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Note 13 - Derivative Financial Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 13 – Derivative Financial Instruments

The Bancorp has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Bancorp to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Bancorp enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Bancorp agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Bancorp 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 client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions 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 Bancorp’s results of operations.

The Bancorp enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., interest rate lock commitment). The interest rate lock commitments are considered derivatives and are recorded on the accompanying consolidated balance sheets at fair value in accordance with FASB ASC 815, Derivatives and Hedging.

The following table shows the amounts of non-hedging derivative financial instruments:

September 30, 2020
	Notational or		Asset derivatives			Liability derivatives
(Dollars in thousands)	contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification		Fair value
Interest rate swap contracts	$	61,909	Other assets	$	4,062	Other liabilties		$	4,062
Interest rate lock commitments		27,507	Other assets		495		N/A		-
Total	$	89,416		$	4,557			$	4,062

December 31, 2019
	Notational or		Asset derivatives			Liability derivatives
(Dollars in thousands)	contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification		Fair value
Interest rate swap contracts	$	29,466	Other assets	$	1,358	Other liabilties		$	1,358
Interest rate lock commitments		12,822	Other assets		186		N/A		-
Total	$	42,288		$	1,544			$	1,358

The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments:

		Nine Months Ended
		September 30,
(Dollars in thousands)	Statement of Income Classification	2020		2019
Interest rate swap contracts	Other income	$	512	$	338
Interest rate lock commitments	Gain on sale of loans held-for-sale, net		309		-
Total		$	821	$	338

The following table shows the offsetting of financial assets and derivative assets:

							Gross Amounts not Offset in the
							Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
September 30, 2020
Interest rate swap contracts	$	4,062	$	-	$	4,062	$	-	$	-	$	4,062
Interest rate lock commitments		495		-		495		-		-		495
Total	$	4,557	$	-	$	4,557	$	-	$	-	$	4,557

							Gross Amounts not Offset in the
							Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
December 31, 2019
Interest rate swap contracts	$	1,358	$	-	$	1,358	$	-	$	-	$	1,358
Interest rate lock commitments		186		-		186		-		-		186
Total	$	1,544	$	-	$	1,544	$	-	$	-	$	1,544

The following table shows the offsetting of financial liabilities and derivative liabilities:

							Gross Amounts not Offset in the
							Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount
September 30, 2020
Interest rate swap contracts	$	4,062	$	-	$	4,062	$	-	$	3,930	$	132
Total	$	4,062	$	-	$	4,062	$	-	$	3,930	$	132

							Gross Amounts not Offset in the
							Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount
December 31, 2019
Interest rate swap contracts	$	1,358	$	-	$	1,358	$	-	$	2,290	$	(932	)
Total	$	1,358	$	-	$	1,358	$	-	$	2,290	$	(932	)