Derivatives (Notes)

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative [Text Block]

Derivatives

The Company has entered into various interest rate swap agreements as part of its interest rate risk management strategy. The Company uses interest rate swaps to manage its interest rate risk exposure on certain loans, variable-rate and short-term borrowings, and deposits due to interest rate movements. The notional amounts of the interest rate swaps 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.

Interest Rate Swaps Designated as a Cash Flow Hedge: The Company had interest rate swaps designated as cash flow hedges with total notional amounts of $305,000 and $335,000 at September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, the Company had swaps with a total notional amount of $175,000 that hedge the interest payments of rolling fixed-rate one- or three-month funding consisting of FHLB advances or brokered deposits. Also as of September 30, 2020, the Company had a swap with a total notional amount of $20,000 that effectively converts variable-rate junior subordinated notes to fixed-rate debt, and swaps with a total notional amount of $110,000 that hedge the interest payments of certain deposits accounts.

Derivatives Not Designated as Accounting Hedges: To accommodate customer needs, the Company on occasion offers loan level interest rate swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a swap counterparty (back-to-back swap program). The interest rate swaps are free-standing derivatives and are recorded at fair value. The Company enters into a floating-rate loan and a fixed-rate swap with our customer. Simultaneously, the Company enters into an offsetting fixed-rate swap with a swap counterparty. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay a swap counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customers to effectively convert variable-rate loans to fixed-rate loans. The customer accommodations and any offsetting swaps are treated as non-hedging derivative instruments which do not qualify for hedge accounting.

The table below identifies the balance sheet category and fair values of the Company's derivative instruments as of September 30, 2020 and December 31, 2019.

	Notional Amount		Fair Value		Balance Sheet Category	Weighted Average Floating Rate		Weighted Average Fixed Rate		Weighted Average Maturity - Years
Cash flow hedges:
September 30, 2020
Interest rate swaps	$	305,000	$	(26,870)	Other Liabilities	0.39	%	2.17	%	5.3
December 31, 2019
Interest rate swaps	$	215,000	$	(5,786)	Other Liabilities	1.84	%	2.26	%	5.5
Interest rate swaps	70,000		403		Other Assets	2.62	%	2.37	%	5.2
Forward-starting interest rate swaps(1)	50,000		(343)		Other Liabilities	—		1.74	%	6.1
Non-hedging derivatives:
September 30, 2020
Interest rate swaps - counterparty	$	84,192	$	1,562	Other Assets	2.90	%	3.47	%	10.0
Interest rate swaps - loan customer	84,192		(1,562)		Other Liabilities	2.90	%	3.47	%	10.0

(1) The fixed rate for forward-starting swaps represents the fixed rate to be paid beginning on the scheduled start dates of the swaps. No interest payments were required related to these swaps in 2019 or 2020.

The following table identifies the pre-tax gains or losses recognized on the Company's derivative instruments designated as cash flow hedges for the nine months ended September 30, 2020 and 2019.

					Reclassified from AOCI into Income
	Amount of Pre-tax Gain (Loss) Recognized in OCI
						Amount of Gain (Loss)
	Nine Months Ended September 30,					Nine Months Ended September 30,
	2020		2019		Category	2020		2019
Interest rate swaps	$	(23,912)	$	(12,357)	Interest Expense	$	(2,799)	$	280

The Company estimates there will be approximately $5,436 reclassified from accumulated other comprehensive income (AOCI) to interest expense through the 12 months ending September 30, 2021 related to cash flow hedges.

The Company is exposed to credit risk in the event of nonperformance by interest rate swap counterparties, which is minimized by collateral-pledging provisions in the agreements. Derivative contracts with swap counterparties are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration. As of September 30, 2020 and December 31, 2019, the Company pledged $29,540 and $6,570, respectively, of collateral to the counterparties in the form of cash on deposit with third parties. The interest rate swap product with the borrower is cross collateralized with the underlying loan and therefore there is no pledged cash collateral under swap contracts with customers.