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DERIVATIVE INSTRUMENTS
9 Months Ended
Sep. 30, 2021
DERIVATIVE INSTRUMENTS  
DERIVATIVE INSTRUMENTS

NOTE L: DERIVATIVE INSTRUMENTS

The Company is party to derivative financial instruments in the normal course of its business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments have been limited to interest rate swap agreements, commitments to originate real estate loans held for sale and forward sales commitments. The Company does not hold or issue derivative financial instruments for trading or other speculative purposes.

The Company enters into forward sales commitments for the future delivery of residential mortgage loans, and interest rate lock commitments to fund loans at a specified interest rate. The forward sales commitments are utilized to reduce interest rate risk associated with interest rate lock commitments and loans held for sale. Changes in the estimated fair value of the forward sales commitments and interest rate lock commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time. At inception and during the life of the interest rate lock commitment, the Company includes the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of the interest rate lock commitments. These derivatives are recorded at fair value, which were immaterial at September 30, 2021 and December 31, 2020. The effect of the changes to these derivatives for the three and nine months then ended was also immaterial.

The Company acquired interest rate swaps in 2017 with notional amounts with certain commercial customers which totaled $0.6 million at September 30, 2021 and $14.4 million at December 31, 2020. In order to minimize the Company’s risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps (pay fixed/receive floating swaps) with the Company’s counterparty totaling $0.6 million at September 30, 2021 and $14.4 million at December 31, 2020. At September 30, 2021, the weighted average receive rate of these interest rate swaps was 2.33%, the weighted average pay rate was 3.54% and the weighted average maturity was 1.5 years. At December 31, 2020, the weighted average receive rate of these interest rate swaps was 2.10%, the weighted average pay rate was 4.44% and the weighted average maturity was 5.2 years. Hedge accounting has not been applied for these derivatives. Since the terms of the swaps with the Company’s customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s results of operations.

The Company also acquired interest rate swaps in 2017 with notional amounts totaling $5.3 million at September 30, 2021, and $5.7 million at December 31, 2020, that were designated as fair value hedges of certain fixed rate loans with municipalities which are recorded in loans in the consolidated statements of condition. At September 30, 2021, the weighted average receive rate of these interest rate swaps was 1.38%, the weighted average pay rate was 3.11% and the weighted average maturity was 11.8 years. At December 31, 2020, the weighted average receive rate of these interest rate swaps was 1.42%, the weighted average pay rate was 3.11% and the weighted average maturity was 12.5 years. The Company includes the gain or loss on the hedged items in interest and fees on loans, the same line item as the offsetting gain or loss on the related interest rate swaps. The effects of fair value accounting in the consolidated statements of income for the three and nine months ended September 30, 2021 are immaterial.

As of September 30, 2021 and December 31, 2020, the following amounts were recorded in the consolidated statement of condition related to cumulative basis adjustments for fair value hedges:

(000’s omitted)

Cumulative Amount of Fair Value

Carrying Amount of the Hedged

Hedging Adjustment Included in the

Line Item in the Consolidated

Assets

Carrying Amount of the Hedged Assets

Statement of Condition in Which

September 30, 

December 31, 

September 30, 

December 31, 

the Hedged Item Is Included

    

2021

    

2020

    

2021

    

2020

Loans

$

5,363

$

5,675

$

(330)

$

(498)

Fair values of derivative instruments as of September 30, 2021 and December 31, 2020 are as follows:

(000’s omitted)

September 30, 2021

Derivative Assets

Derivative Liabilities

Consolidated Statement

Fair

Consolidated Statement of

Fair

    

of Condition Location

    

Value

    

Condition Location

    

Value

Derivatives designated as hedging instruments under Subtopic 815-20

 

  

 

  

 

  

 

  

Interest rate swaps

 

Other assets

$

330

 

  

 

  

Derivatives not designated as hedging instruments under Subtopic 815-20

 

  

 

 

  

 

  

Interest rate swaps

 

Other assets

 

5

 

Accrued interest and other liabilities

$

5

Commitments to originate real estate loans for sale

 

Other assets

 

45

 

  

 

Forward sales commitments

 

Other assets

 

53

 

  

 

Total derivatives

 

  

$

433

 

  

$

5

(000’s omitted)

December 31, 2020

Derivative Assets

Derivative Liabilities

Consolidated Statement

Fair

Consolidated Statement of

Fair

    

of Condition Location

    

Value

    

Condition Location

    

Value

Derivatives designated as hedging instruments under Subtopic 815-20

 

  

 

  

 

  

 

  

Interest rate swaps

 

Other assets

$

498

 

  

 

  

Derivatives not designated as hedging instruments under Subtopic 815-20

 

 

 

  

 

  

Interest rate swaps

 

Other assets

 

1,074

 

Accrued interest and other liabilities

$

1,074

Commitments to originate real estate loans for sale

Other assets

14

Forward sales commitments

Other assets

2

Total derivatives

 

$

1,588

 

  

$

1,074

The Company assessed its counterparty risk at September 30, 2021 and December 31, 2020 and determined any credit risk inherent in our derivative contracts was not material. Further information about the fair value of derivative financial instruments can be found in Note K to these consolidated financial statements.