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DERIVATIVE FINANCIAL INSTRUMENTS | 3 Months Ended
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Mar. 31, 2022
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 AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. At March 31, 2022 and December 31, 2021, the Company had no interest rate derivative designated as a hedging instrument. 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 March 31, 2022, the Company had 14 customer and 14 corresponding third-party broker interest rate derivatives not designated as a hedging instrument with an aggregate notional amount of $120.6 million. The Company had $75.8 million in notional amount of such derivative instruments at December 31, 2021. During the three months ended March 31, 2022 and 2021, the Company entered into new interest rate swaps with its commercial loan customers and recognized swap fee income of $953 thousand and zero, respectively, which is included in noninterest income in the unaudited condensed consolidated statements of income. At March 31, 2022 and December 31, 2021, the Company provided cash collateral of zero and $260 thousand to the counterparties for these derivatives, respectively. At March 31, 2022 and December 31, 2021, the Company was holding cash collateral of $2.6 million and $490 thousand from the counterparties for these derivatives, respectively. 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 during the three months ended March 31, 2021, and is included in noninterest income in the unaudited condensed consolidated statements of income. 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 borrower. 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. The total notional amount of the risk participation agreement was $15.9 million at both March 31, 2022 and December 31, 2021. 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 for the held for sale pipeline. The following table summarizes the fair value of the Company's derivative instruments at March 31, 2022 and December 31, 2021:
| March 31, 2022 |  | December 31, 2021
| Notional Amount |  | Balance Sheet Location |  | Fair Value |  | Notional Amount |  | Balance Sheet Location |  | Fair Value
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 60,279 |  |  | Other assets |  | $ | 3,067 |  |  | $ | 37,915 |  |  | Other assets |  | $ | 764 |
Interest rate swaps | 60,279 |  |  | Other liabilities |  | (3,024) |  |  | 37,915 |  |  | Other liabilities |  | (758) |
Risk participation | 15,855 |  |  | Other liabilities |  | (1) |  |  | 15,855 |  |  | Other liabilities |  | (2) |
Interest rate lock commitments with customers | 12,302 |  |  | Other assets |  | 300 |  |  | 16,604 |  |  | Other assets |  | 353 |
Forward sale commitment | 7,537 |  |  | Other assets |  | 353 |  |  | 8,665 |  |  | Other assets |  | 52 |
Total derivatives not designated as hedging instruments |  |  |  |  | $ | 695 |  |  |  |  |  |  | $ | 409 |
The following tables summarize the effect of the Company's derivative financial instruments on OCI and net income for the three months ended March 31, 2022 and 2021:
|  |  | Amount of Gain Recognized in OCI on Derivative
|  |  | Three Months Ended March 31,
|  |  |  |  | 2022 |  | 2021
Derivatives in cash flow hedging relationships: |  |  |  |  |  |
Interest rate products |  |  |  |  | $ | — |  |  | $ | 739 |
Total |  |  |  |  | $ | — |  |  | $ | 739 |
|  |  | Amount of Loss Reclassified from AOCI into Income |  | Location of Loss Recognized from AOCI into Income
|  |  | Three Months Ended March 31, |  |
|  |  |  |  | 2022 |  | 2021 |  |
Derivatives in cash flow hedging relationships: |  |  |  |  |  |  |  |
Interest rate products |  |  |  |  | $ | — |  |  | $ | (87) |  |  | Interest expense
Total |  |  |  |  | $ | — |  |  | $ | (87) |  |  |
During the three months ended September 30, 2021, the Company terminated its interest rate swap designated as a hedging instrument of $50.0 million.
|  |  | Amount of Gain (Loss) Recognized in Income |  | Location of Gain (Loss) Recognized in Income
|  |  | Three Months Ended March 31, |  |
|  |  |  |  | 2022 |  | 2021 |  |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Interest rate products |  |  |  |  | $ | 37 |  |  | $ | 52 |  |  | Other operating expenses
Risk participation agreement |  |  |  |  | 2 |  |  | 4 |  |  | Other operating expenses
Interest rate lock commitments with customers |  |  |  |  | (53) |  |  | (1) |  |  | Mortgage banking activities
Forward sale commitment |  |  |  |  | 300 |  |  | 254 |  |  | Mortgage banking activities
Total |  |  |  |  | $ | 286 |  |  | $ | 309 |  |  |

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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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