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DERIVATIVES

3 Months Ended

Mar. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES

8. DERIVATIVES

We utilize various designated and undesignated derivative financial instruments to reduce our exposure to movements in interest rates. We measure all derivatives at fair value on our consolidated balance sheet. In each reporting period, we record the derivative instruments in other assets or other liabilities depending on whether the derivatives are in an asset or liability position. For derivative instruments that are designated as cash flow hedging instruments, we record the effective portion of the changes in the fair value of the derivative in AOCI, net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We immediately recognize the portion of the gain or loss in the fair value of the derivative that represents hedge ineffectiveness in current period earnings. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivative are included in current period earnings.

Interest Rate Lock and Forward Sale Commitments

We enter into interest rate lock commitments on certain mortgage loans that are intended to be sold. To manage interest rate risk on interest rate lock commitments, we also enter into forward loan sale commitments. The interest rate locks and forward loan sale commitments are accounted for as undesignated derivatives and are recorded at their respective fair values in other assets or other liabilities, with changes in fair value recorded in current period earnings. These instruments serve to reduce our exposure to movements in interest rates. At March 31, 2022, we were a party to interest rate lock and forward sale commitments on $0.9 million and $5.7 million of mortgage loans, respectively.

Risk Participation Agreements

In the first and fourth quarters of 2020, we entered into credit risk participation agreements ("RPA") with financial institution counterparties for interest rate swaps related to loans in which we participate. The risk participation agreements entered into by us and a participant bank provide credit protection to the financial institution counterparties should the borrowers fail to perform on their interest rate derivative contracts with the financial institutions.

Back-to-Back Swap Agreements

The Company established a program whereby it originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an equal and offsetting swap with a highly rated third-party financial institution. These "back-to-back swap agreements" are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. These back-to-back swap agreements are free-standing derivatives and are recorded at fair value on our consolidated balance sheet in other assets or other liabilities. During the three months ended March 31, 2022, the Company had swap agreements with its borrowers with a total notional amount of $32.9 million, offset by swap agreements with third party financial institutions with a total notional amount of $32.9 million. As of March 31, 2022, the Company was in a net cash receive position of $1.7 million for collateral of the back-to-back swap agreements.

Interest Rate Swaps

During the first quarter of 2022, the Company entered into a forward starting interest rate swap, with an effective date of March 31, 2024. This transaction had a notional amount totaling $115.5 million as of March 31, 2022, and was designated as a fair value hedge of certain municipal debt securities. The Company will pay the counterparty a fixed rate of 2.095% and will receive a floating rate based on the Federal Funds effective rate. The fair value hedge has a maturity date of March 31, 2029.

The interest rate swap is carried on the Company’s consolidated balance sheet at its fair value in other assets (when the fair value is positive) or in other liabilities (when the fair value is negative). The changes in the fair value of the interest rate swap are recorded in interest income. The unrealized gains or losses due to changes in fair value of the hedged debt securities due to changes in benchmark interest rates are recorded as an adjustment to the hedged debt securities and offset in the same interest income line item.

The following table presents the location of all assets and liabilities associated with our derivative instruments within the consolidated balance sheets:

Derivative Financial Instruments Not Designated as Hedging Instruments												Asset Derivatives												Liability Derivatives
												Fair Value at												Fair Value at
(dollars in thousands)						Balance Sheet Location						March 31, 2022						December 31, 2021						March 31, 2022						December 31, 2021
Interest rate lock and forward sale commitments						Other assets / other liabilities						$	149					$	5					$	5					$	4
Risk participation agreements						Other assets / other liabilities						—						—						—						16
Back-to-back swap agreements						Other assets / other liabilities						1,624						435						1,624						435
Derivative Financial Instruments Designated as Hedging Instruments												Asset Derivatives												Liability Derivatives
												Fair Value at												Fair Value at
(dollars in thousands)						Balance Sheet Location						March 31, 2022						December 31, 2021						March 31, 2022						December 31, 2021
Interest rate swap						Other assets / other liabilities						$	—					$	—					$	50					$	—

The following table presents the impact of derivative instruments and their location within the consolidated statements of income:

Derivative Financial Instruments Not Designated as Hedging Instruments

Location of Gain (Loss) Recognized in Earnings on Derivatives

Amount of Gain (Loss) Recognized in Earnings on Derivatives

(dollars in thousands)

Three Months Ended March 31, 2022

Interest rate lock and forward sale commitments

Mortgage banking income

143

Loans held for sale

Other income

(63)

Risk participation agreements

Other service charges and fees

16

Back-to-back swap agreements

Other service charges and fees

—

Three Months Ended March 31, 2021

Interest rate lock and forward sale commitments

Mortgage banking income

180

Loans held for sale

Other income

(1)

Risk participation agreements

Other service charges and fees

—

Back-to-back swap agreements

Other service charges and fees

31

X

- References

No definition available.

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X

- 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

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