Derivative Financial Instruments

6 Months Ended

Jun. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

13. DERIVATIVE FINANCIAL INSTRUMENTS

United uses derivative instruments to help aid against adverse price changes or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives may consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. United also executes derivative instruments with its commercial banking customers to facilitate its risk management strategies.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

United uses derivative instruments to help aid against adverse price changes or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives may consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. United also executes derivative instruments with its commercial banking customers to facilitate its risk management strategies.

During the second quarter of 2020, United entered into a new interest rate swap derivative designated as a cash flow hedge. The notional amount of the cash flow hedge derivative totaled $250,000. The derivative is intended to hedge the changes in cash flows associated with floating rate FHLB borrowings. United is required to pay-fixed 0.59% and receive-variable 1-month LIBOR with monthly resets. The tenor of the interest rate swap derivative is 10 years with an expiration date in June 2030. During the third quarter of 2020, United entered into an additional interest rate swap derivative designated as a cash flow hedge. The notional amount of the cash flow hedge derivative totaled $250,000. The derivative is intended to hedge the changes in cash flows associated with floating rate FHLB borrowings. United is required to pay-fixed 0.19% and receive-variable 1-month LIBOR with monthly resets. The tenor of the interest rate swap derivative is 4 years with an expiration date in August 2024. As of June 30, 2022, United has determined that no forecasted transactions related to its cash flow hedges resulted in gains or losses pertaining to cash flow hedge reclassification from AOCI to income because the forecasted transactions became probable of not occurring. United estimates that $13,114 will be reclassified from AOCI as a decrease to interest expense over the next 12-months following June 30, 2022 related to the cash flow hedges. As of June 30, 2022, the maximum length of time over which forecasted transactions are hedged is eight years.

At inception of a hedge relationship, United formally documents the hedged item, the particular risk management objective, the nature of the risk being hedged, the derivative being used, how effectiveness of the hedge will be assessed and how the ineffectiveness of the hedge will be measured. United also assesses hedge effectiveness at inception and on an ongoing basis using regression analysis. Hedge ineffectiveness is measured by using the change in fair value method. The change in fair value method compares the change in the fair value of the hedging derivative to the change in the fair value of the hedged exposure, attributable to changes in the benchmark rate.

United through its mortgage banking subsidiaries enters into interest rate lock commitments to finance residential mortgage loans with its customers. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by United. Interest

rate risk arises on these commitments and subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Market risk on interest rate lock commitments and mortgage loans held for sale is managed using corresponding forward mortgage loan sales contracts. United is a party to these forward mortgage loan sales contracts to sell loans servicing released and short sales of mortgage-backed securities. When the interest rate is locked with the borrower, the rate lock commitment, forward sale agreement, and mortgage-backed security position are undesignated derivatives and marked to fair value through earnings. The fair value of the rate lock derivative includes the servicing premium and the interest spread for the difference between retail and wholesale mortgage rates. Income from mortgage banking activities includes the gain recognized for the period presented and associated elements of fair value.

United is subject to the Dodd-Frank Act clearing requirement for eligible derivatives. United has executed and cleared eligible derivatives through the London Clearing House (“LCH”). Variation margin at the LCH is distinguished as settled-to-market and settled daily based on the prior day value, rather than collateralized-to-market. The total notional amount of interest rate swap derivatives cleared through the LCH include $500,000 for asset derivatives as of June 30, 2022. The related fair value on a net basis approximate zero.

The following tables disclose the derivative instruments’ location on the Company’s Consolidated Balance Sheets and the notional amount and fair value of those instruments at June 30, 2022 and December 31, 2021.

	Asset Derivatives
	June 30, 2022						December 31, 2021
	Balance Sheet Location		Notional Amount		Fair Value		Balance Sheet Location		Notional Amount		Fair Value
Derivatives designated as hedging instruments
Fair Value Hedges:
Interest rate swap contracts (hedging commercial loans)		Other assets	$	57,244	$	1,849		Other assets	$	0	$	0
Total Fair Value Hedges			$	57,244	$	1,849			$	0	$	0
Cash Flow Hedges:
Interest rate swap contracts (hedging FHLB borrowings)		Other assets	$	500,000	$	55,317		Other assets	$	500,000	$	21,328
Total Cash Flow Hedges			$	500,000	$	55,317			$	500,000	$	21,328
Total derivatives designated as hedging instruments			$	557,244	$	57,166			$	500,000	$	21,328
Derivatives not designated as hedging instruments
Forward loan sales commitments		Other assets	$	31,084	$	112		Other assets	$	33,349	$	430
TBA mortgage-backed securities		Other assets		238,555		764		Other assets		133,747		127
Interest rate lock commitments		Other assets		214,578		4,219		Other assets		467,472		10,380
Total derivatives not designated as hedging instruments			$	484,217	$	5,095			$	634,568	$	10,937
Total asset derivatives			$	1,041,461	$	62,261			$	1,134,568	$	32,265

