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Derivatives

12 Months Ended

Dec. 31, 2019

NOTE O – DERIVATIVES

As part of its asset liability management activities, the Corporation utilizes interest rate swaps to help manage its interest rate risk position. The notional amount of an interest rate swap does not represent the amount exchanged by the parties. The exchange of cash flows is determined by reference to the notional amount and the other terms of the interest rate swap agreements.

The Bank entered into an interest rate swap with a notional amount totaling $150 million on May 22, 2018 and a second interest rate swap with a notional amount of $50 million on January 17, 2019. The interest rate swaps were designated as cash flow hedges of certain FHLB advances and brokered CDs. The swaps were determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps is recorded in other liabilities, with changes in fair value net of related income taxes 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 Corporation 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.



	December 31, 2019	December 31, 2018
Notional amount	$200 million	$150 million
Weighted average fixed pay rate	2.83%	2.90%
Weighted average 3-month LIBOR receive rate	2.04%	2.38%
Weighted average maturity	2.06 Years	2.43 Years

Interest expense recorded on the swap transactions, which totaled $827,000 for 2019, is recorded as a component of interest expense in the consolidated statements of income. Amounts reported in accumulated other comprehensive income (loss) related to the swaps will be reclassified to interest expense as interest payments are made on the Bank’s variable rate liabilities. During 2019, the Corporation had $827,000 of reclassifications to interest expense. During the next 12 months, the Corporation estimates that $2,237,000 will be reclassified as an increase to interest expense.

The following table presents the net gains (losses) recorded in the consolidated statements of income and the consolidated statements of comprehensive income relating to the interest rate swaps for the years ended 2019 and 2018.



	Twelve Months Ended
	December 31,
(in thousands)	2019		2018
Interest rate contracts:
Amount of loss recognized in OCI (effective portion)	$	(4,116)	$	(1,607)
Amount of loss reclassified from OCI to interest expense		827		477
Amount of loss recognized in other noninterest income (ineffective portion)		—		—

The following table reflects the amounts relating to interest rate swaps included in the consolidated balance sheet at December 31, 2019 and 2018.



		December 31, 2019						December 31, 2018
		Notional	Fair Value				Notional		Fair Value
(in thousands)		Amount	Asset		Liability		Amount		Asset		Liability
Included in other assets or other liabilities			$	—	$	4,418			$	—	$	1,130
Interest rate swap hedging brokered CDs	$	150,000					$	—
Interest rate swap hedging FHLB advances	$	50,000					$	150,000

Credit Risk Related Contingent Features. The Bank’s agreement with its interest rate swap counterparty sets forth minimum collateral posting thresholds. If the termination value of the swaps is a net asset position, the counterparty may be required to post collateral against its obligations to the Bank under the agreement. However, if the termination value of the swaps is a net liability position, the Bank may be required to post collateral to the counterparty. At December 31, 2019, the Bank is in compliance with the collateral posting provisions to its counterparty. The amount of collateral posted amounts to approximately $6.6 million. If the Bank had breached any of these provisions at December 31, 2019, it could have been required to settle its obligations under the agreement at the termination value.