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DERIVATIVE FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2020
DERIVATIVE FINANCIAL INSTRUMENTS |
DERIVATIVE FINANCIAL INSTRUMENTS | NOTE 10 – DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are negotiated contracts entered into by two issuing counterparties containing specific agreement terms, including the underlying instrument, amount, exercise price, and maturities. The derivatives accounting guidance requires that the Company recognize all derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets. The Company may utilize interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. Interest Rate Swaps Designated as Cash Flow Hedges The Company designated certain interest rate swap agreements as cash flow hedges on variable-rate borrowings. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on interest rate swaps designated as cash flow hedging instruments are reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. The interest rate swap agreements designated as cash flow hedges are summarized as follows:
|  | September 30, 2020 |  | December 31, 2019
|  | Notional |  | Fair |  | Notional |  | Fair
|  | Amount |  | Value |  | Amount |  | Value
Designated as cash flow hedges: |  | (dollars in thousands)
Fair value recorded in other liabilities |  | $ | 17,000 |  | $ | (1,572) |  | $ | 17,000 |  | $ | (676)
As of September 30, 2020, the interest rate swap agreements designated as cash flow hedges had contractual maturities between 2024 and 2025. As of September 30, 2020 and December 31, 2019, the Company had cash pledged and held on deposit at counterparties of $1,630,000 and $710,000, respectively. During the three months ended March 31, 2019, the Company had an interest rate swap contract with a notional amount of $10,000,000 designated as a cash flow hedge on variable-rate loans. Beginning April 1, 2019, this hedging relationship was no longer considered highly effective, and the Company discontinued hedge accounting. In accordance with hedge accounting guidance, the net unrealized gain associated with the discontinued hedging relationship, recorded within accumulated other comprehensive income, was reclassified into earnings through April 7, 2020, the period the hedged forecasted transactions affect earnings. For the three and nine months ended September 30, 2020 and 2019, the effect of interest rate swap agreements designated as cash flow hedges on the consolidated statements of income are summarized as follows:
Location of gross gain (loss) reclassified |  | Amounts of gross gain (loss)
from accumulated other |  | reclassified from accumulated
comprehensive income to income |  | other comprehensive income
|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
|  | 2020 |  | 2019 |  | 2020 |  | 2019
Designated as cash flow hedges: |  | (dollars in thousands)
Taxable loan interest income |  | $ | — |  | $ | 33 |  | $ | 64 |  | $ | 83
Junior subordinated debentures interest expense |  |  | (97) |  |  | (9) |  |  | (202) |  |  | (7)
Total |  | $ | (97) |  | $ | 24 |  | $ | (138) |  | $ | 76
Interest Rate Swaps Not Designated as Hedging Instruments The Company may offer interest rate swap agreements to its commercial borrowers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party financial institution. While these interest rate swap agreements generally worked together as an economic interest rate hedge, the Company did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred. The interest rate swap agreements not designated as hedging instruments are summarized as follows:
|  | September 30, 2020 |  | December 31, 2019
|  | Notional |  | Fair |  | Notional |  | Fair
|  | Amount |  | Value |  | Amount |  | Value
Not designated as hedging instruments: |  | (dollars in thousands)
Fair value recorded in other assets: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps with a commercial borrower counterparty |  | $ | 140,820 |  | $ | 21,568 |  | $ | 114,140 |  | $ | 8,532
Interest rate swaps with a financial institution counterparty |  |  | — |  |  | — |  |  | 24,216 |  |  | 110
Total fair value recorded in other assets |  | $ | 140,820 |  | $ | 21,568 |  | $ | 138,356 |  | $ | 8,642
Fair value recorded in other liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps with a commercial borrower counterparty |  | $ | — |  | $ | — |  | $ | 24,216 |  | $ | (110)
Interest rate swaps with a financial institution counterparty |  |  | 140,820 |  |  | (21,568) |  |  | 114,140 |  |  | (8,532)
Total fair value recorded in other liabilities |  | $ | 140,820 |  | $ | (21,568) |  | $ | 138,356 |  | $ | (8,642)
As of September 30, 2020, the interest rate swap agreements not designated as hedging instruments had contractual maturities between 2022 and 2042. As of September 30, 2020 and December 31, 2019, the Company had $22,280,000 and $8,713,000, respectively, of debt securities pledged and held in safekeeping at the financial institution counterparty. For the three and nine months ended September 30, 2020 and 2019, the effect of interest rate contracts not designated as hedging instruments recognized in other noninterest income on the consolidated statements of income are summarized as follows:
|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
|  | 2020 |  | 2019 |  | 2020 |  | 2019
Not designated as hedging instruments: |  | (dollars in thousands)
Gross gains |  | $ | 2,188 |  | $ | 4,151 |  | $ | 17,369 |  | $ | 10,196
Gross losses |  |  | (2,188) |  |  | (4,151) |  |  | (17,369) |  |  | (10,159)
Net gains (losses) |  | $ | — |  | $ | — |  | $ | — |  | $ | 37

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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