	Liability Derivatives
	June 30, 2022						December 31, 2021
	Balance Sheet Location		Notional Amount		Fair Value		Balance Sheet Location		Notional Amount		Fair Value
Derivatives designated as hedging instruments
Fair Value Hedges:
Interest rate swap contracts (hedging commercial loans)		Other liabilities	$	0	$	0		Other liabilities	$	72,447	$	3,197
Total Fair Value Hedges			$	0	$	0			$	72,447	$	3,197
Total derivatives designated as hedging instruments			$	0	$	0			$	72,447	$	3,197
Derivatives not designated as hedging instruments
Forward loan sales commitments		Other liabilities	$	5,356	$	43		Other liabilities	$	15,005	$	36
TBA mortgage-backed securities		Other liabilities		0		0		Other liabilities		550,000		470
Interest rate lock commitments		Other liabilities		136,889		1,879		Other liabilities		24,743		25
Total derivatives not designated as hedging instruments			$	142,245	$	1,922			$	589,748	$	531
Total liability derivatives			$	142,245	$	1,922			$	662,195	$	3,728

The following table represents the carrying amount of the hedged assets/(liabilities) and the cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/(liabilities) that are designated as a fair value accounting relationship as of June 30, 2022 and December 31, 2021.

Derivatives in Fair Value Hedging Relationships	Location in the Statement of Condition	June 30, 2022
		Carrying Amount of the Hedged Assets/(Liabilities)		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)		Cumulative Amount of Fair Value Hedging Adjustment Remaining for any Hedged Assets/ (Liabilities) for which Hedge Accounting has been Discontinued
Interest rate swaps	Loans, net of unearned income	$	57,967	$	0	$	0
Derivatives in Fair Value Hedging Relationships	Location in the Statement of Condition	December 31, 2021
		Carrying Amount of the Hedged Assets/ (Liabilities)		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)		Cumulative Amount of Fair Value Hedging Adjustment Remaining for any Hedged Assets/ (Liabilities) for which Hedge Accounting has been Discontinued
Interest rate swaps	Loans, net of unearned income	$	73,232	$	0	$	0

Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. United’s exposure is limited to the replacement value of the contracts rather than the notional amount of the contract. The Company’s agreements generally contain provisions that limit the unsecured exposure up to an agreed upon threshold. Additionally, the Company attempts to minimize credit risk through certain approval processes established by management.

The effect of United’s derivative financial instruments on its unaudited Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021 are presented as follows:

		Three Months Ended
	Income Statement Location	June 30, 2022		June 30, 2021
Derivatives in hedging relationships
Cash flow Hedges:
Interest rate swap contracts	Interest on long-term borrowings	$	263	$	(363)
Fair Value Hedges:
Interest rate swap contracts	Interest and fees on loans	$	(169)	$	(558)
Total derivatives in hedging relationships		$	94	$	(921)
Derivatives not designated as hedging instruments
Forward loan sales commitments	Income from Mortgage Banking Activities	$	723	$	1,706
TBA mortgage-backed securities	Income from Mortgage Banking Activities		(10,303)		(19,459)
Interest rate lock commitments	Income from Mortgage Banking Activities		(1,631)		(8,996)
Total derivatives not designated as hedging instruments		$	(11,211)	$	(26,749)
Total derivatives		$	(11,117)	$	(27,670)

		Six Months Ended
	Income Statement Location	June 30, 2022		June 30, 2021
Derivatives in hedging relationships
Cash flow Hedges:
Interest rate swap contracts	Interest on long-term borrowings	$	(79)	$	(586)
Fair Value Hedges:
Interest rate swap contracts	Interest and fees on loans	$	(334)	$	(793)
Total derivatives in hedging relationships		$	(413)	$	(1,379)
Derivatives not designated as hedging instruments
Forward loan sales commitments	Income from Mortgage Banking Activities	$	(324)	$	(1,284)
TBA mortgage-backed securities	Income from Mortgage Banking Activities		1,107		4,704
Interest rate lock commitments	Income from Mortgage Banking Activities		(5,337)		(15,987)
Total derivatives not designated as hedging instruments		$	(4,554)	$	(12,567)
Total derivatives		$	(4,967)	$	(13,946)