Derivative Financial Instruments

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

12. 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.

Fair value hedges may be eligible for offset on the consolidated balance sheets because they are subject to master netting arrangements or similar agreements. United has elected not to offset the assets and liabilities subject to such arrangements on the consolidated financial statements.

During 2020, United entered into two interest rate swap derivatives designated as cash flow hedges. The notional amount of these cash flow hedge derivatives totaled $500,000. The derivatives are intended to hedge the changes in cash flows associated with floating rate FHLB borrowings. As of March 31, 2023, 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 $21,776 will be reclassified from AOCI as a decrease to interest expense over the next 12-months following March 31, 2023 related to the cash flow hedges. As of March 31, 2023, the maximum length of time over which forecasted transactions are hedged is seven 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 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 daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument. The total notional amount of interest rate swap derivatives designated as cash flow hedges cleared through the LCH include $500,000 for asset derivatives as of March 31, 2023. Balances related to LCH are presented as a single unit of account with the fair value of the designated cash flow interest rate swap asset being reduced by variation margin posted by (with) the applicable counterparty and reported in the following table on a net basis. The related fair value on a net basis approximates zero.

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 with servicing either released or retained 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 is measured using valuations from investors for loans with similar characteristics as well as considering the probability of the loan closing (i.e. the “pull-through” rate) with some adjusted for the Company’s actual sales experience versus the investor’s indicated pricing. Fair values of TBA mortgage-backed securities are measured using valuations from investors for mortgage-backed securities with similar characteristics. Income from mortgage banking activities includes the gain recognized for the period presented and associated elements of fair value.

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 March 31, 2023 and December 31, 2022.

	Asset Derivatives
	March 31, 2023						December 31, 2022
	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	$	53,964	$	3,057		Other assets	$	55,073	$	4,038
Total Fair Value Hedges			$	53,964	$	3,057			$	55,073	$	4,038
Cash Flow Hedges:
Interest rate swap contracts (hedging FHLB borrowings)		Other assets	$	500,000	$	0		Other assets	$	500,000	$	0
Total Cash Flow Hedges			$	500,000	$	0			$	500,000	$	0
Total derivatives designated as hedging instruments			$	553,964	$	3,057			$	555,073	$	4,038
Derivatives not designated as hedging instruments
Forward loan sales commitments		Other assets	$	10,041	$	127		Other assets	$	15,475	$	220
TBA mortgage-backed securities		Other assets		0		0		Other assets		22,649		146
Interest rate lock commitments		Other assets		102,390		2,099		Other assets		73,412		1,146
Total derivatives not designated as hedging instruments			$	112,431	$	2,226			$	111,536	$	1,512
Total asset derivatives			$	666,395	$	5,283			$	666,609	$	5,550

	Liability Derivatives
	March 31, 2023						December 31, 2022
	Balance Sheet Location		Notional Amount		Fair Value		Balance Sheet Location		Notional Amount		Fair Value
Derivatives not designated as hedging instruments
Forward loan sales commitments		Other liabilities	$	0	$	0		Other liabilities	$	0	$	0
TBA mortgage-backed securities		Other liabilities		107,014		567		Other liabilities		63,000		213
Interest rate lock commitments		Other liabilities		0		0		Other liabilities		48,949		348
Total derivatives not designated as hedging instruments			$	107,014	$	567			$	111,949	$	561
Total liability derivatives			$	107,014	$	567			$	111,949	$	561

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 March 31, 2023 and December 31, 2022.

		March 31, 2023
Derivatives in Fair Value Hedging Relationships	Location in the Statement of Condition	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	$	54,648	$	(2,177	)	$	0
		December 31, 2022
Derivatives in Fair Value Hedging Relationships	Location in the Statement of Condition	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	$	55,770	$	(3,069	)	$	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 months ended March 31, 2023 and 2022 are presented as follows:

		Three Months Ended
	Income Statement Location	March 31, 2023			March 31, 2022
Derivatives in hedging relationships
Fair Value Hedges:
Interest rate swap contracts	Interest and fees on loans	$	89		$	(601	)
Cash flow Hedges:
Interest rate swap contracts	Interest on long-term borrowings	$	4,915		$	(342	)
Total derivatives in hedging relationships		$	5,004		$	(943	)
Derivatives not designated as hedging instruments
Forward loan sales commitments	Income from Mortgage Banking Activities	$	(93	)	$	(1,049	)
TBA mortgage-backed securities	Income from Mortgage Banking Activities		(499	)		11,410
Interest rate lock commitments	Income from Mortgage Banking Activities		607			(3,704	)
Total derivatives not designated as hedging instruments		$	15		$	6,657
Total derivatives		$	5,019		$	5,714

For the three months ended March 31, 2023 and 2022, changes in the fair value of any interest rate swaps attributed to hedge ineffectiveness were recorded, but not significant to United’s Consolidated Statements of Income.