DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2020

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS

The Company, through the Bank, has outstanding interest rate swap contracts in which the Bank entered into an interest rate swap with a customer and entered into an equal and offsetting interest rate swap with another financial institution at the same time. These interest rate swap contracts are not designated as hedging instruments for mitigating interest rate risk of the Bank. The objective of the transactions is to allow the Bank’s customers to effectively convert a variable rate loan to a fixed rate.

In connection with each swap transaction, the Bank agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Bank agrees to pay a third-party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. Because the Bank acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and would not significantly impact the Company’s operating results except in certain situations where there is a significant deterioration in the customer’s credit worthiness or that of the counterparties. At June 30, 2020 and December 31, 2019, no such deterioration was determined by management.

At June 30, 2020 and December 31, 2019, the Company had 22 and 19 interest rate swap agreements outstanding with borrowers and financial institutions, respectively. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in noninterest income or expense. Fair value amounts are included in other assets and other liabilities.

In April 2020, the Company entered into a credit risk participation agreement with another financial institution. Such agreement is associated with an interest rate swap related to a loan for which the Company is the lead agent bank.  This agreement provides credit protection to the Company should the borrower fail to perform under the terms of the interest rate swap agreement.  The fair value of the agreement is determined based on the market value of the underlying interest rate swap adjusted for credit spreads and recovery rates. Derivative instruments outstanding as of the dates shown below were as follows:

								Weighted
								Average
		Notional		Fair				Maturity
(Dollars in thousands)	Classification	Amounts		Value		Fixed Rate	Floating Rate	(Years)
June 30, 2020
Interest rate swaps with customers	Other Assets	$	143,202	$	10,111	3.25% - 5.89%	LIBOR 1M + 2.50% - 3.00%	6.65
Interest rate swaps with financial institution	Other Liabilities		143,202		(10,111)	3.25% - 5.89%	LIBOR 1M + 2.50% - 3.00%	6.65
Credit risk participation agreement with financial institution	Other Liabilities		14,473		(67)	3.50%	LIBOR 1M + 2.50%	9.75
Total derivatives		$	300,877	$	(67)

								Weighted
								Average
		Notional		Fair				Maturity
(Dollars in thousands)	Classification	Amounts		Value		Fixed Rate	Floating Rate	(Years)
December 31, 2019
Interest rate swaps with customers	Other Assets	$	69,189	$	2,599	4.40% - 5.89%	LIBOR 1M + 2.50% - 3.00%	6.65
Interest rate swaps with financial institution	Other Assets		5,987		39	4.00%	LIBOR 1M + 2.50%	6.71
Interest rate swaps with customers	Other Liabilities		5,987		(39)	4.00%	LIBOR 1M + 2.50%	6.71
Interest rate swaps with financial institution	Other Liabilities		69,189		(2,599)	4.40% - 5.89%	LIBOR 1M + 2.50% - 3.00%	6.65
Total derivatives		$	150,352	$	—