Derivative Financial Instruments

The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.

The Company entered into various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses, less any ineffectiveness, in the condensed consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.

The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.

The following table presents amounts that were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of March 31, 2020 and December 31, 2019.



(in thousands)	Carrying amount of the hedged asset				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets
Line item in the condensed consolidated balance sheets in which the hedged item is included	March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Loans	$	494,019	$	474,957	$	44,586	$	21,440
Securities available-for-sale ⁽¹⁾	152,551		151,538		6,790		2,802

⁽¹⁾These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item

is the last layer expected to be remaining at the end of the hedging relationship. At both March 31, 2020 and December 31, 2019, the amounts of the designated hedged items were $88.2 million.

The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company’s asset/liability management activities at March 31, 2020 and December 31, 2019, identified by the underlying interest rate-sensitive instruments.



(dollars in thousands) March 31, 2020	Notional		Weighted- Average Remaining Maturity				Weighted-Average Ratio
Instruments Associated With	Value		(years)	Fair Value			Receive	Pay
Loans	$	424,834	5.3	$	(44,872	)	3-month LIBOR	2.86	%
Securities available-for-sale	88,200		3.9	(6,793		)	3-month LIBOR	2.54	%
Total at March 31, 2020	$	513,034	5.0	$	(51,665	)	3-month LIBOR	2.80	%



(dollars in thousands) December 31, 2019	Notional		Weighted- Average Remaining Maturity				Weighted-Average Ratio
Instruments Associated With	Value		(years)	Fair Value			Receive	Pay
Loans	$	427,446	5.5	$	(21,551	)	3-month LIBOR	2.86	%
Securities available-for-sale	88,200		4.1	(2,806		)	3-month LIBOR	2.54	%
Total at December 31, 2019	$	515,646	5.3	$	(24,357	)	3-month LIBOR	2.80	%

The following tables present a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable-rate liabilities used in the Company’s asset/liability management activities at March 31, 2020 and December 31, 2019.



(dollars in thousands) March 31, 2020	Notional		Weighted- Average Remaining Maturity				Weighted-Average Ratio
Cash Flow Hedges	Value		(years)	Fair Value			Receive	Pay
Interest rate swaps	$	110,000	6.8	$	(17,509	)	3-month LIBOR	2.88	%
Interest rate swaps	100,000		3.7	(9,378		)	1-month LIBOR	2.88	%



(dollars in thousands) December 31, 2019	Notional		Weighted- Average Remaining Maturity				Weighted-Average Ratio
Cash Flow Hedges	Value		(years)	Fair Value			Receive	Pay
Interest rate swaps	$	110,000	7.1	$	(8,390	)	3-month LIBOR	2.88	%
Interest rate swaps	100,000		4.0	(5,040		)	1-month LIBOR	2.88	%

These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Company pledged $81.3 million and $42.3 million of cash collateral to counterparties as security for its obligations related to these interest rate swap transactions at March 31, 2020 and December 31, 2019, respectively. Collateral posted and received is dependent on the market valuation of the underlying hedges.

The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at March 31, 2020 and December 31, 2019.



	March 31, 2020					December 31, 2019
(in thousands)	Notional Amount		Fair Value			Notional Amount		Fair Value
Asset Derivatives
Derivatives designated as hedging instruments
Interest rate swaps associated with loans	$	—	$	—		$	—	$	—
Interest rate swaps associated with securities available-for-sale	—		—			—		—
Derivatives not designated as hedging instruments
IRLCs	139,907		2,064			56,256		910
Total contracts	$	139,907	$	2,064		$	56,256	$	910
Liability Derivatives
Derivatives designated as hedging instruments
Interest rate swaps associated with loans	$	424,834	$	(44,872	)	$	427,446	$	(21,551	)
Interest rate swaps associated with securities available-for-sale	88,200		(6,793		)	88,200		(2,806		)
Interest rate swaps associated with liabilities	210,000		(26,887		)	210,000		(13,429		)
Derivatives not designated as hedging instruments
Forward contracts	106,750		(2,298		)	115,000		(153		)
Total contracts	$	829,784	$	(80,850	)	$	840,646	$	(37,939	)

The fair value of interest rate swaps was estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date.

The following table presents the effects of the Company’s cash flow hedge relationships on the condensed consolidated statements of comprehensive income during the three months ended March 31, 2020 and 2019.



	Amount of Loss Recognized in Other Comprehensive (Loss) Income in The Three Months Ended
(in thousands)	March 31, 2020			March 31, 2019
Interest rate swap agreements	$	(13,458	)	$	(3,572	)

The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three months ended March 31, 2020 and 2019.



	Amount of Gain / (Loss) Recognized in the Three Months Ended
(in thousands)	March 31, 2020			March 31, 2019
Asset Derivatives
Derivatives not designated as hedging instruments
IRLCs	$	1,154		$	392

Liability Derivatives
Derivatives not designated as hedging instruments
Forward contracts	$	(2,145	)	$	(67	)

The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of income during the three months ended March 31, 2020 and 2019.



(in thousands) Line item in the condensed consolidated statements of income	Three Months Ended
	March 31, 2020			March 31, 2019
Interest income
Loans	$	(1,224	)	$	21
Securities - taxable	(91		)	(7		)
Securities - non-taxable	(67		)	45
Total interest income	(1,382		)	59
Interest expense
Deposits	307			90
Other borrowed funds	322			34
Total interest expense	629			124
Net interest income	$	(2,011	)	$	(65	)