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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | 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 11: Fair Value Measurements” for further discussion of the fair value measurement of such derivatives. To secure its obligations under derivative contracts, the Company pledged cash and held collateral as follows (dollars in thousands):
| As of
| September 30, 2022 |  | December 31, 2021
Cash pledged to secure obligations under derivative contracts | $ | 36,048 |  |  | $ | 27,300 |
Collateral held to secure obligations under derivative contracts | 31,550 |  |  | — |
Derivative Instruments 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 OCI 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 Designated as Cash Flow Hedges Interest rate swaps with notional amounts totaling $350.0 million as of September 30, 2022, and $50.0 million as of December 31, 2021, were designated as cash flow hedges. The Company entered into one $50.0 million interest rate swap to hedge the risks 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 (Debt Swap). In addition, during the first quarter of 2022, the Company entered into one $300.0 million receive fixed pay floating interest rate swap to reduce our asset sensitivity (Loan Swap). We added duration to our loan portfolio by fixing a portion of our floating prime based loans. Interest rates had risen above their historical lows allowing us to lock in a portion of our loan portfolio to reduce asset sensitivity while creating a more stable margin in a volatile rate market. These hedges were determined to be highly effective during the period, and the Company expects its hedges to remain highly effective during the remaining terms of the swaps. Changes in fair value were recorded net of tax in OCI. A summary of the interest-rate swaps designated as cash flow hedges is presented below (dollars in thousands):
|  |  | As of
| Location |  | September 30, 2022 |  | December 31, 2021
Debt Swap |  |  |  |  |
Notional amount |  |  | $ | 50,000 |  |  | $ | 50,000 |
Weighted average fixed pay rates |  |  | 1.79 | % |  | 1.79 | %
Weighted average variable 3-month LIBOR receive rates |  |  | 3.29 | % |  | 0.20 | %
Weighted average maturity, in years |  |  | 1.96 yrs |  | 2.71 yrs
Loan Swap |  |  |  |  |
Notional amount |  |  | $ | 300,000 |  |  | N/A
Weighted average fixed receive rates |  |  | 4.81 | % |  | N/A
Weighted average variable Prime pay rates |  |  | 5.80 | % |  | N/A
Weighted average maturity, in years |  |  | 6.35 yrs |  | N/A
Gross aggregate fair value of the swaps |  |  |  |  |
Gross aggregate fair value of swap assets | Other assets |  | $ | 2,486 |  |  | $ | — |
Gross aggregate fair value of swap liabilities | Other liabilities |  | $ | 34,515 |  |  | $ | 958 |
Balances carried in AOCI |  |  |  |  |
Unrealized gains (losses) on cash flow hedges, net of tax | AOCI |  | $ | (22,770) |  |  | $ | (685) |
The Company expects to reclassify unrealized gains and losses from OCI to interest income and interest expense as shown in the following table (dollars in thousands). Amounts actually recognized could differ from these expectations due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to September 30, 2022.
| As of
| September 30, 2022
Unrealized gains (losses) in OCI expected to be recognized in income |
Unrealized gains expected to be reclassified from OCI to interest income | $ | 190 |
Unrealized losses expected to be reclassified from OCI to interest expense | (247) |
Net unrealized gains (losses) in OCI expected to be recognized in net interest income | $ | (57) |
Interest expense recorded on these swap transactions was as follows for the periods presented (dollars in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Interest income (expense) on swap transactions | $ | (370) |  |  | $ | (288) |  |  | $ | 697 |  |  | $ | (854) |
The following table reflects the net gains (losses) relating to cash flow derivative instruments that were recorded in AOCI and the unaudited Consolidated Statements of Income during the periods presented (dollars in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Unrealized gains (losses) on cash flow hedges |  |  |  |  |  |  |
Gain (loss) recognized in OCI, net of tax | $ | (10,192) |  |  | $ | (5) |  |  | $ | (21,587) |  |  | $ | 336 |
(Gain) loss reclassified from OCI to interest expense, net of tax | 266 |  |  | 206 |  |  | (498) |  |  | 611 |
Net change in unrealized gains (losses) on cash flow hedges | $ | (9,926) |  |  | $ | 201 |  |  | $ | (22,085) |  |  | $ | 947 |
