Derivatives Financial Instruments

6 Months Ended

Jun. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives Financial Instruments

Note 11.Derivatives Financial Instruments

Derivatives designated as fair value hedges:

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative net investment hedge instrument, as well as the offsetting gain or loss on the hedged asset or liability attributable to the hedged risk, are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate tax-exempt callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. The Company has adopted ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, which allows such partial term hedge designations.

A summary of the Company’s fair value hedge relationships for the periods presented are as follows (dollars in thousands):

		Weighted
		Average
	Balance	Remaining	Weighted
	Sheet	Maturity	Average		Receive	Notional		Estimated
Liability derivatives	Location	(In Years)	Pay Rate		Rate	Amount		Fair Value
June 30, 2022:
Interest rate swap agreements - securities	Other liabilities	5.70	3.09	%	3 month LIBOR	$	36,000	$	(56)
December 31, 2021:
Interest rate swap agreements - securities	Other liabilities	6.20	3.09	%	3 month LIBOR	$	36,000	$	(3,567)

The effects of the Company’s fair value hedge relationships reported in interest income on tax-exempt available-for-sale securities on the consolidated income statement were as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Interest income on tax-exempt securities	$	387	$	562	$	780	$	1,126
Effects of fair value hedge relationships		(190)		(258)		(444)		(563)
Reported interest income on tax-exempt securities	$	197	$	304	$	336	$	563

	Three Months Ended				Six Months Ended
	June 30,				June 30,
Gain (loss) on fair value hedging relationship	2022		2021		2022		2021
Interest rate swap agreements - securities:
Hedged items	$	1,662	$	(459)	$	3,511	$	1,706
Derivative designated as hedging instruments	$	(1,662)	$	459	$	(3,511)	$	(1,706)
Carry amount of hedged assets - securities available-for-sale	$	37,977	$	43,580	$	37,977	$	43,580

Non-hedged derivatives:

During the second quarter of 2021, the Company initiated a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a dealer bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. Since the income statement impact of the offsetting positions is limited, any changes in fair value is recognized as other noninterest income in the current period.

At June 30, 2022 and December 31, 2021, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):

	June 30, 2022				December 31, 2021
		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	146,639	$	5,021	$	48,125	$	1,326
Liabilities		146,639		(5,021)		48,125		(1,326)

The Company establishes limits and monitors exposures for customer swap positions.  Any fees received to enter the swap agreements at inception are recognized in earnings when received and is included in noninterest income.  Such fees were as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Interest rate swap agreements	$	876	$	10	$	1,396	$	10