Derivatives and Hedging Activities

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The tables below present a summary of the Company's derivative financial instruments, notional amounts and fair values for the periods presented:


	As of December 31, 2020
(Dollars in thousands)	Asset Notional Amount		Asset Derivatives(1)(2)		Liability Notional Amount		Liability Derivatives(1)(2)
Derivatives designated as hedging instruments
Interest-rate contracts - pay fixed, receive floating	$	—	$	—	$	75,000	$	2,814
Total cash flow hedge interest-rate swaps	$	—	$	—	$	75,000	$	2,814

Derivatives not subject to hedge accounting
Interest-rate contracts - pay floating, receive fixed	$	38,027	$	2,286	$	—	$	—
Interest-rate contracts - pay fixed, receive floating	—		—		38,027		2,286
Total back-to-back interest-rate swaps	$	38,027	$	2,286	$	38,027	$	2,286


	December 31, 2019
(Dollars in thousands)	Asset Notional Amount		Asset Derivatives(1)(2)		Liability Notional Amount		Liability Derivatives(1)(2)




Derivatives not subject to hedge accounting
Interest-rate contracts - pay floating, receive fixed	$	10,502	$	438	$	12,273	$	187
Interest-rate contracts - pay fixed, receive floating	12,273		187		10,502		438
Total back-to-back interest-rate swaps	$	22,775	$	625	$	22,775	$	625

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(1) Accrued interest balances related to the Company’s interest rate swaps are not included in the fair values above and are immaterial.

(2) The assets and liabilities related to the pay fixed, receive floating interest-rate contracts are subject to a master netting agreement and are presented net in the Consolidated Balance Sheet.

The Company had no derivative fair value hedges at either December 31, 2020 or December 31, 2019.

Cash flow hedges

Interest-rate swap agreements may be entered into as hedges against adverse interest-rate fluctuations on specifically identified assets or liabilities. The Company’s cash flow hedges are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s wholesale funding.

The Company’s objectives in using these interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. During the first quarter of 2020, the Company entered into three pay fixed, receive float interest rate swaps to hedge the variable cash flows associated with short-term wholesale funding. Each swap has a notional value of $25.0 million with respective maturities of three years, four years and five years. At December 31, 2020, these interest rate swaps are designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

In relation to the Company's cash flow hedges, the Company estimates that an additional $971 thousand (pre-tax) will be reclassified out of AOCI as an increase to interest expense during the next twelve months.

Back-to-Back swaps

The Company has a "Back-to-Back Swap" program whereby the Bank enters into an interest-rate swap with qualified commercial banking customers and simultaneously enters into equal and opposite interest-rate swap with a swap

counterparty. The transaction structure effectively minimizes the Bank's net interest rate risk exposure resulting from such transactions and allows commercial banking customers that have entered into customer interest-rate swap agreements to convert a floating-rate loan payment to a fixed-rate payment. Customer-related credit risk is minimized by the cross collateralization of the loan and the interest-rate-swap agreement to the customer's underlying collateral.

Each Back-to-Back swap consists of two interest-rate swaps (a customer swap and offsetting counterparty swap) and amounted to a total number of 10 interest-rate swaps outstanding at both December 31, 2020 and December 31, 2019. As a result of this offsetting relationship, there were no net gains or losses recognized in income on Back-to-Back swaps during the years ended December 31, 2020, December 31, 2019, or December 31, 2018.

Interest-rate swaps with the counterparty are subject to master netting agreements, while interest-rate swaps with customers are not. At December 31, 2020, all of the Back-to-Back swaps with the counterparty were in the same liability position, therefore there was no netting reflected in the Company’s Consolidated Balance Sheet. The table below presents the Company's liability derivative positions and the potential effect of those netting arrangements on its financial position, as of the period presented.


	As of December 31, 2019
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet
Liability Derivatives
Interest-rate contracts - pay fixed, receive floating	$	625	$	187	$	438

Credit Risk

By using derivative financial instruments, the Company exposes itself to counterparty-credit risk. Credit risk is the risk of failure by the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be creditworthy. Additionally, counterparty interest-rate swaps contain provisions for collateral to be posted if the derivative exposure exceeds a threshold amount.

The Company has one counterparty and it was rated A and A2 by Standard & Poor's and Moody's, respectively, at December 31, 2020. The Company had no credit risk exposure at either December 31, 2020 or December 31, 2019 relating to interest-rate swaps with counterparties. When the Company has credit risk exposure, collateral is received from the counterparty and held by the Company. Collateral held by the Company is restricted and not considered an asset of the Company. Therefore, it is not carried on the Company's Consolidated Balance Sheet. If the Company posts collateral, the cash is restricted, it is considered an asset of the Company and is carried on the Company's Consolidated Balance Sheet. The Company posted cash collateral of $5.3 million and $850 thousand at December 31, 2020 and December 31, 2019, respectively.

Credit-risk-related Contingent Features

The Company's interest-rate swaps with counterparties contain credit-risk-related contingent provisions. These provisions provide the counterparty with the right to terminate its derivative positions and require the Company to settle its obligations under the agreements if the Company defaults on certain of its indebtedness.

As of December 31, 2020, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk, related to these agreements was $5.1 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral at December 31, 2020 as noted above.

Other Derivative Related Activity

The Company also participates in loans originated by third party banks, where the originating bank utilizes a back-to-back interest-rate swap structure; however, the Company is not a party to the swap agreements. Under the terms of the loan participations, the Company has accepted contingent liabilities that would only be realized if the swaps were terminated early and there were outstanding losses not covered by the underlying borrowers and the borrowers' pledged collateral. If applicable, the Company's swap-loss exposure would be equal to a percentage of the originating bank's swap loss based on the ratio of the Company's loan participation to the underlying loan. At both December 31, 2020 and December 31, 2019, the Company had one participation loan where the originating bank utilizes a back-to-back interest-rate swap structure. At December 31, 2020, management considers the risk of material swap loss exposure related to this participation loan to be unlikely based the borrower's financial and collateral strength. Management continues to closely monitor for credit changes resulting from the pandemic.

See also Note 10, "Commitments, Contingencies and Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk," to the Company's consolidated financial statements of this Form 10-K, contained below, for further information on the Company's commitments and contingencies.