Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Interest Rate Swaps

The Corporation periodically uses 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 June 30, 2020, approximately $238 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 June 30, 2020. At June 30, 2020, the notional amount of the interest rate swap was $15.9 million and the fair value was a liability of $695 thousand.

The Corporation has an interest rate swap with a current notional amount of $242 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 June 30, 2020, the Corporation reported fifty-eight variable-rate to fixed-rate interest rate swap transactions between the third-party financial institution and customers with a current notional amount of $393.4 million and remaining maturities ranging from two years to 10 years. At June 30, 2020, the fair value of the Corporation's interest rate swap credit derivatives was a liability of $912 thousand. At June 30, 2020, the fair value of the swaps to the customers was a net liability of $35.1 million and these swaps were in paying positions to the third-party financial institution.

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 June 30, 2020 and December 31, 2019. 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 June 30, 2020
Interest rate swap - cash flow hedge	$	15,880		$	—	Other liabilities	$	695
Total	$	15,880		$	—		$	695
At December 31, 2019
Interest rate swap - cash flow hedge	$	16,286		$	—	Other liabilities	$	235
Total	$	16,286		$	—		$	235

The following table presents the notional amounts and fair values of derivatives not designated as hedging instruments recorded on the consolidated balance sheets at June 30, 2020 and December 31, 2019:

			Derivative Assets			Derivative Liabilities
(Dollars in thousands)	Notional Amount		Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
At June 30, 2020
Interest rate swap	$	242		$	—	Other liabilities	$	13
Credit derivatives	393,444			—		Other liabilities	912
Interest rate locks with customers	106,956		Other assets	3,453			—
Forward loan sale commitments	111,649			—		Other liabilities	582
Total	$	612,291		$	3,453		$	1,507
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

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	Three Months Ended				Six Months Ended
		June 30,				June 30,
(Dollars in thousands)		2020		2019		2020		2019
Interest rate swap—cash flow hedge—net interest payments	Interest expense	$	69	$	(14)	$	98	$	(30)
Interest rate swap—fair value hedge—effectiveness	Interest income	—		—		—		1
Total net (loss) gain		$	(69)	$	14	$	(98)	$	31

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	Three Months Ended				Six Months Ended
		June 30,				June 30,
(Dollars in thousands)		2020		2019		2020		2019
Credit derivatives	Other noninterest income	$	1,665	$	318	$	1,805	$	582
Interest rate locks with customers	Net gain on mortgage banking activities	542		343		3,054		308
Forward loan sale commitments	Net gain (loss) on mortgage banking activities	304		(76)		(563)		(47)
Total net gain		$	2,511	$	585	$	4,296	$	843

The following table presents amounts included in accumulated other comprehensive (loss) income for derivatives designated as hedging instruments at June 30, 2020 and December 31, 2019:

(Dollars in thousands)	Accumulated Other Comprehensive (Loss) Income	At June 30, 2020		At December 31, 2019
Interest rate swap—cash flow hedge	Fair value, net of taxes	$	(549)	$	(185)
Total		$	(549)	$	(185)