Interest Rate Swaps

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

On September 7, 2018, the Corporation executed an interest rate swap agreement with a 5-year term and an effective date of September 15, 2018 in order to hedge cash flows associated with $10 million of a subordinated note that was issued by the Corporation during 2007 and elected cash flow hedge accounting for the agreement. The Corporation’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2018 to September 15, 2023 without the exchange of the underlying notional amount. At December 31, 2019, the variable rate on the subordinated debt was 3.44% (LIBOR plus 155 basis points) and the Corporation was paying 4.53% (2.98% fixed rate plus 155 basis points).

In order to hedge cash flows associated with $10 million of a subordinated note discussed above, on May 3, 2011, the Corporation executed an interest rate swap agreement with a 5-year term and an effective date of September 15, 2013 and expired September 2018. The Corporation’s objective in using this derivative was to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involved the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2013 to September 15, 2018 without exchange of the underlying notional amount.

As of December 31, 2019 and 2018, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Corporation does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

The following tables provide information about the amounts and locations of activity related to the interest rate swaps designated as cash flow hedges within the Corporation’s consolidated balance sheet and statement of income as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018, and 2017:



As of December 31	Liability Derivative
	Balance Sheet	Fair value
	Location	2019	2018
Interest rate contract	Accrued interest payable and other liabilities	$(485)	$(201)
For the Year Ended December 31, 2019	(a)	(b)		(c)	(d)	(e)
Interest rate contract	$(225)	Interest expense – subordinated debentures		$(63)	Other income	$0
For the Year Ended December 31, 2018
Interest rate contract	$(32)	Interest expense – subordinated debentures		$(164)	Other income	$0
For the Year Ended December 31, 2017
Interest rate contract	$194	Interest expense – subordinated debentures		$(288)	Other income	$0


(a)	Amount of Gain or (Loss) Recognized in Other Comprehensive Loss on Derivative (Effective Portion), net of tax


(b)	Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)


(c)	Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)


(d)	Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)


(e)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Amounts reported in accumulated other comprehensive loss related to the interest rate swap will be reclassified to interest expense as interest payments are made on the subordinated debentures. Such amounts reclassified from accumulated other comprehensive loss to interest expense in the next twelve months are expected to be $109.

As of December 31, 2019 and 2018, a cash collateral balance of $750 and $200, respectively, was maintained with the counterparty to the interest rate swaps. These balances are included in interest bearing deposits with other banks on the consolidated balance sheets.

The Corporation entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Corporation enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Corporation agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. Concurrently, the Corporation agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Corporation’s customers to effectively convert a variable rate loan to a fixed rate. Because the Corporation acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not impact the Corporation’s results of operations.

The Corporation pledged cash collateral to another financial institution with a balance $2,000 as of December 31, 2019 and $750 as of December 31, 2018. This balance is included in interest bearing deposits with other banks on the consolidated balance sheets. The Corporation may require its customers to post cash or securities as collateral on its program of back-to-back swaps depending upon the specific facts and circumstances surrounding each loan and individual swap. In addition, certain language is included in the International Swaps and Derivatives Association agreement and loan documents where, in default situations, the Corporation is permitted to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Corporation may be required to post additional collateral to swap counterparties in the future in proportion to potential increases in unrealized loss positions.

The following table provides information about the amounts and locations of activity related to the back-to-back interest rate swaps within the Corporation’s consolidated balance sheet as of December 31, 2019 and 2018:



	Notional Amount			Average Maturity (in years)	Weighted Average Fixed Rate		Weighted Average Variable Rate	Fair Value
December 31, 2019
3^rd Party interest rate swaps	$	35,382		7.7	4.13	%	1 month LIBOR + 2.27%	1,877 (a)
Customer interest rate swaps	(35,382		)	7.7	4.13	%	1 month LIBOR + 2.27%	(1,877) (b)
December 31, 2018
3^rd Party interest rate swaps	$	23,152		7.2	3.85	%	1 month LIBOR + 2.24%	485 (a)
Customer interest rate swaps	(23,152		)	7.2	3.85	%	1 month LIBOR + 2.24%	(485) (b)


(a)	Reported in accrued interest receivable and other assets within the consolidated balance sheets

(b)

Reported in accrued interest payable and other liabilities within the consolidated balance sheets