Derivative Instruments Not Designated as Hedges 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 equal and offsetting derivative agreements with a third-party dealer. These contracts support variable rate, commercial loan relationships totaling $547.9 million and $491.4 million as of September 30, 2022, and December 31, 2021, 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 recorded in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands):
| As of September 30, 2022
| Derivative Asset |  | Derivative Liability
| Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
Derivatives not designated as hedging instruments |  |  |  |  |  |  |
Interest rate swaps – pay floating, receive fixed | $ | 4,668 |  |  | $ | 46 |  |  | $ | 543,207 |  |  | $ | 42,001 |
Interest rate swaps – pay fixed, receive floating | 543,207 |  |  | 42,001 |  |  | 4,668 |  |  | 46 |
Total derivatives not designated as hedging instruments | $ | 547,875 |  |  | $ | 42,047 |  |  | $ | 547,875 |  |  | $ | 42,047 |
| As of December 31, 2021
| Derivative Asset |  | Derivative Liability
| Notional Amount |  | Fair Value |  | Notional Amount |  | Fair 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 |
Changes in fair value of these derivative assets and liabilities are recorded in noninterest expense in the unaudited Consolidated Statements of Income and summarized as follows (dollars in thousands):
|  |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
| Location |  | 2022 |  | 2021 |  | 2022 |  | 2021
Interest rate swaps |  |  |  |  |  |  |  |  |
Pay floating, receive fixed | Noninterest expense |  | $ | 18,317 |  |  | $ | (2,024) |  |  | $ | 21,792 |  |  | $ | (11,355) |
Pay fixed, receive floating | Noninterest expense |  | (18,317) |  |  | 2,024 |  |  | (21,792) |  |  | 11,355 |
Net change in fair value of interest rate swaps |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Risk Participation Agreement To manage the credit risk exposure related to a customer-facing swap, the Company entered into two risk participation agreements in conjunction with loan participation arrangements with other financial institutions. The risk participation agreements mature in 2026 and 2028, and are summarized as follows (dollars in thousands):
| As of
| September 30, 2022 |  | December 31, 2021
Risk participation agreements |  |  |
Notional amount | $ | 18,921 |  |  | $ | 3,990 |
Fair value | 4 |  |  | 11 |
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 unaudited 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 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 unaudited 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 unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands):
|  |  | As of September 30, 2022 |  | As of December 31, 2021
| Location |  | Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
Derivatives with positive fair value |  |  |  |  |  |  |  |  |
Interest rate lock commitments | Other assets |  | $ | 3,434 |  |  | $ | 42 |  |  | $ | 19,384 |  |  | $ | 206 |
Forward sales commitments | Other assets |  | 4,107 |  |  | 134 |  |  | 1,884 |  |  | 10 |
Mortgage banking derivatives recorded in other assets |  |  | $ | 7,541 |  |  | $ | 176 |  |  | $ | 21,268 |  |  | $ | 216 |
Derivatives with negative fair value |  |  |  |  |  |  |  |  |
Interest rate lock commitments | Other liabilities |  | $ | 408 |  |  | $ | 4 |  |  | $ | 499 |  |  | $ | 6 |
Forward sales commitments | Other liabilities |  | 4,342 |  |  | 52 |  |  | 41,002 |  |  | 439 |
Mortgage banking derivatives recorded in other liabilities |  |  | $ | 4,750 |  |  | $ | 56 |  |  | $ | 41,501 |  |  | $ | 445 |
Net gains (losses) relating to these derivative instruments are summarized as follows for the periods presented (dollars in thousands):
|  |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
| Location |  | 2022 |  | 2021 |  | 2022 |  | 2021
Net gains (losses) |  |  |  |  |  |  |  |  |
Interest rate lock commitments | Mortgage revenue |  | $ | (111) |  |  | $ | 537 |  |  | $ | 38 |  |  | $ | 1,502 |
Forward sales commitments | Mortgage revenue |  | 295 |  |  | (1,438) |  |  | 82 |  |  | (3,616) |
Net gains (losses) |  |  | $ | 184 |  |  | $ | (901) |  |  | $ | 120 |  |  | $ | (2,114) |

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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 https://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 https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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