Derivative Financial Instruments

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company offers a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a correspondent bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. The change in fair value is recognized in the income statement as other income and fees.

At September 30, 2022 and December 31, 2021, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table:


	September 30, 2022			December 31, 2021
	(Dollars in thousands)
Interest rate swaps on loans with correspondent banks (included in other assets)
Notional amount	$	988,492		$	148,199
Weighted average remaining term (years)	5.2			7.2
Pay fixed rate (weighted average)	2.73		%	2.92		%
Received variable rate (weighted average)	3.94		%	2.08		%
Estimated fair value	$	74,803		$	3,001

Interest rate swaps on loans with correspondent banks (included in other liabilities)
Notional amount	$	15,969		$	440,486
Weighted average remaining term (years)	10.0			6.1
Pay fixed rate (weighted average)	5.46		%	4.03		%
Received variable rate (weighted average)	4.56		%	2.20		%
Estimated fair value	$	(50)		$	(14,906)

Back to back interest rate swaps with loan customers (included in other liabilities)
Notional amount	$	988,492		$	148,199
Weighted average remaining term (years)	5.2			7.2
Received fixed rate (weighted average)	2.73		%	2.92		%
Pay variable rate (weighted average)	3.94		%	2.08		%
Estimated fair value	$	(74,803)		$	(3,001)

Back to back interest rate swaps with loan customers (included in other assets)
Notional amount	$	15,969		$	440,486
Weighted average remaining term (years)	10.0			6.1
Received fixed rate (weighted average)	5.46		%	4.03		%
Pay variable rate (weighted average)	4.56		%	2.20		%
Estimated fair value	$	50		$	14,906

The Company offers foreign exchange contracts to customers to purchase and/or sell foreign currencies at set rates in the future. The foreign exchange contracts allow customers to hedge the foreign exchange rate risk of their deposits and loans denominated in foreign currencies. In conjunction with this, the Company also enters into offsetting back-to-back contracts with institutional counterparties to hedge our foreign exchange rate risk. These back-to-back contracts are intended to offset each other and allow us to offer our customers foreign exchange products. These foreign exchange contracts are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. During the three and nine months ended September 30, 2022, the changes in fair value on foreign exchange contracts were gains of $9 thousand and $9 thousand, respectively, and were recognized in the income statement as other income and fees.

At September 30, 2022, $130 thousand and $21 thousand in back to back foreign exchange contracts with correspondent banks, with notional amounts of $2.6 million and $338 thousand, were included in other assets and other liabilities, respectively. At September 30, 2022, $21 thousand and $122 thousand in back to back foreign exchange contracts with customers, with notional amounts of $338 thousand and $2.6 million, were included in other assets and other liabilities, respectively. At December 31, 2021, there were no back to back foreign exchange contracts outstanding.

At September 30, 2022, the Company had risk participation agreements with an outside counterparty for an interest rate swap related to a loan in which it is a participant. The risk participation agreement provides credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract. Risk participation agreements are credit derivatives not designated as hedges. Credit derivatives are not speculative and are not used to manage interest rate risk in assets or liabilities. Changes in the fair value in credit derivatives are recognized directly in earnings. The fee received, less the estimate of the loss for credit exposure, was recognized in earnings at the time of the transaction. At September 30, 2022, the notional amount of the risk participation agreements sold was $127.4 million with a credit valuation adjustment of $20 thousand. At December 31, 2021, the notional amount of the risk participation agreements sold was $123.9 million with a credit valuation adjustment of $93 thousand.

As part of the overall liability management, the Company utilizes interest rate swap agreements to help manage interest rate risk positions. The notional amount of the interest rate swaps do not represent the amount exchanged by the parties. The exchange of cash flows is determined by reference to the notional amounts and the other terms of the interest rate swap agreements.

The Company had one existing non-forward starting interest rate swap agreement as of September 30, 2022 and December 31, 2021 with a notional amount of $100.0 million designated as cash flow hedges of certain LIBOR-based debt. At September 30, 2022, the Company had forward starting interest rate swap agreements with a total notional amount of $475.0 million designated as cash flow hedges of liabilities tied to the federal funds rate. The weighted average term for forward starting interest rate swap agreements was 4.5 years. The Company’s swaps were determined to be fully effective during the periods presented. The aggregate fair value of the swaps are recorded in assets or liabilities with changes in fair value recorded in other comprehensive income. The gain or loss on derivatives is recorded in accumulated other comprehensive income (“AOCI”) and is subsequently reclassified into interest expense and interest income in the period during which the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to interest rate swap derivatives will be reclassified to interest income and interest expense as interest payments are received or paid on the Company’s derivatives. The Company expects the hedges to remain fully effective throughout the remaining terms. For the three and nine months ended September 30, 2022, the Company reclassified $511 thousand and $561 thousand, respectively, from accumulated other comprehensive income to interest expense. For the three and nine months ended September 30, 2021, the Company reclassified $88 thousand and $227 thousand, respectively, from accumulated other comprehensive income to interest expense.

At September 30, 2022 and December 31, 2021, interest rate swaps designated as cash flow hedges are presented in the following table:


	September 30, 2022			December 31, 2021
	(Dollars in thousands)
Interest rate swaps designated as cash flow hedge (included in other assets)

Notional amount	$	100,000		$	100,000
Weighted average remaining term (years)	2.5			3.3
Received variable rate (weighted average)	2.74		%	0.12		%
Pay fixed rate (weighted average)	0.49		%	0.49		%
Estimated fair value	$	9,161		$	2,291

The Company enters into various stand-alone mortgage-banking derivatives in order to hedge the risk associated with the fluctuation of interest rates. Changes in fair value are recorded as mortgage banking revenue. Residential mortgage loans funded with interest rate lock commitments and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. At September 30, 2022, the Company had approximately $1.5 million in interest rate lock commitments and total forward sales commitments for the future delivery of residential mortgage loans. At December 31, 2021, the Company had approximately $17.4 million in interest rate lock commitments and total forward sales commitments for the future delivery of residential mortgage loans.

The following table reflects the notional amount and fair value of mortgage banking derivatives for the dates indicated:


	September 30, 2022				December 31, 2021
	Notional Amount		Fair Value		Notional Amount		Fair Value
	(Dollars in thousands)
Assets:
Interest rate lock commitments	$	468	$	1	$	16,518	$	230
Forward sale contracts related to mortgage banking	1,000		41		6,392		17

Liabilities:
Interest rate lock commitments	$	1,220	$	(39)	$	907	$	(2)
Forward sale contracts related to mortgage banking	500		(3)		25,305		(74)