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Derivatives and Balance Sheet Offsetting | 9 Months Ended
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Sep. 30, 2021
General Discussion of Derivative Instruments and Hedging Activities [Abstract] |
Derivatives and Hedging Activities | Derivatives, Hedging Activities and Balance Sheet Offsetting The Company is exposed to certain risks arising from both its business and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into interest rate-based derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio. The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company used an interest rate collar as part of its interest rate risk management strategy. Interest rate collars designated as cash flow hedges involve the payments of variable-rate amounts if interest rates rise above the cap strike rate on the contract and receipts of variable-rate amounts if interest rates fall below the floor strike rate on the contract. These derivative contracts were used to hedge the variable cash flows associated with existing variable-rate assets. With respect to derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives are reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During the next 12 months, the Company estimates that there will be $10.4 million reclassified as an increase to interest income. The Company may use derivatives to hedge the risk or changes in the fair values of interest rate lock commitments and residential mortgage loans held for sale. These derivatives are not designated as hedging instruments. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in income. The Company primarily utilizes interest rate forward loan sales contracts in its derivative risk management strategy. The Company enters into forward delivery contracts to sell residential mortgage loans to broker-dealers at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage interest rate lock commitments. Credit risk associated with forward contracts is limited to the replacement cost of those forward contracts in a gain position. There were no counterparty default losses on forward contracts during the three and nine months ended September 30, 2021 and 2020. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Bank limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with broker-dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the Company completes the transaction by either paying or receiving a fee to or from the broker-dealer equal to the increase or decrease in the market value of the forward contract. At September 30, 2021 and December 31, 2020, the Bank had commitments to originate mortgage loans held for sale totaling $30.6 million and $31.9 million, respectively, and forward sales commitments of $27.5 million and $26.5 million, respectively, which are used to hedge both on-balance sheet and off-balance sheet exposures. In addition, the Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The Company then enters into a corresponding swap agreement with a third-party in order to offset its exposure on the variable and fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the FASB ASC, the instruments are marked to market in earnings. The notional amount of open interest rate swap agreements at September 30, 2021 and December 31, 2020 was $587.9 million and $597.9 million, respectively. The following table presents the fair value of derivatives, as well as their classification on the Consolidated Balance Sheet as of the dates presented:
| Asset Derivatives |  | Liability Derivatives
| September 30, 2021 |  | December 31, 2020 |  | September 30, 2021 |  | December 31, 2020
| Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
| (in thousands)
Derivatives not designated as hedging instruments:
Interest rate lock commitments | Other assets |  | $ | 482 |  |  | Other assets |  | $ | 1,096 |  |  | Other liabilities |  | $ | — |  |  | Other liabilities |  | $ | — |
Interest rate forward loan sales contracts | Other assets |  | $ | — |  |  | Other assets |  | $ | — |  |  | Other liabilities |  | $ | 79 |  |  | Other liabilities |  | $ | 165 |
Interest rate swap contracts | Other assets |  | $ | 29,139 |  |  | Other assets |  | $ | 46,184 |  |  | Other liabilities |  | $ | 29,139 |  |  | Other liabilities |  | $ | 46,637 |
The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive income (loss) for the periods indicated:
| Amount of Gain or (Loss) Recognized in Accumulated Other Comprehensive Income on Derivative |  | Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income |  | Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
| Three Months Ended September 30, |  |  |  | Three Months Ended September 30,
| 2021 |  | 2020 |  |  |  | 2021 |  | 2020
| (in thousands) |  |  |  | (in thousands)
Interest rate collar | $ | — |  |  | $ | (81) |  |  | Interest income |  | $ | 2,631 |  |  | $ | 2,673 |
| Nine Months Ended September 30, |  |  |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  |  |  | 2021 |  | 2020
