Note 10: Derivative Financial Instruments

The Company has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s Consolidated Statements of Income. The notional amount of customer-facing swaps as of March 31, 2019 and December 31, 2018 was approximately $27.5 million and $21.1 million, respectively. During the three months ended March 31, 2019 and 2018, the Company did not recognize any net gains or losses related to the changes in fair value of these swaps. Additionally, the Company recognized $51,000 of income for the related swap fees for the three months ended March 31, 2019 and no swap fee income for the three months ended March 31, 2018.

The following table shows the fair values of derivative financial instruments at March 31, 2019 and December 31, 2018.


	Derivatives
		Fair Value					Fair Value
	Balance Sheet	March 31,		December 31,		Balance Sheet	March 31,		December 31,
	Location	2019		2018		Location	2019		2018
Derivatives not designated as hedging instruments:
Interest rate contracts	Other assets	$	667	$	599	Other liabilities	$	667	$	599