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Derivatives | 9 Months Ended
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Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | DerivativesThe 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 through the use of derivative financial instruments. Mortgage Banking Derivatives As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs ("best efforts") or commits to deliver the locked loan in a binding ("mandatory") delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of MBS. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded. Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations. The fair value of the mortgage banking derivatives is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change. 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 under ASC 815 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. The Company's derivative position is classified within Level 2 of the fair value hierarchy and is valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models' key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility. See Note 10. Fair Value Measurements. 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 September 30, 2022 and December 31, 2021, the Company had no designated cash flow hedge interest rate swap transactions 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. 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 September 30, 2022 and December 31, 2021. The Company has a minimum collateral posting threshold with its derivative counterparty. If the Company had breached any provisions under the agreement at September 30, 2022, it could have been required to settle its obligations under the agreement at the termination value.
|  | September 30, 2022 |  | December 31, 2021
(dollars in thousands) |  | Notional Amount |  | Fair Value |  | Balance Sheet Category |  | Notional Amount |  | Fair Value |  | Balance Sheet Category
Derivatives not designated as hedging instruments in an asset position |  |  |  |  |  |  |  |  |  |  |  |
Interest rate product |  | $ | 316,161 |  |  | $ | 30,635 |  |  | Other assets |  | $ | 272,825 |  |  | $ | 5,273 |  |  | Other assets
Mortgage banking derivatives |  | 8,000 |  |  | 259 |  |  | Other assets |  | 56,331 |  |  | 636 |  |  | Other assets
|  | $ | 324,161 |  |  | $ | 30,894 |  |  |  |  | $ | 329,156 |  |  | $ | 5,909 |  |  |
Derivatives not designated as hedging instruments in a liability position |  |  |  |  |  |  |  |  |  |  |  |
Interest rate product |  | $ | 316,161 |  |  | $ | 29,492 |  |  | Other liabilities |  | $ | 272,825 |  |  | $ | 5,223 |  |  | Other liabilities
Mortgage banking derivatives |  | 21,428 |  |  | 115 |  |  | Other liabilities |  | — |  |  | — |  |  | Other liabilities
Credit risk participation agreements |  | 26,032 |  |  | 3 |  |  | Other liabilities |  | 26,417 |  |  | 47 |  |  | Other liabilities
|  | $ | 363,621 |  |  | 29,610 |  |  |  |  | $ | 299,242 |  |  | 5,270 |  |  |
Cash and other collateral posted |  |  |  | (2,270) |  |  |  |  |  |  | (2,930) |  |  |
Net derivatives in a liability position |  |  |  | $ | 27,340 |  |  |  |  |  |  | $ | 2,340 |  |  |
The table below presents the pre-tax net gains (losses) of the Company's designated cash flow hedges for the three and nine months ended September 30, 2022 and 2021:
The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
|  | Amount of Gain (Loss) Recognized |  |  |  | Amount of Gain (Loss) Reclassified
Derivatives in Subtopic |  | in OCI on Derivatives |  | Location of |  | from AOCI into Net Income
815-20 Hedging Relationships |  | Three Months Ended September 30, |  | Gain (Loss) Recognized |  | Three Months Ended September 30,
(dollars in thousands) |  | 2022 |  | 2021 |  | from AOCI into Net Income |  | 2022 |  | 2021
Derivatives in cash flow hedging relationships |  |  |  |  |  |  |  |  |  |
Interest rate products |  | $ | — |  |  | $ | — |  |  | Interest Expense |  | $ | — |  |  | $ | — |
|  | Amount of Gain (Loss) Recognized |  |  |  | Amount of Gain (Loss) Reclassified
Derivatives in Subtopic |  | in OCI on Derivative |  | Location of |  | from AOCI into Net Income
815-20 Hedging Relationships |  | Nine Months Ended September 30, |  | Gain (Loss) Recognized |  | Nine Months Ended September 30,
(dollars in thousands) |  | 2022 |  | 2021 |  | from AOCI into Net Income |  | 2022 |  | 2021
Derivatives in cash flow hedging relationships |  |  |  |  |  |  |  |  |  |
Interest rate products |  | $ | — |  |  | $ | 1 |  |  | Interest Expense |  | $ | — |  |  | $ | (445) |
The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of income for the three and nine months ended September 30, 2022 and 2021:
The Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income
|  | Amount of Gain (Loss) Recognized in Interest Expense on
|  | Fair Value and Cash Flow Hedging Relationships
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(dollars in thousands) |  | 2022 |  |  | 2021 |  | 2022 |  | 2021
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded |  | $ | — |  |  |  | $ | — |  |  | $ | — |  |  | $ | (445) |
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 |  |  |  |  |  |  |  |  |
Interest contracts |  |  |  |  |  |  |  |  |
Amount of gain (loss) reclassified from AOCI into income |  | $ | — |  |  |  | $ | — |  |  | $ | — |  |  | $ | (445) |
Amount of gain (loss) reclassified from AOCI into income - included component |  | $ | — |  |  |  | $ | — |  |  | $ | — |  |  | $ | (445) |
The Effect of Derivatives Not Designated as Hedging Instruments in the Consolidated Statements of Income
|  |  |  | Amount of Gain (Loss) Recognized in Income on Derivatives
|  | Location of Gain (Loss) Recognized |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(dollars in thousands) |  | in Income on Derivatives |  | 2022 |  | 2021 |  | 2022 |  | 2021
Interest rate products |  | Other income / (other expense) |  | $ | 837 |  |  | $ | 277 |  |  | $ | 2,299 |  |  | $ | 261 |
Mortgage banking derivatives |  | Gain on sale of loans |  | (90) |  |  | 1,575 |  |  | (619) |  |  | 5,268 |
Other contracts |  | Other income / (other expense) |  | — |  |  | — |  |  | — |  |  | 44 |
Total |  |  |  | $ | 747 |  |  | $ | 1,852 |  |  | $ | 1,680 |  |  | $ | 5,573 |

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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 https://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 https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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