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Other Derivatives | 6 Months Ended
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Jun. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Other Derivatives | Other Derivatives The Company is exposed to certain risks 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. Cash Flow Hedges of Interest Rate Risk The Company uses interest rate swap agreements to assist in its interest rate risk management. The Company’s objective in using interest rate derivatives designated as cash flow hedges is to add stability to interest expense and to better manage its exposure to interest rate movements. To accomplish this objective, the Company utilizes interest rate swaps as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds. The notional amounts of the interest rate swaps designated as cash flow hedges do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties. The interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from one counterparty in exchange for the Company making fixed payments. The Company’s intent is to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments. For derivatives designated as cash flow hedges, changes in the fair value of the derivative are initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company's sole designated cash flow hedge matured during April 2021. Thus, as of June 30, 2021 and December 31, 2020, the Company had zero and one, respectively, designated cash flow hedge interest rate swap transaction outstanding associated with the Company's variable rate deposits. Amounts reported in accumulated other comprehensive income related to designated cash flow hedge derivatives were reclassified to interest income/expense as interest payments were made/received on the Company’s variable-rate assets/liabilities. Non-designated Hedges Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. The Company entered into credit risk participation agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Credit-risk-related Contingent Features The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty. The interest rate derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party’s exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; 3) if the Company fails to maintain its status as a well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. As of June 30, 2021, the aggregate fair value of the derivative contract with credit risk contingent features (i.e., containing collateral posting or termination provisions based on our capital status) that was in a net liability position totaled $4.3 million. The Company has a minimum collateral posting threshold with its derivative counterparty. As of June 30, 2021, the Company was required to post collateral totalin g $3.4 million with its derivative counterparty against its obligations under this agreement. If the Company had breached any provisions under the agreement at June 30, 2021, it could have been required to settle its obligations under the agreement at the termination value. The table below identifies the balance sheet category and fair value of the Company’s designated cash flow hedge derivative instruments and non-designated hedges as of June 30, 2021and December 31, 2020.
|  | June 30, 2021 |  | December 31, 2020
(dollars in thousands) |  | Notional Amount |  | Fair Value |  | Balance Sheet Category |  | Fair Value |  | Balance Sheet Category
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |
Interest rate product |  | $ | 276,740 |  |  | $ | 5,534 |  |  | Other Assets |  | $ | 3,491 |  |  | Other Assets
Mortgage banking derivatives |  | $ | 109,111 |  |  | $ | 1,179 |  |  | Other Assets |  | 5,213 |  |  | Other Assets
|  | $ | 385,851 |  |  | $ | 6,713 |  |  | Other Assets |  | $ | 8,704 |  |  | Other Assets
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |  |
Interest rate product |  | $ | — |  |  | $ | — |  |  | Other Liabilities |  | $ | 516 |  |  | Other Liabilities
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |
Interest rate product |  | $ | 276,740 |  |  | $ | 5,712 |  |  | Other Liabilities |  | 3,653 |  |  | Other Liabilities
Other Contracts |  | $ | 26,666 |  |  | $ | 74 |  |  | Other Liabilities |  | 118 |  |  | Other Liabilities
