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Derivative Financial Instruments

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 6: Derivative Financial Instruments

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational risks primarily 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 through 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 payments principally related to certain variable-rate assets.

The Company does not use derivatives for trading or speculative purposes. 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.

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 that are entered into, economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. 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 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 consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets.

The table below presents the notional amount and fair value of the Company’s interest rate swaps, IRLCs and forward contracts utilized as of December 31, 2019 and 2018.

	December 31, 2019					December 31, 2018
($ in thousands)	Notional		Fair			Notional		Fair
	Amount		Value			Amount		Value
Asset Derivatives
Derivatives not designated as hedging instruments
Interest rate swaps associated with loans	$	82,826	$	2,846		$	49,927	$	687
IRLCs		16,347		55			9,896		83
Total contracts	$	99,173	$	2,901		$	59,823	$	770

Liability Derivatives
Derivatives not designated as hedging instruments
Interest rate swaps associated with loans	$	82,826	$	(2,846	)	$	49,927	$	(687	)
Forward contracts		22,000		(32	)		14,500		(113	)
Total contracts	$	104,826	$	(2,878	)	$	64,427	$	(800	)

The fair value of interest rate swaps were 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 amounts included in the consolidated statements of income for non-hedging derivative financial instruments for the twelve months ended December 31, 2019 and 2018.

		Amount of gain (loss)
($ in thousands)	Statement of income classification	2019			2018
Interest rate swap contracts	Other income	$	513		$	146
Interest rate swap contracts	Other expense		(41	)		-
IRLCs	Gain on sale of mortgage loans & OMSR		(28	)		76
Forward contracts	Gain on sale of mortgage loans & OMSR		81			(90	)

The following table shows the offsetting of financial assets and derivative assets at December 31, 2019 and 2018.

($ in thousands)	Gross amounts		Gross amounts offset in the		Net amounts of assets presented in		Gross amounts not offset in the consolidated balance sheet
	of recognized assets		consolidated balance sheet		the consolidated balance sheet		Financial instruments		Cash collateral received		Net amount

December 31, 2019 Interest rate swaps	$	2,901	$	55	$	2,846	$	-	$	-	$	2,846

December 31, 2018 Interest rate swaps	$	1,272	$	585	$	687	$	-	$	310	$	377

The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2019 and 2018.

($ in thousands)	Gross amounts		Gross amounts offset in the		Net amounts of liabilities presented in		Gross amounts not offset in the consolidated balance sheet
	of recognized liabilities		consolidated balance sheet		the consolidated balance sheet		Financial instruments		Cash collateral pledged		Net amount

December 31, 2019 Interest rate swaps	$	2,901	$	55	$	2,846	$	-	$	3,242	$	(396	)

December 31, 2018 Interest rate swaps	$	1,272	$	585	$	687	$	-	$	-	$	687