Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Interest Rate Swaps

The Corporation periodically uses interest rate swap agreements to modify interest rate characteristics from variable to fixed or fixed to variable in order to reduce the impact of interest rate changes on future net interest income. The Corporation’s credit exposure on interest rate swaps includes fair value and any collateral that is held by a third party.

In 2014, the Corporation entered into an amortizing interest rate swap classified as a cash flow hedge with a notional amount of $20.0 million to hedge a portion of the debt financing of a pool of 10-year fixed rate loans that were originated in 2013 with balances totaling $29.1 million at time of the hedge. A brokered money market demand account with a balance exceeding the amortizing interest rate swap balance is being used for the cash flow hedge. Under the terms of the swap agreement, the Corporation pays a fixed rate of 2.10% and receives a floating rate of one-month LIBOR. The swap matures in November 2022. The Corporation performed an assessment of the hedge for effectiveness at the inception of the hedge and on a recurring basis to determine that the derivative has been and is expected to continue to be highly effective in offsetting changes in cash flows of the hedged item. At March 31, 2022, approximately $40 thousand in net deferred losses, net of tax, recorded in accumulated other comprehensive loss are expected to be reclassified into earnings during the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to March 31, 2022. At March 31, 2022, the notional amount of the interest rate swap was $14.4 million and the fair value was a liability of $57 thousand.

The Corporation has an interest rate swap with a current notional amount of $11 thousand, for a 15-year fixed rate loan that is earning interest at 7.43%. The Corporation pays a fixed rate of 7.43% and receives a floating rate based on the one-month LIBOR plus 224 basis points. The swap matures in April 2022. The interest rate swap is carried at fair value in accordance with FASB ASC 815 "Derivatives and Hedging." The loan is carried at fair value under the fair value option as permitted by FASB ASC 825 "Financial Instruments."

Credit Derivatives

The Corporation has agreements with third-party financial institutions whereby the third-party financial institution enters into interest rate derivative contracts with loan customers referred to them by the Corporation. By the terms of the agreements, the third-party financial institution has recourse to the Corporation for any exposure created under each swap contract in the event the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. These transactions represent credit derivatives and are a customary arrangement that allows the Corporation to provide access to interest rate swap transactions for customers without issuing the swap.

At March 31, 2022, the Corporation had 126 variable-rate to fixed-rate interest rate swap transactions between the third-party financial institution and customers with a current notional amount of $769.3 million and remaining maturities ranging from 1 month to 12 years. At March 31, 2022, the fair value of the Corporation's interest rate swap credit derivatives was a liability of $457 thousand. At March 31, 2022, the fair value of the swaps to the customers was a net liability of $2.1 million and all but one of these swaps were in paying positions to the third-party financial institution.

The maximum potential payments by the Corporation to the third-party financial institution under these credit derivatives are not estimable as they are contingent on future interest rates and the agreement does not provide for a limitation of the maximum potential payment amount.

Mortgage Banking Derivatives

Derivative loan commitments represent agreements for delayed delivery of financial instruments in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified instrument at a specified price or yield. The Corporation’s derivative loan commitments are commitments to sell loans secured by 1-to 4-family residential properties whose predominant risk characteristic is interest rate risk.

Derivatives Tables

The following table presents the notional amounts and fair values of derivatives designated as hedging instruments recorded on the condensed consolidated balance sheets at March 31, 2022 and December 31, 2021. The Corporation pledges cash or securities to cover the negative fair value of derivative instruments. Cash collateral associated with derivative instruments are not added to or netted against the fair value amounts.

			Derivative Assets			Derivative Liabilities
(Dollars in thousands)	Notional Amount		Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
At March 31, 2022
Interest rate swap - cash flow hedge	$	14,393		$	—	Other liabilities	$	57
Total	$	14,393		$	—		$	57
At December 31, 2021
Interest rate swap - cash flow hedge	$	14,611		$	—	Other liabilities	$	202
Total	$	14,611		$	—		$	202

The following table presents the notional amounts and fair values of derivatives not designated as hedging instruments recorded on the condensed consolidated balance sheets at March 31, 2022 and December 31, 2021:

			Derivative Assets			Derivative Liabilities
(Dollars in thousands)	Notional Amount		Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
At March 31, 2022
Interest rate swap	$	11		$	—	Other liabilities	$	2
Credit derivatives	769,329			—		Other liabilities	457
Interest rate locks with customers	39,524			—		Other liabilities	245
Forward loan sale commitments	54,045		Other assets	806			—
Total	$	862,909		$	806		$	704
At December 31, 2021
Interest rate swap	$	46		$	—	Other liabilities	$	2
Credit derivatives	755,576			—		Other liabilities	381
Interest rate locks with customers	33,876		Other assets	765			—
Forward loan sale commitments	55,476		Other assets	87			—
Total	$	844,974		$	852		$	383

The following table presents amounts included in the condensed consolidated statements of income for derivatives designated as hedging instruments for the periods indicated:

	Statement of Income Classification	Three Months Ended
		March 31,
(Dollars in thousands)		2022		2021
Interest rate swap—cash flow hedge—net interest payments	Interest expense	$	68	$	76
Total net loss		$	(68)	$	(76)

The following table presents amounts included in the condensed consolidated statements of income for derivatives not designated as hedging instruments for the periods indicated:

	Statement of Income Classification	Three Months Ended
		March 31,
(Dollars in thousands)		2022		2021
Credit derivatives	Other noninterest income	$	450	$	1,107
Interest rate locks with customers	Net loss on mortgage banking activities	(1,010)		(1,730)
Forward loan sale commitments	Net gain on mortgage banking activities	719		1,974
Total net gain		$	159	$	1,351

The following table presents amounts included in accumulated other comprehensive (loss) income for derivatives designated as hedging instruments at March 31, 2022 and December 31, 2021:

(Dollars in thousands)	Accumulated Other Comprehensive (Loss) Income	At March 31, 2022		At December 31, 2021
Interest rate swap—cash flow hedge	Fair value, net of taxes	$	(45)	$	(159)
Total		$	(45)	$	(159)