Other Derivatives

3 Months Ended

Mar. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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.

As of March 31, 2021 and December 31, 2020, the Company had one 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 will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. The Company's sole designated cash flow hedge matured during April 2021. Accordingly, the Company estimates (based on existing interest rates) that $60 thousand will be reclassified as an increase in interest expense during April 2021.

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 March 31, 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 $474 thousand. The Company has a minimum collateral posting threshold with its derivative counterparty. As of March 31, 2021, the Company was required to post collateral totaling $1.0 million with its derivative counterparty against its obligations under this agreement. If the Company had breached any provisions under the agreement at March 31, 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 March 31, 2021 (unaudited) and December 31, 2020.


	March 31, 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	$	217,398	$	3,637	Other Assets	$	3,491	Other Assets
Mortgage banking derivatives	$	191,902	$	2,514	Other Assets	5,213		Other Assets
	$	409,300	$	6,151	Other Assets	$	8,704	Other Assets

Derivatives designated as hedging instruments
Interest rate product	$	100,000	$	133	Other Liabilities	$	516	Other Liabilities
Derivatives not designated as hedging instruments
Interest rate product	$	217,398	$	3,516	Other Liabilities	3,653		Other Liabilities
Other Contracts	$	26,789	$	78	Other Liabilities	118		Other Liabilities
	$	244,187	$	3,594	Other Liabilities	$	3,771	Other Liabilities

Net Derivatives on the balance sheet			$	3,727		$	4,287
Cash and other collateral			$	2,550		4,168
Net Derivative Amounts			$	1,177		$	119

The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the three months ended March 31, 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 March 31,				Comprehensive Income into	Three Months Ended March 31,
Relationships (dollars in thousands)	2021		2020		Income	2021		2020
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(844)	$	(1,521)	Interest Expense	$	(385)	$	28
Total	$	(844)	$	(1,521)		$	(385)	$	28

able below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the three months ended March 31, 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 March 31,
	2021		2020
	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	$	(384)	$	28

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	$	(384)	$	28
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	$	(384)	$	28
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 March 31,
Instruments under Subtopic 815-20	Income on Derivative	2021		2020
Interest Rate Products	Other income / (expense)	$	283	$	(168)
Mortgage banking derivatives	Other income / (expense)	2,514		663
Other Contracts	Other income / (expense)	40		(66)
Total		$	2,837	$	429