Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Interest Rate Swaps

The Corporation may use interest rate swap agreements to modify interest rate characteristics from variable to fixed or fixed to variable in order to reduce the impact of interest rate changes on future net interest income. The Corporation’s credit exposure on interest rate swaps includes fair value and any collateral that is held by a third party.

In 2014, the Corporation entered into an amortizing interest rate swap classified as a cash flow hedge with a notional amount of $20.0 million to hedge a portion of the debt financing of a pool of 10-year fixed rate loans with balances totaling $29.1 million, at time of the hedge, that were originated in 2013. A brokered money market demand account with a balance exceeding the amortizing interest rate swap balance is being used for the cash flow hedge. Under the terms of the swap agreement, the Corporation pays a fixed rate of 2.10% and receives a floating rate of one-month LIBOR. The swap matures in November 2022. The Corporation performed an assessment of the hedge for effectiveness at the inception of the hedge and on a recurring basis to determine that the derivative has been and is expected to continue to be highly effective in offsetting changes in cash flows of the hedged item. At December 31, 2019, approximately $63 thousand in net deferred losses, net of tax, recorded in accumulated other comprehensive loss are expected to be reclassified into earnings during the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to December 31, 2019. At December 31, 2019, the notional amount of the interest rate swap was $16.3 million, and the fair value was a liability of $235 thousand.

The Corporation had an interest rate swap classified as a fair value hedge for a 10-year fixed rate loan that was earning interest at 5.83%. The interest rate swap was terminated due to early payoff of the loan during the third quarter of 2019. The Corporation paid a fixed rate of 5.83% and received a floating rate based on the one-month LIBOR plus 350 basis points. The swap was due to mature in October 2021.

The Corporation has an interest rate swap with a current notional amount of $303 thousand, for a 15-year fixed rate loan that is earning interest at 7.43%. The Corporation pays a fixed rate of 7.43% and receives a floating rate based on the one-month LIBOR plus 224 basis points. The swap matures in April 2022. The interest rate swap is carried at fair value in accordance with FASB ASC 815 "Derivatives and Hedging." The loan is carried at fair value under the fair value option as permitted by FASB ASC 825 "Financial Instruments."

Credit Derivatives

The Corporation has agreements with third-party financial institutions whereby the third-party financial institution enters into interest rate derivative contracts with loan customers referred to them by the Corporation. By the terms of the agreements, the third-party financial institution has recourse to the Corporation for any exposure created under each swap contract in the event the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. These transactions represent credit derivatives and are a customary arrangement that allows the Corporation to provide access to interest rate transactions for customers without creating the swap.

At December 31, 2019, the Corporation had thirty-eight variable-rate to fixed-rate interest rate swap transactions between the third-party financial institution and customers with a current notional amount of $270.1 million and remaining maturities ranging from one year to 10 years. At December 31, 2019, the fair value of the swaps to the customers was a net liability of $8.3 million and $225.2 million of notional amount of the swaps were in paying positions while $44.9 million were in receiving positions to the third-party financial institution. At December 31, 2019, the fair value of the Corporation's interest rate swap credit derivative was a liability of $176 thousand.

The maximum potential payments by the Corporation to the third-party financial institution under these credit derivatives are not estimable as they are contingent on future interest rates and the agreement does not provide for a limitation of the maximum potential payment amount.

Mortgage Banking Derivatives

Derivative loan commitments represent agreements for delayed delivery of financial instruments in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified instrument at a specified price or yield. The Corporation’s derivative loan commitments are commitments to sell loans secured by 1-to 4-family residential properties whose predominant risk characteristic is interest rate risk.

Derivatives Tables

The following table presents the notional amounts and fair values of derivatives designated as hedging instruments recorded on the consolidated balance sheets at December 31, 2019 and 2018. The Corporation pledges cash or securities to cover the negative fair value of derivative instruments. Cash collateral associated with derivative instruments are not added to or netted against the fair value amounts.


			Derivative Assets				Derivative Liabilities
(Dollars in thousands)	Notional Amount		Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
At December 31, 2019
Interest rate swap - cash flow hedge	$	16,286		$	—	Other liabilities	$	235

Total	$	16,286		$	—		$	235
At December 31, 2018
Interest rate swap - cash flow hedge	$	17,076	Other assets	$	185		$	—
Interest rate swap - fair value hedge	1,346		Other assets	4			—
Total	$	18,422		$	189		$	—

The following table presents the notional amounts and fair values of derivatives not designated as hedging instruments recorded on the consolidated balance sheets at December 31, 2019 and 2018:


			Derivative Assets				Derivative Liabilities
(Dollars in thousands)	Notional Amount		Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
At December 31, 2019
Interest rate swap	$	303		$	—	Other liabilities	$	14
Credit derivatives	270,147			—		Other liabilities	176
Interest rate locks with customers	19,966		Other assets	399			—
Forward loan sale commitments	21,846			—		Other liabilities	19
Total	$	312,262		$	399		$	209
At December 31, 2018
Interest rate swap	$	418		$	—	Other liabilities	$	20
Credit derivatives	122,410			—		Other liabilities	72
Interest rate locks with customers	21,494		Other assets	490			—
Forward loan sale commitments	23,227			—		Other liabilities	150
Total	$	167,549		$	490		$	242

The following table presents amounts included in the consolidated statements of income for derivatives designated as hedging instruments for the periods indicated:


	Statement of Income Classification	For the Years Ended December 31,
(Dollars in thousands)				2019		2018		2017
Interest rate swap—cash flow hedge—net interest payments	Interest expense	$	(22)	$	15	$	182

Interest rate swap—fair value hedge—effectiveness	Interest income	(5)		—		—
Interest rate swap—cash flow hedge—ineffectiveness	Other noninterest income	—		83		—
Interest rate swap—fair value hedge—ineffectiveness	Other noninterest income	—		3		7
Total net gain (loss)		$	17	$	71	$	(175)

The following table presents amounts included in the consolidated statements of income for derivatives not designated as hedging instruments for the periods indicated:


	Statement of Income Classification	For the Years Ended December 31,
(Dollars in thousands)				2019		2018		2017
Credit derivatives	Other noninterest income	$	1,350	$	262	$	403
Interest rate locks with customers	Net loss on mortgage banking activities	(91)		(37)		(274)
Forward loan sale commitments	Net gain (loss) on mortgage banking activities	131		(211)		(196)
Total net gain (loss)		$	1,390	$	14	$	(67)

The following table presents amounts included in accumulated other comprehensive (loss) income for derivatives designated as hedging instruments at December 31, 2019 and 2018:


	Accumulated Other Comprehensive Income	At December 31,
(Dollars in thousands)				2019		2018
Interest rate swap—cash flow hedge	Fair value, net of taxes	$	(186)	$	80
Total		$	(186)	$	80