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Financial Derivative Instruments | 9 Months Ended
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Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Financial Derivative Instruments | Financial Derivative Instruments 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, 2021 | December 31, 2020 | September 30, 2020
Effective Date | Maturity Date | Variable Index Received | Fixed Rate Paid | Presentation on Consolidated Balance Sheet | Notional Amount | Fair Value | Notional Amount | Fair Value | Notional Amount | Fair Value
06/28/2016 | 06/28/2021 | 1-Month USD Libor | 0.940% | Other Liabilities | $ | — |  | $ | — |  | $ | 30,000,000 |  | $ | (121,000) |  | $ | 30,000,000 |  | $ | (179,000) |
06/27/2016 | 06/27/2021 | 1-Month USD Libor | 0.893% | Other Liabilities | — |  | — |  | 20,000,000 |  | (76,000) |  | 20,000,000 |  | (112,000) |
08/02/2019 | 08/02/2024 | 1-Month USD Libor | 1.590% | Other Liabilities | 12,500,000 |  | (381,000) |  | 12,500,000 |  | (626,000) |  | 12,500,000 |  | (692,000) |
08/05/2019 | 08/05/2024 | 1-Month USD Libor | 1.420% | Other Liabilities | 12,500,000 |  | (320,000) |  | 12,500,000 |  | (550,000) |  | 12,500,000 |  | (611,000) |
02/12/2020 | 02/12/2023 | 3-Month USD Libor | 1.486% | Other Liabilities | 25,000,000 |  | (438,000) |  | 25,000,000 |  | (695,000) |  | 25,000,000 |  | (762,000) |
02/12/2020 | 02/12/2024 | 3-Month USD Libor | 1.477% | Other Liabilities | 25,000,000 |  | (601,000) |  | 25,000,000 |  | (972,000) |  | 25,000,000 |  | (1,044,000) |
06/28/2021 | 06/28/2026 | 1-Month USD Libor | 1.158% | Other Liabilities | 50,000,000 |  | (594,000) |  | 50,000,000 |  | (1,872,000) |  | 50,000,000 |  | (2,162,000) |
03/13/2020 | 03/13/2025 | 3-Month USD Libor | 0.855% | Other Liabilities | 25,000,000 |  | (85,000) |  | 25,000,000 |  | (551,000) |  | 25,000,000 |  | (621,000) |
03/13/2020 | 03/13/2030 | 3-Month USD Libor | 1.029% | Other (Liabilities) Assets | 20,000,000 |  | 644,000 |  | 20,000,000 |  | (339,000) |  | 20,000,000 |  | (690,000) |
04/07/2020 | 04/07/2023 | 3-Month USD Libor | 0.599% | Other Liabilities | 20,000,000 |  | (106,000) |  | 20,000,000 |  | (185,000) |  | 20,000,000 |  | (194,000) |
04/07/2020 | 04/07/2024 | 3-Month USD Libor | 0.643% | Other Liabilities | 20,000,000 |  | (64,000) |  | 20,000,000 |  | (255,000) |  | 20,000,000 |  | (275,000) |
|  |  |  |  | $210,000,000 | $(1,945,000) | $260,000,000 | $(6,242,000) | $260,000,000 | $(7,342,000)
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 $1.76 million 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 September 30, 2021, there were six customer loan swap arrangements in place, detailed below:
|  | September 30, 2021 | December 31, 2020 | September 30, 2020
| Presentation on Consolidated Balance Sheet | Number of Positions | Notional Amount | Fair Value | Number of Positions | Notional Amount | Fair Value | Number of Positions | Notional Amount | Fair Value
Pay Fixed, Receive Variable | Other Assets | 3 | $ | 15,885,000 |  | $ | 801,000 |  | 3 | $ | 16,922,000 |  | $ | 37,000 |  | — |  | $ | — |  | $ | — |
Pay Fixed, Receive Variable | Other Liabilities | 3 | 24,768,000 |  | (1,862,000) |  | 2 | 16,065,000 |  | (2,603,000) |  | 4 |  | 28,541,000 |  | (3,311,000) |
|  | 6 | 40,653,000 |  | (1,061,000) |  | 5 | 32,987,000 |  | (2,566,000) |  | 4 |  | 28,541,000 |  | (3,311,000) |
Receive Fixed, Pay Variable | Other Assets | 3 | 24,768,000 |  | 1,862,000 |  | 2 | 16,065,000 |  | 2,603,000 |  | 4 |  | 28,541,000 |  | 3,311,000 |
Receive Fixed, Pay Variable | Other Liabilities | 3 | 15,885,000 |  | (801,000) |  | 3 | 16,922,000 |  | (37,000) |  | — |  | — |  | — |
|  | 6 | 40,653,000 |  | 1,061,000 |  | 5 | 32,987,000 |  | 2,566,000 |  | 4 |  | 28,541,000 |  | 3,311,000 |
Total |  | 12 | $ | 81,306,000 |  | $ | — |  | 10 | $ | 65,974,000 |  | $ | — |  | 8 |  | $ | 57,082,000 |  | $ | — |
Derivative collateral The Bank 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 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, 2021, the Bank posted to the counterparty $6,600,000 of cash as collateral on its swap contracts. The required amount to be pledged was $3,243,000. Cessation of LIBOR The Company is aware that 1) certain tenors of US Dollar ("USD") denominated London Interbank Offering Rate ("LIBOR") indices will no longer be published after December 31, 2021, while other tenors are expected to continue being published until June 30, 2023, and 2) no new contracts referencing LIBOR are to be written after December 31, 2021. 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 has issued a voluntary fallback protocol for market participants. The Company formed a working group to address LIBOR cessation, which continues to monitor developments from ARRC and ISDA, along with guidance from US banking regulators. A replacement reference rate index for new transactions will be selected prior to year-end 2021 as required. Each of the interest rate swap contracts the Company has in place as of September 30, 2021 is tied to a LIBOR tenor expected to be published until June 2023. Two contracts with a total notional value of $45 million mature prior to June 30, 2023, while an additional seven contracts with a total notional amount of $165 million have maturity dates beyond June 30, 2023. The six customer loan swap contracts shown in the table immediately above have maturity dates of December 19, 2029, August 21, 2030, April 1, 2031, July 1, 2035, October 1, 2035 and October 1, 2039. It is anticipated that necessary actions to amend these legacy contracts and designate a replacement reference rate index will be undertaken in late 2022.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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