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DERIVATIVE FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS | DERIVATIVE FINANCIAL INSTRUMENTS The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used as risk management tools by the Company to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings and are not used for trading or speculative purposes. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company, however, discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period due to circumstances, such as the impact of the COVID-19 pandemic. Upon discontinuance, the associated gains and losses deferred in accumulated other comprehensive income (loss) are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. During the three months ended September 30, 2021, the Company terminated its interest rate derivative of $50.0 million that was designated as a cash flow hedge of interest-rate risk associated with overnight borrowings due to the unprecedented nature and impact of the COVID-19 pandemic, and reclassified $398.0 thousand of the realized losses from AOCI to current earnings because the hedged forecasted transaction was determined to be no longer probable of occurring. At December 31, 2020, the Company had one interest rate derivative designated as a hedging instrument with an aggregate notional amount of $50.0 million. At September 30, 2021 and December 31, 2020, the Company had cash collateral of zero and $1.7 million held with the counterparty for these derivatives, respectively. The cash collateral was settled with the derivative counterparty upon termination of the cash flow hedge. The Company enters into interest rate swaps that allow its commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges and are marked through earnings. At September 30, 2021, the Company had 11 customer and 11 corresponding third-party broker interest rate derivatives not designated as a hedging instrument with an aggregate notional amount of $64.9 million. The Company had $61.3 million in notional amount of such derivative instruments at December 31, 2020. The Company entered into a risk participation agreement with a financial institution counterparty (the “Agent Bank”) for an interest rate derivative contract related to a loan in which the Company is a participant. The risk participation agreement provides credit protection to the Agent Bank should the borrower fail to perform on its interest rate derivative contracts with the Agent Bank. The Company received an upfront fee of $53 thousand upon entry into the risk participation agreement in the nine months ended September 30, 2021. The Company manages its credit risk on the risk participation agreement by monitoring the creditworthiness of the borrower, which is based on the same credit review process as though the Company had entered into the derivative instruments directly with the borrow er. The notional amount of such risk participation agreement reflects the Company’s pro-rata share of the derivative instrument, consistent with its share of the related participated loan. As of September 30, 2021 and December 31, 2020, the total notional amount of the risk participation agreement was $15.9 million and zero, respectively. As a part of its normal residential mortgage operations, the Company will enter into an interest rate lock commitment with a potential borrower. The Company will enter into a corresponding commitment with an investor to sell that loan at a specific price shortly after origination. In accordance with FASB ASC 820, adjustments are recorded through earnings to account for the net change in fair value of these transactions. The following table summarizes the fair value of the Company's derivative instruments at September 30, 2021 and December 31, 2020:
| September 30, 2021 |  | December 31, 2020
| Notional Amount |  | Balance Sheet Location |  | Fair Value |  | Notional Amount |  | Balance Sheet Location |  | Fair Value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - balance sheet hedge | $ | — |  |  |  |  | $ | — |  |  | $ | 50,000 |  |  | Other liabilities |  | $ | (1,230) |
Total derivatives designated as hedging instruments |  |  |  |  | $ | — |  |  |  |  |  |  | $ | (1,230) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Interest rate swap - commercial borrower | $ | 32,462 |  |  | Other assets |  | $ | 277 |  |  | $ | 30,673 |  |  | Other assets |  | $ | 690 |
Interest rate swap - counterparty | 32,462 |  |  | Other liabilities |  | (269) |  |  | 30,673 |  |  | Other liabilities |  | (726) |
Risk participation | 15,855 |  |  | Other liabilities |  | (3) |  |  | — |  |  |  |  | — |
Interest rate lock commitments with customers | 22,025 |  |  | Other assets |  | 546 |  |  | 22,560 |  |  | Other assets |  | 673 |
Forward sale commitment | 6,198 |  |  | Other assets |  | 23 |  |  | 10,400 |  |  | Other liabilities |  | (61) |
Total derivatives not designated as hedging instruments |  |  |  |  | $ | 574 |  |  |  |  |  |  | $ | 576 |
The following tables summarize the effect of the Company's derivative financial instruments on OCI and net income for the three and nine months ended September 30, 2021 and 2020:
| Amount of (Loss) Gain Recognized in OCI on Derivative |  | Amount of Gain (Loss) Recognized in OCI on Derivative
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Derivatives in cash flow hedging relationships: |  |  |  |  |  |
Interest rate products | $ | (183) |  |  | $ | 208 |  |  | $ | 473 |  |  | $ | (1,893) |
Total | $ | (183) |  |  | $ | 208 |  |  | $ | 473 |  |  | $ | (1,893) |
| Amount of Loss Reclassified from AOCI into Income |  | Amount of Loss Reclassified from AOCI into Income |  | Location of Loss Recognized from AOCI into Income
| Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
| 2021 |  | 2020 |  | 2021 |  | 2020 |  |
Derivatives in cash flow hedging relationships: |  |  |  |  |  |  |  |
Interest rate products | $ | (581) |  |  | $ | (114) |  |  | $ | (757) |  |  | $ | (239) |  |  | Interest expense / Other operating expenses(1)
Total | $ | (581) |  |  | $ | (114) |  |  | $ | (757) |  |  | $ | (239) |  |  |
(1) Includes $514 thousand recorded to other operating expenses due to the loss from the termination of an interest rate swap designated as a cash flow hedge.
| Amount of Gain (Loss) Recognized in Income |  | Amount of Gain (Loss) Recognized in Income |  | Location of Gain (Loss) Recognized in Income
| Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
| 2021 |  | 2020 |  | 2021 |  | 2020 |  |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Interest rate products | $ | 8 |  |  | $ | (4) |  |  | $ | 44 |  |  | $ | (21) |  |  | Other operating expenses
Risk participation agreement | 1 |  |  | — |  |  | (3) |  |  | — |  |  | Other operating expenses
Interest rate lock commitments with customers | 89 |  |  | 157 |  |  | (128) |  |  | 1,040 |  |  | Mortgage banking activities
Forward sale commitment | 1 |  |  | 71 |  |  | 84 |  |  | (126) |  |  | Mortgage banking activities
Total | $ | 99 |  |  | $ | 224 |  |  | $ | (3) |  |  | $ | 893 |  |  |
The following table is a summary of components for interest rate swaps designated as hedging at September 30, 2021 and December 31, 2020. During the three and nine months ended September 30, 2021, the Company terminated its interest rate derivative of $50.0 million.
| September 30, 2021 |  | December 31, 2020
Weighted average pay rate | — | % |  | 0.77 | %
Weighted average receive rate | — | % |  | 0.09 | %
Weighted average maturity in years | 0.0 |  | 4.2

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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 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 + Details
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