DERIVATIVES

3 Months Ended

Mar. 31, 2020

DERIVATIVES

DERIVATIVES

NOTE 12 – DERIVATIVES

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

The Company has agreements with certain of its dealer counterparties that contain a provision allowing the counterparty to terminate the derivative positions if the Company fails to maintain its status as a well or adequately capitalized institution.  Upon any such termination, the Company would be required to settle its obligations under the agreements.

As of March 31, 2020, the Company had two dealer counterparties and had a net liability position with respect to each counterparty. The termination value for these net liability positions, which includes accrued interest, was $17.1 million at March 31, 2020. The Company has minimum collateral posting thresholds with its derivative counterparties and has posted collateral of $17.2 million against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2020, it would have been required to settle its obligations under the agreements at the termination value.

During the three months ended March 31, 2020 and 2019, the Company did not record any hedge ineffectiveness.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Income and Comprehensive Income at March 31, 2020 and December 31, 2019:

	March 31, 2020
							Counterparty
	Notional/				Balance	Counterparty	Maximum Length
	Contract		Fair		Sheet	Weighted Average	Derivative Contract
(Dollars in thousands)	Amount		Value		Location	Remaining Years	(years)
Derivatives designated as hedging instruments
Counterparty:
PNC	$	—	$	—	Other Assets
PNC		78,500		(5,489)	Other Liabilities	4.4	7.5
US Bank		—		—	Other Assets
US Bank		310,000		(11,647)	Other Liabilities	2.9	5
Total	$	388,500	$	(17,136)		3.2

	December 31, 2019
							Counterparty
	Notional/				Balance	Counterparty	Maximum Length
	Contract		Fair		Sheet	Weighted Average	Derivative Contract
(Dollars in thousands)	Amount		Value		Location	Remaining Years	(years)
Derivatives designated as hedging instruments
Counterparty:
PNC	$	12,500	$	62	Other Assets
PNC		66,000		(1,440)	Other Liabilities	4.3	7
US Bank		80,000		627	Other Assets
US Bank		170,000		(2,450)	Other Liabilities	3.1	4.75
Total		328,500		(3,201)		3.3

The table below presents the Company’s derivative financial instruments that are designated as cash flow hedges of interest rate risk and their effect on the Company’s Consolidated Statements of Income and Comprehensive Income during the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31, 2020
	Amount of Gain
	Recognized in OCI		Location of Gain
	on		(Loss) Recognized in	Amount of Gain (Loss)
	Derivatives, net of		Income of	Recognized in Income of
	Tax		Derivatives	Derivatives
(Dollars in thousands)	(Effective Portion)		(Ineffective Portion)	(Ineffective Portion)
Derivatives in cash flow hedges
Interest rate swaps by effective date:
PNC	$	(2,874)	Not applicable	$	—
US Bank		(6,868)	Not applicable		—
Total	$	(9,741)		$	—

	Three Months Ended March 31, 2019
	Amount of Gain
	Recognized in OCI		Location of Gain
	on		(Loss) Recognized in	Amount of Gain (Loss)
	Derivatives, net of		Income of	Recognized in Income of
	Tax		Derivatives	Derivatives
(Dollars in thousands)	(Effective Portion)		(Ineffective Portion)	(Ineffective Portion)
Derivatives in cash flow hedges
Interest rate swaps by effective date:
PNC	$	(811)	Not applicable	$	—
US Bank		(402)	Not applicable		—
Total	$	(1,213)		$	—

The Company has master netting arrangements with its counterparty.  All master netting arrangements include rights to offset associated with the Company’s recognized derivative assets, derivative liabilities, and cash collateral received and pledged.

Amounts reported in accumulated other comprehensive income related to derivatives are reclassified to interest expense as interest payments made on the Company’s variable rate borrowing positions. During the three months ended March 31, 2020, the Company had $27 thousand of reclassifications to interest income. During the three months ended March 31, 2019, the Company had $54 thousand of reclassifications to interest expense.

As required under the master netting arrangement with its derivatives counterparty, the Company pledged $6.1 million of financial collateral at March 31, 2020, and received financial collateral in the amount of $2.8 million at March 31, 2019.

Offsetting derivatives

The following table presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives in the Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019. The net amounts of derivative liabilities and assets can be reconciled to the tabular disclosure of the fair value hierarchy, see Note 12, Fair Value of Financial Instruments. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Company’s Consolidated Balance Sheets.

						Gross Amounts Not Offset
				Net			Cash
		Derivatives in	Derivatives in	Amounts		Financial	Collateral		Net
(Dollars in thousands)		Asset Position	Liability Position	Presented		Instruments	Pledged		Amount
March 31, 2020
Interest Rate Swaps (PNC)	$	—	(5,489)	$	(5,489)	—	$	(5,750)	$	261
Interest Rate Swaps (US Bank)		—	(11,647)		(11,647)	—		(11,410)		(237)
Total	$	—	(17,136)	$	(17,136)	—	$	(17,160)	$	24
December 31, 2019
Interest Rate Swaps (PNC)	$	62	(1,440)	$	(1,378)	—	$	(1,550)	$	172
Interest Rate Swaps (US Bank)		627	(2,450)		(1,823)	—		(2,050)		227
Total	$	689	(3,890)	$	(3,201)	—	$	(3,600)	$	399