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Derivative Financial Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

NOTE 9 – DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

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.

Non-designated Hedges

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 Interest Rate Lock Commitments (“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 September 30, 2020 and December 31, 2019.

	September 30, 2020					December 31, 2019
	Notional		Fair			Notional		Fair
($ in thousands)	Amount		Value			Amount		Value
Asset Derivatives
Derivatives not designated as hedging instruments
Interest rate swaps associated with loans	$	88,509	$	9,169		$	82,826	$	2,846
IRLCs		62,795		290			16,347		55
Total contracts	$	151,304	$	9,459		$	99,173	$	2,901

Liability Derivatives
Derivatives not designated as hedging instruments
Interest rate swaps associated with loans	$	88,509	$	(9,169	)	$	82,826	$	(2,846	)
Forward contracts		71,500		(197	)		22,000		(32	)
Total contracts	$	160,009	$	(9,366	)	$	104,826	$	(2,878	)

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 nine months ended September 30, 2020 and 2019.

		Amount of gain (loss)
($ in thousands)	Statement of income classification	2020			2019
Interest rate swap contracts	Other income	$	282		$	394
Interest rate swap contracts	Other expense		-			-
IRLCs	Gain on sale of mortgage loans & OMSR		235			(215	)
Forward contracts	Gain on sale of mortgage loans & OMSR		(165	)		199

The following table shows the offsetting of financial assets and derivative assets at September 30, 2020 and December 31, 2019.

	Gross		Gross amounts offset in the		Net amounts of assets presented in the		Gross amounts not offset in the consolidated balance sheet
($ in thousands)	amounts of recognized assets		consolidated balance sheet		consolidated balance sheet		Financial instruments		Cash collateral received		Net amount
September 30, 2020
Interest rate swaps	$	9,169	$	-	$	9,169	$	-	$	-	$	9,169

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

The following table shows the offsetting of financial liabilities and derivative liabilities at September 30, 2020 and December 31, 2019.

	Gross		Gross amounts offset in the		Net amounts of liabilities presented in the		Gross amounts not offset in the consolidated balance sheet
($ in thousands)	amounts of recognized liabilities		consolidated balance sheet		consolidated balance sheet		Financial instruments		Cash collateral pledged		Net amount
September 30, 2020
Interest rate swaps	$	9,169	$	-	$	9,169	$	1,155	$	8,241	$	(227	)

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