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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Derivative Financial Instruments The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company entered into forward contracts for the future delivery of mortgage loans to third-party investors and entered into IRLCs with potential borrowers to fund specific mortgage loans that were sold into the secondary market. The forward contracts were entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The Company had various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses in the condensed consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The Company offers interest rate swaps to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable-to-fixed interest rate contract with the customer. The Company also enters into an offsetting interest rate swap with a correspondent bank. These back-to-back swap agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a discounted cash flow approach. The fair value assets and liabilities of centrally cleared interest rate swaps are net of variation margin settled-to-market. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The following table presents amounts that were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of September 30, 2023 and December 31, 2022.
(in thousands) |  | Carrying amount of the hedged asset |  | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets
Line item in the condensed consolidated balance sheets in which the hedged item is included |  | September 30, 2023 |  | December 31, 2022 |  | September 30, 2023 |  | December 31, 2022
Securities available-for-sale 1 |  | $ | 69,041 |  |  | $ | 68,963 |  |  | $ | (1,707) |  |  | $ | (2,088) |
1 These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The designated hedged items were $50.0 million at both September 30, 2023 and December 31, 2022. The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company’s asset/liability management activities at September 30, 2023 and December 31, 2022, identified by the underlying interest rate-sensitive instruments.
(dollars in thousands) September 30, 2023 |  | Notional Value |  | Weighted- Average Remaining Maturity (years) |  |  |  | Weighted-Average Ratio
Instruments Associated With |  |  |  | Fair Value |  | Receive |  | Pay
Securities available-for-sale |  | $ | 50,000 |  |  | 1.1 |  | $ | 1,717 |  |  | 3-month SOFR |  | 2.33 | %
Total at September 30, 2023 |  | $ | 50,000 |  |  | 1.1 |  | $ | 1,717 |  |  | 3-month SOFR |  | 2.33 | %
(dollars in thousands) December 31, 2022 |  | Notional Value |  | Weighted- Average Remaining Maturity (years) |  |  |  | Weighted-Average Ratio |
Instruments Associated With |  |  |  | Fair Value |  | Receive |  | Pay |
Securities available-for-sale |  | $ | 50,000 |  |  | 1.8 |  | $ | 2,093 |  |  | 3-month LIBOR |  | 2.33 | % |
Total swap portfolio at December 31, 2022 |  | $ | 50,000 |  |  | 1.8 |  | $ | 2,093 |  |  | 3-month LIBOR |  | 2.33 | % |
In March 2021, the Company terminated the last layer of interest rate swaps associated with available-for-sale agency mortgage-backed securities - residential, which resulted in swap termination payments to counterparties totaling $1.9 million. The corresponding fair value hedging adjustment was allocated pro-rata to the underlying hedged securities and is being amortized over the remaining lives of the designated securities. Amortization expense totaling $0.1 million and $0.1 million for the three and nine months ended September 30, 2023, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30 2022 respectively was recognized as a reduction to interest income on securities. In June 2020, the Company terminated all fair value hedging relationships associated with loans, which resulted in swap termination payments to counterparties totaling $46.1 million. The corresponding loan fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated loans, which have a weighted average term to maturity of 10.6 years as of September 30, 2023. Amortization expense totaling $1.5 million and $3.5 million for the three and nine months ended September 30, 2023, respectively, and $1.5 million and $3.6 million for the three and nine months ended September 30 2022 respectively, related to these previously terminated fair value hedges was recognized as a reduction to interest income on loans. The following tables present a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable-rate liabilities used in the Company’s asset/liability management activities at September 30, 2023 and December 31, 2022.
(dollars in thousands) September 30, 2023 |  | Notional Value |  | Weighted- Average Remaining Maturity (years) |  |  |  | Weighted-Average Ratio
Cash Flow Hedges |  |  |  | Fair Value |  | Receive |  | Pay
Interest rate swaps |  | $ | 110,000 |  |  | 3.3 |  | $ | 6,450 |  |  | 3-month SOFR |  | 2.88 | %
Interest rate swaps |  | 20,000 |  |  | 0.2 |  | 85 |  |  | 1-month SOFR |  | 2.94 | %
Interest rate swaps |  | 40,000 |  |  | 0.7 |  | 682 |  |  | Fed Funds Effective |  | 2.78 | %
(dollars in thousands) December 31, 2022 |  | Notional Value |  | Weighted- Average Remaining Maturity (years) |  |  |  | Weighted-Average Ratio
Cash Flow Hedges |  |  |  | Fair Value |  | Receive |  | Pay
Interest rate swaps |  | $ | 110,000 |  |  | 4.1 |  | $ | 4,787 |  |  | 3-month LIBOR |  | 2.88 | %
Interest rate swaps |  | 60,000 |  |  | 0.6 |  | 735 |  |  | 1-month LIBOR |  | 2.88 | %
Interest rate swaps |  | 40,000 |  |  | 1.4 |  | 1,030 |  |  | Fed Funds Effective |  | 2.78 | %
These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Company received $9.4 million and $7.7 million of cash collateral from counterparties as security for their obligations related to these swap transactions at September 30, 2023 and December 31, 2022. The Company had no pledged cash collateral as of September 30, 2023 and December 31, 2022 to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the market valuation of the underlying hedges. The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at September 30, 2023 and December 31, 2022.
