DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2020

DERIVATIVE FINANCIAL INSTRUMENTS [Abstract]

17. 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 its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments 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 certain variable rate borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed interest payments. As of December 31, 2020, the Company had six interest rate swaps with a notional of $50.5 million associated with the Company’s cash outflows associated with various floating-rate amounts.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company did not recognize any hedge ineffectiveness in earnings during the period ended December 31, 2020. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company estimates that $0 will be reclassified as an increase in interest expense.

Customer Swaps

The Company also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of customers desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. In order to economically hedge the interest rate risk associated with offering this product, the Company simultaneously enters into derivative contracts with third parties to offset the customer contracts, such that the Company minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts decrease over time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to customers. The Company utilizes a loan hedging program to accommodate clients preferring a fixed rate loan. The loan documents include an addendum with a zero premium collar. The zero premium collar is a cap and floor at the same interest rate, resulting in a fixed rate to the borrower. To hedge this embedded option, the Company enters into a dealer facing trade exactly mirroring the terms of the loan addendum. At December 31, 2020, the Company had interest rate swaps related to this program with an aggregate notional amount of $64.0 million.

Counterparty Credit Risk

As a result of its derivative contracts, the Company is exposed to credit risk. Specifically, approved counterparties and exposure limits are defined. On at least an annual basis, the customer derivative contracts and related counterparties are evaluated for credit risk with an adjustment made to the contracts fair value. In accordance with the interest rate agreements with derivative dealers, the Company maybe required to post margin to these counterparties. At December 31, 2020, the Company has required collateral with certain of its derivative counterparties in the amount of $6.5 million and was not holding collateral of any derivative counterparties.

The following table reflects the estimated fair value positions of derivative contracts as of December 31, 2020:

Derivatives designated as hedging instruments under ASC 815 (in thousands):

Third party interest rate swaps	Balance Sheet Location	Notional Amount		Interest rate Paid	Interest rate Received	Fair Value
Maturing in 2025	Other liabilities	$	15,000	Fixed - 0.57%	3-Month Libor	$	(143	)
Maturing in 2027	Other liabilities		10,000	Fixed - 0.65%	3-Month Libor		(50	)
Maturing in 2027	Other liabilities		7,500	Fixed - 3.57%	3-Month Libor + 280		(87	)
Maturing in 2027	Other liabilities		6,000	Fixed - 0.61%	3-Month Libor		24
Maturing in 2029	Other liabilities		6,000	Fixed - 0.72%	3-Month Libor		74
Maturing in 2032	Other liabilities		6,000	Fixed - 0.82%	3-Month Libor		171
		$	50,500			$	(11	)

Derivatives not designated as hedging instruments under ASC 815 (in thousands):

Interest Rate Products	Balance Sheet Location	Notional Amount		Fair Value
Zero Premium Collar	Other assets	$	64,013	$	1,111

Dealer Offset to Zero Premium Collar	Other liabilities	$	64,013	$	(1,111	)