Derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. The Company utilizes interest rate swap agreements as part of its asset liability management strategy. Interest rate swaps involve the exchange of interest payments at specified intervals between two parties without the exchange of any underlying principal. These derivative instruments are designated as cash flow hedges with the effective portion of changes in the fair value of the derivative recorded in accumulated other comprehensive income and recognized in earnings when the hedged transaction affects earnings. The ineffective portion of changes in the fair value of the cash flow hedge is recognized directly in earnings.

During the three months ended June 30, 2020, the Company entered into two $5 million notional interest rate swaps that have been designated as cash flow hedges on 90-day advances from FHLB. One agreement is currently active and the other is a forward swap with a start date of April 13, 2021. The purpose of these cash flow hedges is to reduce potential interest rate risk by swapping a variable rate borrowing to a fixed rate. Management deemed it prudent to limit the variability of these interest payments by entering into these interest rate swap agreements. These agreements provide for the Company to receive payments at a variable rate determined by a specific index (three-month LIBOR) in exchange for making payments at a fixed rate. Publication of LIBOR is expected to cease at the end of 2021. The swap agreements allow for substitution of an alternative reference rate such as the secured overnight financing rate (“SOFR”) at that time.

The effective portion of changes in the fair value of interest rate swaps are reported in other comprehensive income and are subsequently reclassified into earnings in the period that the hedged transactions affect earnings. For the three months ended June 30, 2020, the change in fair value for these derivative instruments was $(164,000). At June 30, 2020, the fair value of interest rate swap derivatives resulted in a liability of $164,000 and is recorded in other liabilities.

The following table summarizes the Company’s derivatives associated with its interest rate risk management activities:

				June 30, 2020
(Dollars in thousands)	Start Date	Maturity Date	Rate	Notional		Assets		Liabilities
Debt Hedging
Hedging Instruments:
Interest Rate Swap 2020	4/13/2020	4/13/2025	0.68%	$	5,000	$	—	$	80
Interest Rate Swap 2021	4/13/2021	4/13/2026	0.74%	$	5,000	$	—	$	84
Total Hedging Instruments				$	10,000	$	—	$	164
Hedged Items:
Variability in cash flows related to 90-day FHLB advances				N/A		$	—	$	5,000

The credit risk associated with these interest rate swaps is the risk of default by the counterparty. To minimize this risk, the Company only enters into interest rate swaps agreements with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure. Risk management results for the three months ended June 30, 2020, related to the balance sheet hedging of $5.0 million of 90 day FHLB advances, included in borrowings, indicate that the hedge was 100% effective and there was no component of the derivative instruments’ unrealized loss which was excluded from the assessment of hedge effectiveness. The Company’s arrangement with its counterparty requires it to post cash or other assets as collateral for its interest rate swap contracts in a net liability position based on their aggregate fair value and the Company’s credit rating. At June 30, 2020, the Company posted $525,000 of cash to the counterparty as collateral on its interest rate swap contracts which was presented within cash and due from banks on the consolidated balance sheets.