|  | September 30, 2023 |  | December 31, 2022
(in thousands) |  | Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
Asset Derivatives |  |  |  |  |  |  |  |
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |
Interest rate swaps associated with securities available-for-sale |  | $ | 50,000 |  |  | $ | 1,717 |  |  | $ | 50,000 |  |  | $ | 2,093 |
Interest rate swaps associated with liabilities |  | 170,000 |  |  | 7,217 |  |  | 210,000 |  |  | 6,552 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
Back-to-back swaps |  | $ | 904 |  |  | $ | 81 |  |  | $ | — |  |  | $ | — |
IRLCs |  | — |  |  | — |  |  | 14,862 |  |  | 133 |
Forward contracts |  | — |  |  | — |  |  | 17,000 |  |  | 97 |
Total contracts |  | $ | 220,904 |  |  | $ | 9,015 |  |  | $ | 291,862 |  |  | $ | 8,875 |
Liability Derivatives |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
Back-to-back swaps |  | $ | 904 |  |  | $ | 81 |  |  | $ | — |  |  | $ | — |
Total contracts |  | $ | 904 |  |  | $ | 81 |  |  | $ | — |  |  | $ | — |
The fair value of interest rate swaps was estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date. Back-to-back swaps consist of two interest-rate swaps (a customer swap and an offsetting counterparty swap). As a result of this offsetting relationship, no net gains or losses are recognized in income. The following table presents the effects of the Company’s cash flow hedge relationships on the condensed consolidated statements of comprehensive income during the three and nine months ended September 30, 2023 and 2022.
|  | Amount of Gain Recognized in Other Comprehensive Loss in The Three Months Ended |  | Amount of Gain Recognized in Other Comprehensive Income (Loss) in The Nine Months Ended
(in thousands) |  | September 30, 2023 |  | September 30, 2022 |  | September 30, 2023 |  | September 30, 2022
Interest rate swap agreements |  | $ | 740 |  |  | $ | 6,058 |  |  | $ | 664 |  |  | $ | 19,424 |
The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three and nine months ended September 30, 2023 and 2022.
|  | Amount of Gain / (Loss) Recognized in the Three Months Ended |  | Amount of Gain / (Loss) Recognized in the Nine Months Ended
(in thousands) |  | September 30, 2023 |  | September 30, 2022 |  | September 30, 2023 |  | September 30, 2022
Asset Derivatives |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
IRLCs |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Forward contracts |  | — |  |  | 993 |  |  | — |  |  | 1,036 |
Liability Derivatives |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
IRLCs |  | $ | — |  |  | $ | (850) |  |  | $ | (133) |  |  | $ | (1,102) |
Forward contracts |  | — |  |  | — |  |  | (119) |  |  | — |
The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of operations during the three and nine months ended September 30, 2023 and 2022.
(in thousands) Line item in the condensed consolidated statements of operations |  | Three Months Ended |  | Nine Months Ended
| September 30, 2023 |  | September 30, 2022 |  | September 30, 2023 |  | September 30, 2022
Interest income |  |  |  |  |  |  |  |
Securities - taxable |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Securities - non-taxable |  | 407 |  |  | (7) |  |  | 1,055 |  |  | (442) |
Total interest income |  | 407 |  |  | (7) |  |  | 1,055 |  |  | (442) |
Interest expense |  |  |  |  |  |  |  |
Deposits |  | (372) |  |  | 159 |  |  | (1,330) |  |  | 1,338 |
Other borrowed funds |  | (748) |  |  | 168 |  |  | (1,865) |  |  | 1,355 |
Total interest expense |  | (1,120) |  |  | 327 |  |  | (3,195) |  |  | 2,693 |
Net interest income |  | $ | 1,527 |  |  | $ | (334) |  |  | $ | 4,250 |  |  | $ | (3,135) |

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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://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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