DERIVATIVE INSTRUMENTS

3 Months Ended

Mar. 31, 2020

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

Note 10 – Derivative Instruments

As part of the Company’s overall management of interest rate sensitivity, the Company utilizes derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility, including interest rate lock commitments, forward commitments to sell mortgage-backed securities and interest rate swap contracts.

Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities

The Company issues interest rate lock commitments on originated fixed-rate commercial and residential real estate loans to be sold. The interest rate lock commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. The fair value of the interest rate lock commitments and forward contracts to sell mortgage-backed securities are included in other assets or other liabilities in the consolidated balance sheets. Changes in the fair value of derivative financial instruments are recognized in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

The following table summarizes the interest rate lock commitments and forward commitments to sell mortgage-backed securities held by the Company, their notional amount and estimated fair values at March 31, 2020 and December 31, 2019:

	Notional Amount				Fair Value Gain
	March 31,		December 31,		March 31,		December 31,
(dollars in thousands)	2020		2019		2020		2019
Derivative Instruments (included in Other Assets):
Interest rate lock commitments	$	239,119	$	222,654	$	4,305	$	3,350
Forward commitments to sell mortgage-backed securities		197,756		221,052		—		—
Total	$	436,875	$	443,706	$	4,305	$	3,350

	Notional Amount				Fair Value Loss
	March 31,		December 31,		March 31,		December 31,
(dollars in thousands)	2020		2019		2020		2019
Derivative Instruments (included in Other Liabilities):
Forward commitments to sell mortgage-backed securities	$	28,266	$	—	$	329	$	—

During the three months ended March 31, 2020 and 2019, the Company recognized net gains of $626,000 and $1.3 million, respectively, on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

Interest Rate Swap Contracts

The Company entered into interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. The swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with mirror-image terms. Because of the mirror-image terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in the fair value subsequent to initial recognition have a minimal effect on earnings. These derivative contracts do not qualify for hedge accounting.

The notional amounts of the customer derivative instruments and the offsetting counterparty derivative instruments were $8.8 million and $9.0 million at March 31, 2020 and December 31, 2019, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $888,000 and $306,000 at March 31, 2020 and December 31, 2019, respectively, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.