11. DERIVATIVES

During the first quarter of 2019 the Company adopted ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. The Company has adopted the standard in 2019 with minimal impact to its financial position upon transition.

The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR. ARRC has proposed that the transition to SOFR from USD-LIBOR will take place by the end of 2021. The Company has material contracts that are indexed to USD-LIBOR. Industry organizations are currently working on the transition plan. The Company is currently monitoring this activity and evaluating the risks involved.

Cash Flow Hedges of Interest Rate Risk

As part of its asset liability management, the Company utilizes interest rate swap agreements to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Interest rate swaps with notional amounts totaling $305.0 million and $290.0 million at March 31, 2020 and December 31, 2019, respectively, were designated as cash flow hedges of certain FHLB advances. The swaps were determined to be fully effective during the periods presented. The aggregate fair value of the swaps is recorded in other assets or other liabilities, with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.

The following table summarizes information about the interest rate swaps designated as cash flow hedges at March 31, 2020 and December 31, 2019:



(Dollars in thousands)	March 31, 2020			December 31, 2019
Notional amounts	$	305,000		$	290,000
Weighted average pay rates		1.84	%		1.84	%
Weighted average receive rates		1.38	%		1.94	%
Weighted average maturity		4.10	years		2.91	years

Interest income recorded on these swap transactions totaled $110 thousand and $556 thousand for the three months ended March 31, 2020 and 2019, respectively, which is reported as a component of interest expense on FHLB advances. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company's variable-rate assets/liabilities. During the three months ended March 31, 2020, the Company had $110 thousand of reclassifications as a reduction to interest expense. During the next twelve months, the Company estimates that an additional $3.0 million will be reclassified as an increase to interest expense.

The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the consolidated statements of income relating to the cash flow derivative instruments for the three months ended March 31, 2020 and 2019:


					Amount of gain (loss)		Amount of gain
					reclassified from		reclassified from
	Amount of (loss) gain		Amount of (loss) gain		Accumulated OCI		Accumulated OCI
(In thousands)	recognized in OCI		recognized in OCI		into income		into income
Interest rate contracts	included component		excluded component		included component		excluded component
Three months ended March 31, 2020	$	(9,510)	$	—	$	110	$	—
Three months ended March 31, 2019	$	(1,597)	$	—	$	556	$	—

The following table reflects the cash flow hedges included in the consolidated balance sheets at the dates indicated:



	March 31, 2020						December 31, 2019
			Fair		Fair				Fair		Fair
(In thousands)	Notional		Value		Value		Notional		Value		Value
Included in other assets/(liabilities):	Amount		Asset		Liability		Amount		Asset		Liability
Interest rate swaps related to FHLB advances	$	240,000	$	—	$	(10,603)	$	240,000	$	1,233	$	(978)
Forward starting interest rate swaps related to FHLB advances		65,000		—		(360)		50,000		—		(1,427)

Non-Designated Hedges

Derivatives not designated as hedges may be used to manage the Company's exposure to interest rate movements or to provide service to customers but do not meet the requirements for hedge accounting under U.S. GAAP. The Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a third party in order to minimize the net risk exposure resulting from such transactions. These interest-rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in current period earnings.

Interest rate swaps with notional amounts totaled $918.8 million at March 31, 2020. Of the $918.8 million notional amounts, $459.4 million were from loan customers and $459.4 million were from bank counterparties. Interest rate swaps with notional amounts totaled $823.9 million at December 31, 2019. Of the $823.9 million notional amounts, $411.9 million were from loan customers and $411.9 million were from bank counterparties.

The following table presents summary information about the interest rate swaps at March 31, 2020 and December 31, 2019:



(Dollars in thousands)	March 31, 2020			December 31, 2019
Notional amounts	$	918,770		$	823,894
Weighted average pay rates		3.36	%		3.75	%
Weighted average receive rates		3.36	%		3.75	%
Weighted average maturity		10.49	years		10.77	years
Fair value of combined interest rate swaps	$	—		$	—

Loan swap fees recorded on these swap transactions, which is reported as a component of non-interest income, totaled $1.2 million and $1.1 million for the three months ended March 31, 2020 and 2019.

Credit-Risk-Related Contingent Features

As of March 31, 2020, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $69.2 million, while there were no derivatives in a net asset position. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. If the termination value of derivatives is a net liability position, the Company is required to post collateral its obligations to the Company under the agreements. However, if the termination value of derivatives is a net liability position, the Company is required to post collateral to the counterparty. At March 31, 2020, the Company posted collateral of $70.8 million to its counterparties under the agreements in a net liability position and received no collateral from its counterparties under the agreements in a net asset position. If the Company had breached any of these provisions at March 31, 2020, it could have been required to settle its obligations under the agreements at the termination value.