Derivatives, Hedging Activities, and Other Financial Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives, Hedging Activities, and Other Financial Instruments

Derivatives, Hedging Activities and Other Financial Instruments

The Company enters into derivative financial instruments which involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures, seeking to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. In general, the derivative transactions entered into by the Company fall into one of two types: an economic hedge of a derivative offering to Bank customers, or a cash flow hedge related to counter the cash variability of a recognized financial asset or liability. The Company does not use derivative financial instruments for trading purposes.

Customer Derivatives – Interest Rate Swaps

The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurements. The Company recognized gains of $303,000 in other income resulting from fair value adjustments for the three months ended March 31, 2020 as compared to losses of $54,000 during the three months ended March 31, 2019. The notional amount of derivatives not designated as hedging instruments was $490.8 million and $337.6 million at March 31, 2020 and December 31, 2019, respectively.

The table below presents the fair value of derivatives not designated as hedging instruments as well as their location on the consolidated statements of financial condition (in thousands):

	Fair Value
Balance Sheet Location	March 31, 2020		December 31, 2019
Other assets	$	48,612	$	10,141
Other liabilities	48,877		10,708

Credit Risk-Related Contingent Features

The Company is a party to International Swaps and Derivatives Association agreements with third party broker-dealers that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $51.7 million and $13.7 million at March 31, 2020 and December 31, 2019, respectively. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $48.9 million and $10.7 million at March 31, 2020 and December 31, 2019, respectively.

Cash Flow Hedge - Interest Rate Swap

On January 1, 2020, the Company acquired an interest rate swap designated as a cash flow hedge from Country Bank, which is part of the Company’s asset liability management strategy. The notional amount of the interest rate swap designated as a cash flow hedge was $10.0 million and is recorded at a fair value of $624,000 in other liabilities at March 31, 2020. For the three months ended March 31, 2020, the Company recorded an unrealized loss in other comprehensive income of $547,000, net of tax.