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Derivatives and hedging activities | 3 Months Ended
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Mar. 31, 2020
Derivatives and hedging activities |
Derivatives and hedging activities | 9. Derivatives and hedging activities Risk Management Objective of Using Derivatives The Company is exposed to certain risk 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 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 principally related to the Company’s assets. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate floors as part of its interest rate risk management strategy. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up-front premium. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded components is presented in interest income. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During 2020, the Company estimates that an additional $64 will be reclassified as a reduction to interest income. Non-designated Hedges Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of March 31, 2020, the Company had 44 interest rate swaps with an aggregate notional amount of $225,376 related to this program. Fair Values of Derivative Instruments on the Balance Sheet The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of March 31 2020 and December 31, 2019.
|  |  |  | Asset Derivatives |  | Asset Derivatives |  | Liability Derivatives |  | Liability Derivatives
|  |  |  | As of March 31, 2020 |  | As of December 31, 2019 (1) |  | As of March 31, 2020 |  | As of December 31, 2019 (2)
|  | Notional |  | Balance Sheet |  |  |  |  | Balance Sheet |  |  |  |  | Balance Sheet |  |  |  |  | Balance Sheet |  |  |
|  | Amount |  | Location |  | Fair Value |  | Location |  | Fair Value |  | Location |  | Fair Value |  | Location |  | Fair Value
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Floor | $ | 25,000 |  | Other Assets |  | $ | 1,966 |  | Other Assets |  | $ | 944 |  |  |  |  |  |  |  |  |  |
Total derivatives designated as hedging instruments |  |  |  |  |  | $ | 1,966 |  |  |  | $ | 944 |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swaps | $ | 225,376 |  | Other Assets |  | $ | 14,679 |  | Other Assets |  | $ | 4,728 |  | Other Liabilities |  | $ | 14,762 |  | Other Liabilities |  | $ | 4,680
Total derivatives not designated as hedging instruments |  |  |  |  |  | $ | 14,679 |  |  |  | $ | 4,728 |  |  |  | $ | 14,762 |  |  |  | $ | 4,680
| (1) |  | Assets amount does not include accrued interest receivable of $65.
| (2) |  | Liabilities amount does not include accrued interest payable of $65.
| (3) |  | Notional amount of interest rate swaps at March 31, 2019 $79,667.
Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss) The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income (loss) as of March 31, 2020 and March 31, 2019.
|  |  |  |  |  |  |  |  |  | Location of |  |  |  |  |  | Amount of |  |  | Amount of
|  | Amount of |  |  | Amount of |  |  | Amount of |  | Gain or (Loss) |  |  | Amount of |  |  | Gain |  |  | Loss
|  | Loss |  |  | Loss |  |  | Gain |  | Recognized from |  |  | Loss |  |  | Reclassified |  |  | Reclassified
|  | Recognized in |  |  | Recognized in |  |  | Recognized in |  | Accumulated |  |  | Reclassified |  |  | from Accumulated |  |  | from Accumulated
Derivatives in |  | OCI on |  |  | OCI Included |  |  | OCI Excluded |  | Other Comprehensive |  |  | from Accumulated |  |  | OCI into Income |  |  | OCI into Income
Hedging |  | Derivative |  |  | Component |  |  | Component |  | Income into |  |  | OCI into Income |  |  | Included Component |  |  | Excluded Component
Relationships |  |  |  |  | March 31, 2020 |  |  |  |  | Income |  |  |  |  |  | March 31, 2020 |  |  |
Derivatives in Cash Flow Hedging Relationships |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Floor (*) | $ | (1,072) |  | $ | (1,104) |  | $ | 36 |  | Interest Income |  | $ | 36 |  | $ | 52 |  | $ | (16)
|  |  |  |  |  |  |  |  |  | Location of |  |  |  |  |  | Amount of |  |  | Amount of
|  | Amount of |  |  | Amount of |  |  | Amount of |  | Gain or (Loss) |  |  | Amount of |  |  | Gain |  |  | Loss
|  | Gain |  |  | Gain |  |  | Loss |  | Recognized from |  |  | Gain |  |  | Reclassified |  |  | Reclassified
|  | Recognized in |  |  | Recognized in |  |  | Recognized in |  | Accumulated |  |  | Reclassified |  |  | from Accumulated |  |  | from Accumulated
Derivatives in |  | OCI on |  |  | OCI Included |  |  | OCI Excluded |  | Other Comprehensive |  |  | from Accumulated |  |  | OCI into Income |  |  | OCI into Income
Hedging |  | Derivative |  |  | Component |  |  | Component |  | Income into |  |  | OCI into Income |  |  | Included Component |  |  | Excluded Component
Relationships |  |  |  |  | March 31, 2019 |  |  |  |  | Income |  |  |  |  |  | March 31, 2019 |  |  |
Derivatives in Cash Flow Hedging Relationships |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Floor (*) | $ | 47 |  | $ | 295 |  | $ | (248) |  | Interest Income |  | $ | (15) |  | $ |  |  | $ | (15)
| * |  | Amounts disclosed are gross and not net of taxes.
Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income and Comprehensive Income The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2020 and March 31, 2019.
|  | Location and Amount of Gain or (Loss) Recognized in
|  | Income on Fair Value and Cash Flow Hedging
|  | Relationships
|  | 2020 |  | 2019
|  | Interest Income |  | Interest Income
Total amounts of income and expense line items presented in the statements of income and comprehensive income in which the effects of fair value or cash flow hedges are recorded | $ | 36 | $ | (15)
The effects of fair value and cash flow hedging: |  |  |  |
Gain or (loss) on cash flow hedging relationships |  |  |  |
Interest contracts |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | $ | 36 | $ | (15)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - included component |  | 52 |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income - excluded component | $ | (16) | $ | (15)
Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2020 and 2019.
|  |  |  | Amount of Loss |  | Amount of Loss |
|  |  |  | Recognized in |  | Recognized in |
|  | Location of Gain or (Loss) |  | Income |  | Income |
|  | Recognized in Income on |  | Three Months Ended |  | Three Months Ended |
Derivatives Not Designated as Hedging Instruments |  | Derivative |  | March 31, 2020 |  | March 31, 2019 |
Interest Rate Swaps |  | Other non-interest income |  | $ | (131) |  | $ | (110) |
Fee Income |  | Other income / (expense) |  | $ | 601 |  | $ | 391 |
Offsetting Derivatives The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2020 and December 31, 2019. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Consolidated Balance Sheets.
Offsetting of Derivative Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
as of March 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Balance Sheet |  |  |
|  | Gross |  |  |  | Net Amounts |  |  |  |  |  |  |  |  |
|  | Amounts of |  | Gross Amounts |  | of Assets |  |  |  |  |  |  |  |  |
|  | Recognized |  | Offset in the |  | presented in the |  | Financial |  | Cash Collateral |  | Net
|  | Assets |  | Balance Sheet |  | Balance Sheet |  | Instruments |  | Received |  | Amount
Derivatives |  | $ | 16,645 |  | $ |  |  | $ | 16,645 |  | $ |  |  |  |  |  | $ | 16,645
Offsetting of Derivative Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
as of March 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Balance Sheet |  |  |
|  | Gross |  |  |  | Net Amounts |  |  |  |  |  |  |  |  |
|  | Amounts of |  | Gross Amounts |  | of Assets |  |  |  |  |  |  |  |  |
|  | Recognized |  | Offset in the |  | presented in the |  | Financial |  | Cash Collateral |  | Net
|  | Assets |  | Balance Sheet |  | Balance Sheet |  | Instruments |  | Received |  | Amount
Derivatives |  | $ | 14,762 |  | $ |  |  | $ | 14,762 |  | $ |  |  |  |  |  | $ | 14,762
Offsetting of Derivative Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
as of December 31, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Balance Sheet |  |  |
|  | Gross |  |  |  | Net Amounts |  |  |  |  |  |  |  |  |
|  | Amounts of |  | Gross Amounts |  | of Assets |  |  |  |  |  |  |  |  |
|  | Recognized |  | Offset in the |  | presented in the |  | Financial |  | Cash Collateral |  | Net
|  | Assets |  | Balance Sheet |  | Balance Sheet |  | Instruments |  | Received |  | Amount
Derivatives |  | $ | 5,672 |  | $ |  |  | $ | 5,672 |  | $ |  |  |  |  |  | $ | 5,672
Offsetting of Derivative Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
as of December 31, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Balance Sheet |  |  |
|  | Gross |  |  |  | Net Amounts |  |  |  |  |  |  |  |  |
|  | Amounts of |  | Gross Amounts |  | of Assets |  |  |  |  |  |  |  |  |
|  | Recognized |  | Offset in the |  | presented in the |  | Financial |  | Cash Collateral |  | Net
|  | Assets |  | Balance Sheet |  | Balance Sheet |  | Instruments |  | Received |  | Amount
Derivatives |  | $ | 4,680 |  | $ |  |  | $ | 4,680 |  | $ |  |  |  |  |  | $ | 4,680
Credit-risk-related Contingent Features The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. The Company has agreements with certain of its derivative counterparties that contain provisions that require the Company’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Company’s credit rating is reduced below investment grade then a termination event shall be deemed to have occurred and the non-affected counterparty shall have the right but not obligation to terminate all affected transactions under the agreement. As of March 31, 2020, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $83. As of December 31, 2019, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $48. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $13,090 against its obligations under these agreements as of March 31, 2020, compared to having posted collateral of $5,120 with counterparties at December 31, 2019. If the Company had breached any of these provisions it could have been required to settle its obligations under the agreements at the termination value.

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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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