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Derivative Financial Instruments

3 Months Ended

Mar. 31, 2021

Note 4.Derivative Financial Instruments

The Company enters into interest rate swap agreements (“swap agreements”) to facilitate the risk management strategies needed in order to accommodate the needs of its banking customers. The Company mitigates the risk of entering into these loan agreements by entering into equal and offsetting swap agreements with highly-rated third party financial institutions. These back-to-back swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated balance sheets (asset positions are included in other assets and liability positions are included in other liabilities) as of March 31, 2021 and December 31, 2020. The Company is party to master netting arrangements with its financial institution counterparty; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in value of the derivative. These payments, commonly referred to as variation margin, are recorded as settlements of the derivatives’ mark-to-market exposure rather than collateral against the exposures, which effectively results in any centrally cleared derivative having a Level 2 fair value that approximates zero on a daily basis, and therefore, these swap agreements were not included in the offsetting table in the Fair Value Measurement section. As of March 31, 2021, the Company entered into 21 interest rate swap agreements which are collateralized with $8.7 million in cash. There were 21 interest rate swap agreements outstanding as of December 31, 2020 which were collateralized with $14.0 million in cash.

The notional amount and fair value of the Company’s derivative financial instruments as of March 31, 2021 and December 31, 2020 were as follows:


	March 31, 2021
	Notional Amount		Fair Value

	(In thousands)
Interest Rate Swap Agreements
Receive Fixed/Pay Variable Swaps	$	97,431	$	7,809
Pay Fixed/Receive Variable Swaps		97,431		(7,809)


	December 31, 2020
	Notional Amount		Fair Value

	(In thousands)
Interest Rate Swap Agreements
Receive Fixed/Pay Variable Swaps	$	97,658	$	13,633
Pay Fixed/Receive Variable Swaps		97,658		(13,633)

Interest Rate Risk Management—Cash Flow Hedging Instruments

The Company uses FHLB advances and other wholesale funding from time to time as a source of funds for use in the Company’s lending and investment activities and other general business purposes. This wholesale funding exposes the Company to increased interest rate risk as a result of the variability in cash flows (future interest payments). The Company believes it is prudent to reduce this interest rate risk. To meet this objective, the Company entered into interest rate swap agreements whereby the Company reduces the interest rate risk associated with the Company’s variable rate advances (or other wholesale funding) from the designation date and going through the maturity date.

At March 31, 2021 and December 31, 2020, the information pertaining to outstanding interest rate swap agreements used to hedge variability in cash flows (FHLB advance which is included in other borrowed funds on the consolidated balance sheet) and a portion of its wholesale deposits (which is included in total deposits on the consolidated balance sheet) is as follows:


(Dollars in thousands)	March 31, 2021			December 31, 2020
Notional amount	$	60,000		$	60,000
Weighted average pay rate		0.87	%		0.87	%
Weighted average receive rate		0.19	%		0.24	%
Weighted average maturity in years		1.85 years			2.10 years
Unrealized loss relating to interest rate swaps	$	(556)		$	(754)

These agreements provided for the Company to receive payments determined by a specific index (three month LIBOR) in exchange for making payments at a fixed rate. At March 31, 2021 and December 31, 2020, the unrealized loss relating to interest rate swaps designated as hedging instruments of the variability of cash flows associated with FHLB advances and wholesale deposits are reported in other comprehensive income. These amounts are subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the advance affects earnings. The Company measures cash flow hedging relationships for effectiveness on a monthly basis, and at March 31, 2021 and December 31, 2020, the hedges were highly effective and the amount of ineffectiveness reflected in earnings was de minimus.