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Derivatives | 3 Months Ended
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Mar. 31, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | 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 through the use of derivative financial instruments. Interest Rate Products Interest rate 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 market 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. Mortgage Banking Derivatives The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the three months ended March 31, 2023. The Company expects to complete residual origination and sales activities as of the end of the third quarter of 2023. As part of its mortgage banking activities, the Bank entered 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. The table below identifies the balance sheet category and fair value of the Company's derivative instruments as of March 31, 2023 and December 31, 2022. The Company has a minimum collateral posting threshold with its derivative counterparty. If the Company had breached any provisions under the agreement at March 31, 2023, it could have been required to settle its obligations under the agreement at the termination value.
|  | March 31, 2023 |  | December 31, 2022
(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 |  | $ | 401,890 |  |  | $ | 25,844 |  |  | Other assets |  | $ | 396,024 |  |  | $ | 31,039 |  |  | Other assets
Mortgage banking derivatives |  | 2,188 |  |  | 29 |  |  | Other assets |  | 6,963 |  |  | 93 |  |  | Other assets
Total |  | $ | 404,078 |  |  | $ | 25,873 |  |  |  |  | $ | 402,987 |  |  | $ | 31,132 |  |  |
Derivatives not designated as hedging instruments in a liability position |  |  |  |  |  |  |  |  |  |  |  |
Interest rate product |  | $ | 401,890 |  |  | $ | 25,218 |  |  | Other liabilities |  | $ | 396,024 |  |  | $ | 30,065 |  |  | Other liabilities
Credit risk participation agreements |  | 25,770 |  |  | 3 |  |  | Other liabilities |  | 25,902 |  |  | 2 |  |  | Other liabilities
Total |  | $ | 427,660 |  |  | 25,221 |  |  |  |  | $ | 421,926 |  |  | 30,067 |  |  |
Cash and other collateral posted |  |  |  | — |  |  |  |  |  |  | — |  |  |
Net derivatives in a liability position |  |  |  | $ | 25,221 |  |  |  |  |  |  | $ | 30,067 |  |  |
The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of income for the three months ended March 31, 2023 and 2022:
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 in Income on Derivatives |  | Three Months Ended March 31, |  |
(dollars in thousands) |  |  | 2023 |  | 2022 |  |  |  |
Interest rate products |  | Other income / (other expense) |  | $ | (350) |  |  | $ | 250 |  |  |  |  |
Mortgage banking derivatives |  | Gain on sale of loans |  | (64) |  |  | 209 |  |  |  |  |
Total |  |  |  | $ | (414) |  |  | $ | 459 |  |  |  |  |

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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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