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Derivative Financial Instruments

12 Months Ended

Dec. 31, 2020

Note 17. Derivative Financial Instruments

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into derivative financial instruments, including interest rate lock commitments issued to residential loan customers for loans that will be held for sale, forward sales commitments to sell residential mortgage loans to investors, and interest rate swaps with customers and other third parties. See “Note 18. Fair Value Measurements” for further discussion of the fair value measurement of such derivatives.

Interest Rate Swaps Designated as Cash Flow Hedges: Starting in the third quarter of 2019, the Company entered into derivative instruments designated as a cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects

earnings. Change in fair value of components excluded from the assessment of effectiveness are recognized in current earnings.

Interest rate swaps with notional amounts totaling $70.0 million as of December 31, 2020, were designated as cash flow hedges to hedge the risk of variability in cash flows (future interest payments) attributable to changes in the contractually specified 3 month LIBOR benchmark interest rate on the Company’s junior subordinated debt owed to unconsolidated trusts and were determined to be highly effective during the period. The gross aggregate fair value of the swaps of $3.1 million and $0.3 million is recorded in other liabilities in the Consolidated Financial Statements at December 31, 2020 and 2019, respectively, with changes in fair value recorded net of tax in other comprehensive income (loss). The Company expects the hedges to remain highly effective during the remaining terms of the swaps.

A summary of the interest-rate swaps designated as cash flow hedges is presented below (dollars in thousands):


	Years Ended December 31,
	2020			2019
Notional amount	$	70,000		$	70,000
Weighted average fixed pay rates		1.80	%		1.80	%
Weighted average variable 3-month LIBOR receive rates		0.22	%		1.90	%
Weighted average maturity, in years		2.85	yrs		3.86	yrs
Unrealized gains (losses), net of tax	$	(2,184)		$	(200)

Interest income (expense) recorded on these swap transactions was $(0.8) million during the year ended December 31, 2020, and was an insignificant amount in 2019. The Company expects $(0.3) million of the unrealized gain (loss) to be reclassified from OCI to interest expense during the next three months. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to December 31, 2020.

The following table reflects the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Income relating to cash flow derivative instruments for the periods presented (dollars in thousands):


	Years Ended December 31,
Interest rate contracts		2020		2019
Amount of gain (loss) recognized in OCI	$	(2,526)	$	(202)
Amount of (gain) loss reclassified from OCI to interest expense		542		2

The Company pledged $3.2 million and $0.3 million in cash to secure its obligation under these contracts at December 31, 2020 and 2019, respectively.

Interest Rate Lock Commitments. Interest rate lock commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the Consolidated Financial Statements, with changes in the fair values of the corresponding derivative financial assets or liabilities recorded as either a charge or credit to current earnings during the period in which the changes occurred.

Forward Sales Commitments. The Company economically hedges mortgage loans held for sale and interest rate lock commitments issued to its residential loan customers related to loans that will be held for sale by obtaining corresponding best-efforts forward sales commitments with an investor to sell the loans at an agreed-upon price at the time the interest rate locks are issued to the customers. Forward sales commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the Consolidated Financial Statements. While such forward sales commitments generally served as an

economic hedge to the mortgage loans held for sale and interest rate lock commitments, the Company did not designate them for hedge accounting treatment. Changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

The following table reflects the amount and fair value of mortgage banking derivatives included in the Consolidated Balance Sheets for the periods presented (dollars in thousands):


		December 31, 2020				December 31, 2019
		Notional		Fair		Notional		Fair
Derivatives with positive fair value	Location	Amount		Value		Amount		Value
Interest rate lock commitments	Other assets	$	45,004	$	1,201	$	67,965	$	1,032
Forward sales commitments	Other assets		978		32		1,773		14
Mortgage banking derivatives recorded in other assets		$	45,982	$	1,233	$	69,738	$	1,046

Derivatives with negative fair value
Interest rate lock commitments	Other liabilities	$	118	$	1	$	1,114	$	11
Forward sales commitments	Other liabilities		84,964		2,662		133,482		2,176
Mortgage banking derivatives recorded in other liabilities		$	85,082	$	2,663	$	134,596	$	2,187

Net gains (losses) relating to these derivative instruments are summarized as follows for the periods presented (dollars in thousands):


		Years Ended December 31,
	Location	2020		2019		2018
Interest rate lock commitments	Mortgage revenue	$	9,667	$	3,988	$	1,757
Forward sales commitments	Mortgage revenue		(18,329)		(6,751)		(3,110)
Net gains (losses)		$	(8,662)	$	(2,763)	$	(1,353)

The impact of the net gains or losses on derivative financial instruments related to interest rate lock commitments issued to residential loan customers for loans that will be held for sale and forward sales commitments to sell residential mortgage loans to loan investors are almost entirely offset by a corresponding change in the fair value of loans held for sale.

Interest Rate Swaps Not Designated as Hedges. The Company may offer derivative contracts to its customers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer. These contracts support variable rate, commercial loan relationships totaling $395.0 million and $290.4 million, at December 31, 2020 and 2019, respectively. These derivatives generally worked together as an economic interest rate hedge, but the Company did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

The following table reflects the amount and fair value of derivative assets and liabilities related to customer interest rate swaps recorded in the Consolidated Balance Sheets for the periods presented (dollars in thousands):


	Derivative Asset				Derivative Liability
	Notional		Fair		Notional		Fair
December 31, 2020	Amount		Value		Amount		Value
Interest rate swaps - pay floating, receive fixed	$	394,954	$	32,685	$	—	$	—
Interest rate swaps - pay fixed, receive floating		—		—		394,954		32,685
Derivatives not designated as hedging instruments	$	394,954	$	32,685	$	394,954	$	32,685

	Derivative Asset				Derivative Liability

	Notional		Fair		Notional		Fair
December 31, 2019	Amount		Value		Amount		Value
Interest rate swaps - pay floating, receive fixed	$	290,418	$	12,354	$	—	$	—
Interest rate swaps - pay fixed, receive floating		—		—		290,418		12,354
Derivatives not designated as hedging instruments	$	290,418	$	12,354	$	290,418	$	12,354

Changes in fair value of these derivative assets and liabilities are recorded in non-interest expense in the Consolidated Statements of Income and summarized as follows (dollars in thousands):


		Years Ended December 31,
	Location	2020		2019		2018
Interest rate swaps - pay floating, receive fixed	Non-interest expense	$	20,331	$	10,915	$	1,176
Interest rate swaps - pay fixed, receive floating	Non-interest expense		(20,331)		(10,915)		(1,176)
Net change in fair value of interest rate swaps		$	—	$	—	$	—

The Company pledged $36.0 million and $18.1 million in cash to secure its obligation under these contracts at December 31, 2020 and 2019, respectively.