 (par value) in securities as collateral on its swap contracts. The required amount to be pledged was $9,011,000.

Cessation of LIBOR

As discussed in Item 1A Risk Factors, the Company is aware that certain tenors of USD LIBOR may no longer be published after December 31, 2021, while other tenors are expected to continue being published until June 30, 2023. The Federal Reserve formed the Alternative Reference Rates Committee (ARRC) to guide the transition process in the United States. ARRC has issued a number of recommendations including the adoption of the Secured Overnight Financing Rate (SOFR) as a replacement for LIBOR. The International Swap and Derivatives Association (ISDA), the organization that oversees and guides swap and derivatives markets and participants, continues to work on transitions and recently issued a voluntary fallback protocol for market participants. The Company has formed a working group to address the change away from LIBOR. Management intends to continue to monitor developments from ARRC and ISDA, along with guidance from US banking regulators, closely, and expects to pursue the steps ultimately recommended to provide for an orderly transition to a post-LIBOR environment. Each of the interest rate swap contracts the Company has in place as of December 31, 2020 is tied to a LIBOR tenor expected to be published until June 30, 2023. Two contracts carrying a total notional amount of $50 million are set to mature in 2021; two additional contracts carrying a total notional value of $45 million mature prior to June 30, 2023, and an additional seven contracts with a total notional amount of $165 million have maturity dates beyond June 30, 2023. The five customer loan swap contracts shown in the table immediately above have maturity dates of December 19, 2029, August 21, 2030, July 1, 2035, October 1, 2035 and April 1, 2039.