Derivatives

3 Months Ended

Mar. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives:

The Company utilizes derivative financial instruments as part of its ongoing efforts to manage its interest rate risk exposure as well as the exposure for its customers. Derivative financial instruments are included in the consolidated balance sheets line items “Other assets” or “Other liabilities” at fair value in accordance with ASC 815, “Derivatives and Hedging.”

Derivatives not designated as hedging instruments

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Under such commitments, interest rates for mortgage loans are typically locked in for between 45 to 90 days with the customer. These interest rate lock commitments are recorded at fair value in the Company’s consolidated balance sheets. The Company also enters into best effort or mandatory delivery forward commitments to sell residential mortgage loans to secondary market investors. Gains and losses arising from changes in the valuation of the rate-lock commitments and forward commitments are recognized currently in earnings and are reflected under the line item “Mortgage banking income” on the consolidated statements of income.

The Company enters into forward commitments, futures and options contracts as economic hedges to offset the changes in fair value of Mortgage servicing rights. Gains and losses associated with these instruments are included in earnings and are reflected under the line item “Mortgage banking income” on the consolidated statements of income.

Additionally, the Company enters into derivative instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with customer contracts, the Company enters into an offsetting derivative contract. The Company manages its credit risk, or potential risk of default by its commercial customers through credit limit approval and monitoring procedures.

The following tables provide details on the Company’s non-designated derivative financial instruments as of the dates presented:

	March 31, 2022
	Notional Amount		Asset		Liability
Interest rate contracts	$	587,309	$	23,245	$	23,195
Forward commitments	805,000		12,921		—
Interest rate-lock commitments	541,560		1,752		—
Futures contracts	382,000		—		4,754
Total	$	2,315,869	$	37,918	$	27,949

	December 31, 2021
	Notional Amount		Asset		Liability
Interest rate contracts	$	600,048	$	19,265	$	19,138
Forward commitments	1,180,000		—		1,077
Interest rate-lock commitments	487,396		7,197		—
Futures contracts	429,000		922		—
Total	$	2,696,444	$	27,384	$	20,215

Gains (losses) included in the consolidated statements of income related to the Company’s non-designated derivative financial instruments were as follows:

	Three Months Ended March 31,
	2022		2021
Included in mortgage banking income:
Interest rate lock commitments	$	(5,446)	$	(21,442)
Forward commitments	37,903		43,258
Futures contracts	(16,535)		(16,332)
Option contracts	36		—
Total	$	15,958	$	5,484

Derivatives designated as cash flow hedges

The Company also maintains two interest rate swap agreements with notional amounts totaling $30,000 used to hedge interest rate exposure on outstanding subordinated debentures included in long-term debt totaling $30,930. Under these agreements, the Company receives a variable rate of interest equal to 3-month LIBOR and pays a weighted average fixed rate of interest of 2.08%. Upon the cessation of LIBOR in June 2023, the rate will convert to SOFR plus an adjustment in accordance with market standards. The interest rate swap contracts, which mature in June of 2024, are designated as cash flow hedges with the objective of reducing the variability in cash flows resulting from changes in interest rates.

 The following presents a summary of the Company's designated cash flow hedges as of the dates presented:

			March 31, 2022			December 31, 2021
	Notional Amount		Estimated fair value		Balance sheet location	Estimated fair value		Balance sheet location
Interest rate swap agreements-    subordinated debt	$	30,000	$	262	Other assets	$	(785)	Accrued expenses and other liabilities

During the three months ended March 31, 2022 and 2021, the Company's consolidated statements of income included losses of $139 and $137, respectively, in interest expense on borrowings related to these cash flow hedges. The cash flow hedges were effective during the periods presented and as a result qualified for hedge accounting treatment. As such, no amounts were reclassified from accumulated other comprehensive (loss) income into earnings during either period presented.

The following discloses the amount included in other comprehensive income, net of tax, for derivative instruments designated as cash flow hedges for the periods presented: 

	Three Months Ended March 31,
	2022		2021
Amount of gain recognized in other comprehensive    (loss) income, net of tax expense of $273 and $112	$	774	$	316

Derivatives designated as fair value hedges

During the three months ended March 31, 2022, the Company entered into three designated fair value hedges to mitigate the effect of changing rates on the fair value of various fixed rate liabilities, including certain money market deposits and subordinated debt. The hedging strategy converts the fixed interest rates of the hedged items to the daily compounded SOFR in arrears paid monthly. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. As of March 31, 2022, the fair value hedges were deemed effective.

	March 31, 2022
	Notional Amount		Remaining Maturity (In Years)	Receive Fixed Rate	Pay Floating Rate	Estimated fair value
Derivatives included in other liabilities:
Interest rate swap     agreement- subordinated     debt	$	100,000	1.92	1.45625%	SOFR	$	(1,333)
Interest rate swap     agreement- fixed rate     money market deposits	75,000		2.39	1.49500%	SOFR	(1,405)
Interest rate swap     agreement- fixed rate     money market deposits	125,000		2.39	1.49500%	SOFR	(2,342)
Total	$	300,000	2.23	1.48208%		$	(5,080)

During the three months ended March 31, 2022, the Company recognized income of $162 and $313 included in interest expense on borrowings and deposits, respectively, related to these fair value hedging instruments.

The following amounts were recorded on the balance sheet related to cumulative adjustments for fair value hedges as of March 31, 2022:

Line item on the balance sheet	Carrying Amount of the Hedged Item			Cumulative Decrease in Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Item
Borrowings	$	97,378	(1)	$	(1,333)
Money market and savings deposits	205,415		(2)	(3,747)

(1) The carrying value also includes unamortized subordinated debt issuance costs of $1,289.

(2) The carrying value also includes and purchase accounting fair value premium of $9,162.

Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheets when the “right of offset” exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements, however the Company has not elected to offset such financial instruments in the consolidated balance sheets. The following table presents the Company's gross derivative positions as recognized in the consolidated balance sheets as well as the net derivative positions, including collateral pledged to the extent the application of such collateral did not reduce the net derivative liability position below zero, had the Company elected to offset those instruments subject to an enforceable master netting agreement:

	Offsetting Derivative Assets				Offsetting Derivative Liabilities
	March 31, 2022		December 31, 2021		March 31, 2022		December 31, 2021
Gross amounts recognized	$	18,895	$	4,990	$	12,134	$	15,733
Gross amounts offset in the consolidated balance sheets	—		—		—		—
Net amounts presented in the consolidated balance sheets	18,895		4,990		12,134		15,733
Gross amounts not offset in the consolidated balance sheets
Less: financial instruments	9,681		4,297		9,681		4,297
Less: financial collateral pledged	—		—		2,453		11,436
Net amounts	$	9,214	$	693	$	—	$	—

Most derivative contracts with clients are secured by collateral. Additionally, in accordance with the interest rate agreements with derivatives dealers, the Company may be required to post margin to these counterparties. As of March 31, 2022 and December 31, 2021, the Company had minimum collateral posting thresholds with certain derivative counterparties and had collateral posted of $52,221 and $57,868, respectively, against its obligations under these agreements. Cash pledged as collateral on derivative contracts is recorded in other assets on the consolidated balance sheets.