Financial Derivative Instruments

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Bank uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income.

The details of the interest rate swap agreements are as follows:


					December 31, 2021		December 31, 2020
Effective Date	Maturity Date	Variable Index Received	Fixed Rate Paid	Presentation on Consolidated Balance Sheet	Notional Amount	Fair Value	Notional Amount		Fair Value
06/27/16	06/27/21	1-Month USD LIBOR	0.893%	Other Liabilities	$—	$—	$	20,000,000	$	(76,000)
06/28/16	06/28/21	1-Month USD LIBOR	0.940%	Other Liabilities	—	—	30,000,000		(121,000)

08/02/19	08/02/24	1-Month USD LIBOR	1.590%	Other Liabilities	—	—	12,500,000		(626,000)
08/05/19	08/05/24	1-Month USD LIBOR	1.420%	Other Liabilities	—	—	12,500,000		(550,000)
02/12/20	02/12/23	3-Month USD LIBOR	1.486%	Other Liabilities	—	—	25,000,000		(695,000)
02/12/20	02/12/24	3-Month USD LIBOR	1.477%	Other Liabilities	—	—	25,000,000		(972,000)
06/28/21	06/28/26	1-Month USD LIBOR	1.158%	Other Liabilities	—	—	50,000,000		(1,872,000)
03/13/20	03/13/25	3-Month USD LIBOR	0.855%	Other Liabilities	—	—	25,000,000		(551,000)
03/13/20	03/13/30	3-Month USD LIBOR	1.029%	Other Liabilities	—	—	20,000,000		(339,000)
04/07/20	04/07/23	3-Month USD LIBOR	0.599%	Other Liabilities	—	—	20,000,000		(185,000)
04/07/20	04/07/24	3-Month USD LIBOR	0.643%	Other Liabilities	—	—	20,000,000		(255,000)
					$—	$—	$	260,000,000	$	(6,242,000)

The Company would reclassify unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings if the interest rate swaps were to become ineffective or the swaps were to terminate. In the fourth quarter 2021, the Bank took advantage of market opportunities to terminate its interest rate swap position in order to de-lever the balance sheet and reset wholesale funding costs. A one-time gain of $336,000 was recognized in non-interest income. Amounts paid or received under the swaps are reported in interest expense in the consolidated statement of income, and in interest paid in the consolidated statement of cash flows.

Customer loan derivatives

The Bank will enter into interest rate swaps with qualified commercial customers. Through these arrangements, the Bank is able to provide a means for a loan customer to obtain a long-term fixed rate, while it simultaneously contracts with an approved, highly-rated, third-party financial institution as counterparty to swap the fixed rate for a variable rate. Such loan level arrangements are not designated as hedges for accounting purposes, and are recorded at fair value in the Company’s consolidated balance sheet.

At December 31, 2021 there were six customer loan swap arrangements in place, detailed below:


		December 31, 2021					December 31, 2020
	Presentation on Consolidated Balance Sheet	Number of Positions	Notional Amount		Fair Value		Number of Positions	Notional Amount		Fair Value
Pay Fixed, Receive Variable	Other Assets	3	$	15,765,000	$	789,000	3	$	16,922,000	$	37,000
Pay Fixed, Receive Variable	Other Liabilities	3	24,604,000		(1,802,000)		2	16,065,000		(2,603,000)
		6	40,369,000		(1,013,000)		5	32,987,000		(2,566,000)
Receive Fixed, Pay Variable	Other Assets	3	24,604,000		1,802,000		2	16,065,000		2,603,000
Receive Fixed, Pay Variable	Other Liabilities	3	15,765,000		(789,000)		3	16,922,000		(37,000)
		6	40,369,000		1,013,000		5	32,987,000		2,566,000
Total		12	$	80,738,000	$	—	10	$	65,974,000	$	—

Derivative collateral

The Company has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its various swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At December 31, 2021, the Bank had posted to the counterparty $1,500,000 of cash as collateral on its swap contracts. The required amount to be pledged was $1,058,000.

Cessation of LIBOR

As discussed in Item 1A Risk Factors, the Company is aware that 1) certain tenors of USD denominated LIBOR indices will no longer be published after December 31, 2021, while other tenors are expected to continue being published until June 30, 2023, and 2) no new contracts referencing LIBOR are to be written after December 31, 2021. The Federal Reserve formed the ARRC to guide the transition process in the United States. ARRC has issued a number of recommendations including the adoption of the SOFR as a replacement for LIBOR. The International Swap and Derivatives Association ("ISDA"), the organization that oversees and guides swap and derivatives markets and participants, continues to work on transitions and has issued a voluntary fallback protocol for market participants. The Company has adopted SOFR as its replacement reference rate index for new transactions. Each of the customer loan swap contracts the Company has in place as of December 31, 2021 is tied to a LIBOR tenor expected to be published until June 30, 2023. The six customer loan swap contracts shown in the table immediately above have maturity dates of December 19, 2029, August 21, 2030, April 1, 2021, July 1, 2035, October 1, 2035 and October 1, 2039. It is anticipated that necessary actions to amend these legacy contracts to incorporate the new replacement reference rate index will be undertaken in late 2022.