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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2021
Derivative Instruments And Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments |
1 3. | DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of certain balance sheet assets and liabilities. In the normal course of business, the Company also uses derivative financial instruments to add stability to interest income or expense and to manage its exposure to movements in interest rates. The Company does not use derivatives for trading or speculative purposes and only enters into transactions that have a qualifying hedge relationship. The Company’s hedging strategies involving interest rate derivatives are classified as either cash flow hedges or fair value hedges, depending upon the rate characteristic of the hedged item. Cash Flow Hedges The Bank has entered into forward interest rate swap contracts on certain variable-rate money market deposit accounts (indexed to the Federal Funds effective rate’s daily weighted average). The money market account balances are expected to exceed the notional amount for the duration of the hedges and the rates on these deposits are anticipated to move closely with changes in one-month LIBOR, or a comparable benchmark interest rate. The Bank has also entered into a forward interest rate swap contract on a variable-rate FHLB advance (indexed to one-month LIBOR) that will be renewed on a monthly basis and will remain outstanding until the hedge expiration. These interest rate swaps were designated as derivative instruments in cash flow hedges with the objective of converting the floating interest payments to a fixed rate. Under the swap arrangements, the Bank pays a fixed interest rate and receives a variable interest rate based on one-month LIBOR, or a comparable benchmark interest rate, on the notional amount, with monthly net settlements. There were no gains or losses reclassified from other comprehensive income (loss) for cash flow hedges for the three or nine months ended September 30, 2021 and 2020. Fair Value Hedges The Bank has entered into forward interest rate swap contracts on fixed rate commercial real estate loans. The interest rate swaps were designated as derivative instruments in fair value hedges with the objective of effectively converting pools of fixed rate assets to variable rate throughout the hedge durations. Under the swap arrangements, the Bank pays a fixed interest rate and receives a variable interest rate based on one-month LIBOR, or a comparable benchmark interest rate, on the notional amount, with monthly net settlements. The Bank recognized no gains or losses on the fair value hedges for the three or nine months ended September 30, 2021 and 2020. Presentation The Company has elected to offset derivative fair value amounts under master netting agreements, given that all of the Company’s hedges are with the same counterparty. The following table reflects the notional amount and fair value of derivative instruments included on the Company’s Consolidated Balance Sheets on a net basis.
|  | As of September 30, 2021 |  |  | As of December 31, 2020 |
|  | Notional |  |  | Estimated Fair Value |  |  | Notional |  |  | Estimated Fair Value |
|  | Amount |  |  | Gain (Loss) (1) |  |  | Amount |  |  | Gain (Loss) (1) |
|  | (Dollars in Thousands) |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps related to fixed rate commercial real estate loans |  | $ | 20,000 |  |  | $ | (485 | ) |  | $ | 20,000 |  |  | $ | (837 | )
Total fair value hedges |  |  |  |  |  |  | (485 | ) |  |  |  |  |  |  | (837 | )
Cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps related to variable-rate money market deposit accounts |  |  | 20,000 |  |  |  | (775 | ) |  |  | 20,000 |  |  |  | (1,337 | )
Interest rate swaps related to FHLB advances |  |  | 10,000 |  |  |  | (253 | ) |  |  | 10,000 |  |  |  | (436 | )
Total cash flow hedges |  |  |  |  |  |  | (1,028 | ) |  |  |  |  |  |  | (1,773 | )
Total hedges designated as hedging instruments, net |  |  |  |  |  | $ | (1,513 | ) |  |  |  |  |  | $ | (2,610 | )
(1) | Derivatives in a gain position are recorded as other assets and derivatives in a loss position are recorded as other liabilities in the consolidated balance sheets.
The Company has elected the last-of-layer method with respect to both of its fair value hedges. This approach allows the Company to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and other factors affecting the timing and amount of cash flows. Relative to the identified pools of loans, this represents the last dollar amount of the designated commercial loans, which is equivalent to the notional amounts of the derivative instruments. The following amounts were recorded on the condensed consolidated balance sheet related to cumulative basis adjustments for fair value hedges:
Location in the Condensed Consolidated Balance Sheet in Which the Hedged |  | Carrying Amount of the Hedged Assets |  |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets |
Item is Included |  | September 30, 2021 |
|  | (Dollars in Thousands) |
Loans and leases, net of allowance for loan and lease losses (1) |  | $ | 42,501 |  |  | $ | (485 | )
(1) | These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. As of September 30, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $42.0 million, the cumulative basis adjustments associated with these hedging relationships were $0.5 million, and the amounts of the designated hedged items were $20.0 million.
The following table presents the effect of hedging derivative instruments on the Company’s Consolidated Statements of Operations.
|  | Location in the Condensed |  | Three Months Ended |  |  | Nine Months Ended |
|  | Consolidated Statements of Operations |  | September 30, 2021 |  |  | September 30, 2020 |  |  | September 30, 2021 |  |  | September 30, 2020 |
|  |  |  | (Dollars in Thousands) |  |  | (Dollars in Thousands) |
Interest income |  | Interest and fees on loans |  | $ | $(64) | ) |  | $ | $(60) | ) |  | $ | $(188) | ) |  | $ | $(95) | )
Interest expense |  | Interest on deposits |  |  | 32 |  |  |  | 31 |  |  |  | 95 |  |  |  | 46 |
Interest expense |  | Interest on short-term borrowings |  |  | 85 |  |  |  | 80 |  |  |  | 249 |  |  |  | 155 |
|  | Net interest income (expense) |  | $ | $(181) | ) |  | $ | $(171) | ) |  | $ | $(532) | ) |  | $ | $(296) | )

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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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