|  | $ | 303,406 |  |  | $ | 5,786 |  |  | Other Liabilities |  | $ | 3,771 |  |  | Other Liabilities
Net Derivatives on the balance sheet |  |  |  | $ | 5,786 |  |  |  |  | $ | 4,287 |  |  |
Cash and other collateral |  |  |  | $ | 4,295 |  |  |  |  | 4,168 |  |  |
Net Derivative Amounts |  |  |  | $ | 1,491 |  |  |  |  | $ | 119 |  |  |
The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the three and six months ended June 30, 2021 and 2020:
The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
|  |  |  |  |  | Location of Gain or (Loss) |  | Amount of Gain or (Loss)
|  | Amount of Gain (Loss) Recognized |  | Recognized from |  | Reclassified from Accumulated
Derivatives in Subtopic |  | in OCI on Derivative |  | Accumulated Other |  | OCI into Income
815-20 Hedging |  | Three Months Ended June 30, |  | Comprehensive Income into |  | Three Months Ended June 30,
Relationships (dollars in thousands) |  | 2021 |  | 2020 |  | Income |  | 2021 |  | 2020
Derivatives in Cash Flow Hedging Relationships |  |  |  |  |  |  |  |  |  |
Interest Rate Products |  | $ | — |  |  | $ | (27) |  |  | Interest Expense |  | $ | (60) |  |  | $ | (394) |
Total |  | $ | — |  |  | $ | (27) |  |  |  |  | $ | (60) |  |  | $ | (394) |
|  |  |  |  |  | Location of Gain or (Loss) |  | Amount of Gain or (Loss)
|  | Amount of Gain (Loss) Recognized |  | Recognized from |  | Reclassified from Accumulated
Derivatives in Subtopic |  | in OCI on Derivative |  | Accumulated Other |  | OCI into Income
815-20 Hedging |  | Six Months Ended June 30, |  | Comprehensive Income into |  | Six Months Ended June 30,
Relationships (dollars in thousands) |  | 2021 |  | 2020 |  | Income |  | 2021 |  | 2020
Derivatives in Cash Flow Hedging Relationships |  |  |  |  |  |  |  |  |  |
Interest Rate Products |  | (844) |  |  | (1,548) |  |  | Interest Expense |  | (445) |  |  | (366) |
Total |  | (844) |  |  | (1,548) |  |  |  |  | (445) |  |  | (366) |
The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the three and six months ended June 30, 2021 and 2020:
The Effect of Fair Value and Cash Flow Hedge Accounting on the Statements of Income
|  | Location and Amount of Gain or (Loss) Recognized in Income on
|  | Fair Value and Cash Flow Hedging Relationships (in 000's)
|  | Three Months Ended June 30, |  | Six Months Ended June 30, |  |
|  | 2021 |  | 2020 |  | 2021 |  | 2020 |  |  |  |  |  |
|  | Interest Expense |  | Interest Expense |  |  |  |  |  |
Total amounts of income and expense line items presented in the consolidated statement of income in which the effects of fair value or cash flow hedges are recorded |  | $ | (60) |  |  | $ | (394) |  |  | $ | (445) |  |  | $ | (366) |  |  |  |  |  |  |
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income |  | $ | (60) |  |  | $ | (394) |  |  | $ | (445) |  |  | $ | (366) |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |  |  |  |  |
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component |  | $ | (60) |  |  | $ | (394) |  |  | $ | (445) |  |  | $ | (366) |  |  |  |  |  |  |
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Excluded Component |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |  |  |  |  |
Effect of Derivatives Not Designated as Hedging Instruments on the Statements of Income
|  |  |  | Amount of Income (Loss) |  |
|  |  |  | Recognized in Income on |  |
|  | Location of |  | Derivative |  |
Derivatives Not Designated as Hedging |  | (Loss) Recognized in |  | Three Months Ended June 30, |  | Six Months Ended June 30, |  |
Instruments under Subtopic 815-20 |  | Income on Derivative |  | 2021 |  | 2020 |  | 2021 |  | 2020 |  |  |  |
Interest Rate Products |  | Other income / (expense) |  | $ | (299) |  |  | $ | (118) |  |  | (16) |  |  | (286) |  |  |  |  |
Mortgage banking derivatives |  | Other income / (expense) |  | 1,179 |  |  | — |  |  | 3,693 |  |  | — |  |  |  |  |
Other Contracts |  | Other income / (expense) |  | 4 |  |  | 2 |  |  | 44 |  |  | (64) |  |  |  |  |
Total |  |  |  | $ | 884 |  |  | $ | (116) |  |  | 3,721 |  |  | (350) |  |  |  |  |

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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 + Details
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