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Derivative Financial Instruments

12 Months Ended

Dec. 31, 2021

Derivative Financial Instruments

Derivative Financial Instruments

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.

Derivative Instruments Designated as Hedges

Interest Rate Swaps Designated as Cash Flow Hedges

The Company entered into derivative instruments designated as cash flow hedges. For a derivative instrument that is designated and qualifies 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. Changes in fair value of components excluded from the assessment of effectiveness are recognized in current earnings.

Interest rate swaps with notional amounts totaling $50.0 million as of December 31, 2021, and $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. A $20.0 million swap matured on September 17, 2021, and the Company has one remaining swap. The gross aggregate fair value of the swaps of $1.0 million as of December 31, 2021, and $3.1 million as of December 31, 2020, is recorded in other liabilities in the Consolidated Balance Sheets, with changes in fair value recorded net of tax in other comprehensive income (loss). The Company expects its hedge to remain highly effective during the remaining term of the swap.

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


		As of December 31,
		2021			2020
Notional amount		$	50,000		$	70,000
Weighted average fixed pay rates			1.79	%		1.80	%
Weighted average variable 3-month LIBOR receive rates			0.20	%		0.22	%
Weighted average maturity, in years			2.71	yrs		2.85	yrs
Unrealized gains (losses), net of tax		$	(685)		$	(2,184)

The Company expects $0.2 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, 2021.

Interest income (expense) recorded on swap transactions was as follows for the periods presented (dollars in thousands):


		Years Ended December 31,
		2021			2020			2019
Interest income (expense) on swap transactions		$	(1,067)		$	(758)		$	60

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


		Years Ended December 31,
		2021			2020			2019
Unrealized gains (losses) on cash flow hedges
Gain (loss) recognized in OCI, net of tax		$	736		$	(2,526)		$	(202)
(Gain) loss reclassified from OCI to interest expense, net of tax			763			542			2
Net change in unrealized gains (losses) on cash flow hedges		$	1,499		$	(1,984)		$	(200)

The Company pledged $1.0 million and $3.2 million in cash to secure its obligation under these contracts at December 31, 2021, and 2020, respectively.

Derivative Instruments Not Designated as Hedges

Interest Rate Swaps

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 equal and offsetting derivative agreements with a third-party dealer. These contracts support variable rate, commercial loan relationships totaling $491.4 million and $395.0 million, at December 31, 2021, and 2020, 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.

Amounts and fair values of derivative assets and liabilities related to customer interest rate swaps, included in other assets and other liabilities in the Consolidated Balance Sheets, are summarized as follows (dollars in thousands):


		As of December 31, 2021
		Derivative Asset						Derivative Liability
		Notional			Fair			Notional			Fair
		Amount			Value			Amount			Value
Derivatives not designated as hedging instruments
Interest rate swaps – pay floating, receive fixed		$	404,572		$	17,839		$	86,784		$	2,259
Interest rate swaps – pay fixed, receive floating			86,784			2,259			404,572			17,839
Total derivatives not designated as hedging instruments		$	491,356		$	20,098		$	491,356		$	20,098


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

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


					Years Ended December 31,
		Location			2021			2020			2019
Interest rate swaps
Pay floating, receive fixed		Noninterest expense			$	(12,587)		$	20,331		$	10,915
Pay fixed, receive floating		Noninterest expense				12,587			(20,331)			(10,915)
Net change in fair value of interest rate swaps					$	—		$	—		$	—

The Company pledged $26.3 million and $36.0 million in cash to secure its obligation under these contracts at December 31, 2021, and 2020, respectively.

Risk Participation Agreement

In addition, the Company has entered into one risk participation agreement in conjunction with a loan participation with another financial institution to manage the credit risk exposure related to a customer-facing swap. The notional amount of the risk participation agreement was $4.0 million, and it had an insignificant fair value as of December 31, 2021. This risk participation agreement matures in 2028.

Mortgage Banking Derivatives

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 Balance Sheets, 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 Balance Sheets. While such forward sales commitments generally served as an economic hedge to 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.

Amounts and fair values of mortgage banking derivatives included in the Consolidated Balance Sheets are summarized as follows (dollars in thousands):


					As of December 31, 2021						As of December 31, 2020
					Notional			Fair			Notional			Fair
		Location			Amount			Value			Amount			Value
Derivatives with positive fair value
Interest rate lock commitments		Other assets			$	19,384		$	206		$	45,004		$	1,201
Forward sales commitments		Other assets				1,884			10			978			32
Mortgage banking derivatives recorded in other assets					$	21,268		$	216		$	45,982		$	1,233

Derivatives with negative fair value
Interest rate lock commitments		Other liabilities			$	499		$	6		$	118		$	1
Forward sales commitments		Other liabilities				41,002			439			84,964			2,662
Mortgage banking derivatives recorded in other liabilities					$	41,501		$	445		$	85,082		$	2,663

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


					Years Ended December 31,
		Location			2021			2020			2019
Net gains (losses)
Interest rate lock commitments		Mortgage revenue			$	1,702		$	9,667		$	3,988
Forward sales commitments		Mortgage revenue				(4,045)			(18,329)			(6,751)
Net gains (losses)					$	(2,343)		$	(8,662)		$	(2,763)

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.