| (in thousands) |  |  |  | (in thousands)
Interest rate collar | $ | — |  |  | $ | 26,744 |  |  | Interest income |  | $ | 7,809 |  |  | $ | 5,803 |
In January 2019, the Company entered into a $500.0 million notional interest rate collar with a five-year term. In October 2020, the collar was terminated and resulted in a $34.4 million realized gain that was recorded in accumulated other comprehensive income, net of deferred income taxes. The gain will amortize through February 2024 into interest income. The gain will be amortized in this manner as long as the cash flows pertaining to the hedged item are expected to occur. The following table summarizes the types of derivatives not designated as hedging instruments and the gains (losses) recorded during the periods indicated:
|  | Three Months Ended September 30, | Nine Months Ended September 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
|  | (in thousands)
Interest rate lock commitments |  | $ | (103) |  |  | $ | 169 |  |  | $ | (614) |  |  | $ | 169 |
Interest rate forward loan sales contracts |  | (57) |  |  | (3) |  |  | 86 |  |  | (3) |
Interest rate swap contracts |  | (22) |  |  | (2) |  |  | 50 |  |  | (475) |
Total derivative gains (losses) |  | $ | (182) |  |  | $ | 164 |  |  | $ | (478) |  |  | $ | (309) |
The gains and losses on the Company’s mortgage banking derivatives are included in loan revenue. Mark-to-market gains and losses on the Company’s interest rate swap contracts are recorded to “Other” noninterest expense. The Company is party to interest rate swap contracts and repurchase agreements that are subject to enforceable master netting arrangements or similar agreements. Under these agreements, the Company may have the right to net settle multiple contracts with the same counterparty. The following tables show the gross interest rate swap contracts, collar agreements and repurchase agreements in the Consolidated Balance Sheets and the respective collateral received or pledged in the form of cash or other financial instruments. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability. Therefore, instances of over-collateralization are not shown.
| Gross Amounts of Recognized Assets/Liabilities |  | Gross Amounts Offset in the Consolidated Balance Sheets |  | Net Amounts of Assets/Liabilities Presented in the Consolidated Balance Sheets |  | Gross Amounts Not Offset in the Consolidated Balance Sheets
|  |  |  | Collateral Pledged/Received |  | Net Amount
September 30, 2021 | (in thousands)
Assets |  |  |  |  |  |  |  |  |
Interest rate swap contracts | $ | 29,139 |  |  | $ | — |  |  | $ | 29,139 |  |  | $ | (370) |  |  | $ | 28,769 |
Liabilities |  |  |  |  |  |  |  |  |
Interest rate swap contracts | $ | 29,139 |  |  | $ | — |  |  | $ | 29,139 |  |  | $ | (26,670) |  |  | $ | 2,469 |
Repurchase agreements | $ | 40,040 |  |  | $ | — |  |  | $ | 40,040 |  |  | $ | (40,040) |  |  | $ | — |
December 31, 2020 |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |
Interest rate swap contracts | $ | 46,184 |  |  | $ | — |  |  | $ | 46,184 |  |  | $ | — |  |  | $ | 46,184 |
Liabilities |  |  |  |  |  |  |  |  |
Interest rate swap contracts | $ | 46,637 |  |  | $ | — |  |  | $ | 46,637 |  |  | $ | (46,637) |  |  | $ | — |
Repurchase agreements | $ | 73,859 |  |  | $ | — |  |  | $ | 73,859 |  |  | $ | (73,859) |  |  | $ | — |
The Company’s agreements with each of its derivative counterparties provide that if the Company defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The following table presents the class of collateral pledged for repurchase agreements as well as the remaining contractual maturity of the repurchase agreements:
|  | Remaining contractual maturity of the agreements
|  | Overnight and continuous |  | Up to 30 days |  | 30 - 90 days |  | Greater than 90 days |  | Total
September 30, 2021 |  | (in thousands)
Class of collateral pledged for repurchase agreements |  |  |  |  |  |  |  |  |  |
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations |  | $ | 40,040 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 40,040 |
Gross amount of recognized liabilities for repurchase agreements |  | 40,040 |
Amounts related to agreements not included in offsetting disclosure |  | $ | — |
The collateral utilized for the Company’s repurchase agreements is subject to market fluctuations as well as prepayments of principal. The Company monitors the risk of the fair value of its pledged collateral falling below acceptable amounts based on the type of the underlying repurchase agreement. The pledged collateral related to the Company’s $40.0 million sweep repurchase agreements, which mature on an overnight basis, is monitored on a daily basis as the underlying sweep accounts can have frequent transaction activity and the amount of pledged collateral is adjusted as necessary.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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