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Note 12 - Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Text Block]

12. Derivative Financial Instruments

At September 30, 2019 and December 31, 2018, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used for three purposes: 1) to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million, at September 30, 2019 and December 31, 2018; 2) to mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $337.3 million and $286.1 million at September 30, 2019 and December 31, 2018, respectively; and 3) to mitigate exposure to rising interest rates on certain short-term advances totaling $541.5 million and $441.5 million at September 30, 2019 and December 31, 2018, respectively.

At September 30, 2019 and December 31, 2018, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not designated as hedges.

The Company’s derivative instruments are carried at fair value in the Company’s financial statements as part of Other Assets for derivatives with positive fair values and Other Liabilities for derivatives with negative fair values. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.

At September 30, 2019 and December 31, 2018, derivatives with a combined notional amount of $36.3 million were not designated as hedges. At September 30, 2019 and December 31, 2018, derivatives with a combined notional amount of $318.9 million and $267.8 million, respectively, were designated as fair value hedges. At September 30, 2019 and December 31, 2018, derivatives with a combined notional amount of $541.5 million and $441.5 million, respectively, were designated as cash flow hedges.

For cash flow hedges, the effective portion of changes in the fair value of the derivative is reported in AOCL, net of tax. Amounts in AOCL are reclassified into earnings in the same period during which the hedged forecasted transaction effects earnings. During the three months ended September 30, 2019 and 2018, $0.4 million and $0.1 million, respectively, were reclassified from accumulated other comprehensive loss to interest expense. During the nine months ended September 30, 2019 and 2018, $1.3 million and $0.2 million, respectively, were reclassified from accumulated other comprehensive loss to interest expense.

Changes in the fair value of interest rate swaps not designated as hedges are reflected in “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income.

The following table sets forth information regarding the Company’s derivative financial instruments at the periods indicated:

	September 30, 2019					December 31, 2018
	Notional		Net Carrying			Notional		Net Carrying
	Amount		Value ⁽¹⁾			Amount		Value ⁽¹⁾
	(In thousands)

Interest rate swaps (fair value hedge)	$	50,463	$	156		$	248,330	$	10,593
Interest rate swaps (fair value hedge)		268,468		(13,277	)		19,468		(502	)
Interest rate swaps (cash flow hedge)		-		-			441,500		5,368
Interest rate swaps (cash flow hedge)		541,500		(11,695	)		-		-
Interest rate swaps (non-hedge)		36,321		(6,016	)		36,321		(1,737	)
Total derivatives	$	896,752	$	(30,832	)	$	745,619	$	13,722

(1)	Derivatives in a positive position are recorded as “Other assets” and derivatives in a negative position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition.

The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income for the periods indicated:

	For the three months ended						For the nine months ended
	September 30,						September 30,
(In thousands)	2019			2018			2019			2018

Financial Derivatives:
Interest rate swaps (non-hedge) ⁽¹⁾	$	(1,632	)	$	668		$	(4,279	)	$	2,382
Interest rate swaps (fair value hedge) ⁽²⁾		(1,262	)		(153	)		(2,717	)		525
Net (loss) gain	$	(2,894	)	$	515		$	(6,996	)	$	2,907

(1)

Net gains and losses are recorded as part of “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income.

(2)

Net gains and losses recorded during the three and nine months ended September 30, 2019, are recorded as part of “Interests and fees on loans” in the Consolidated Statements of Income. Net gains and losses recorded during the three and nine months ended September 30, 2018, are recorded as part of “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income.

The Company’s interest rate swaps are subject to master netting arrangements between the Company and its two designated counterparties. The Company has not made a policy election to offset its derivative positions.

The following tables present the effect of the master netting arrangements on the presentation of the derivative assets and liabilities in the Consolidated Statements of Condition as of the dates indicated:

	September 30, 2019
							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Assets		Gross Amount Offset in the Statement of Condition		Net Amount of Assets Presented in the Statement of Condition		Financial Instruments		Cash Collateral Received		Net Amount

Interest rate swaps	$	156	$	-	$	156	$	-	$	-	$	156

							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Liabilities		Gross Amount Offset in the Statement of Condition		Net Amount of Liabilities Presented in the Statement of Condition		Financial Instruments		Cash Collateral Pledged		Net Amount

Interest rate swaps	$	30,988	$	-	$	30,988	$	31,070	$	-	$	(82	)

	December 31, 2018
							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Assets		Gross Amount Offset in the Statement of Condition		Net Amount of Assets Presented in the Statement of Condition		Financial Instruments		Cash Collateral Received		Net Amount

Interest rate swaps	$	15,961	$	-	$	15,961	$	-	$	14,960	$	1,001

							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Liabilities		Gross Amount Offset in the Statement of Condition		Net Amount of Liabilities Presented in the Statement of Condition		Financial Instruments		Cash Collateral Pledged		Net Amount

Interest rate swaps	$	2,239	$	-	$	2,239	$	-	$	-	$	2,239