Derivative Financial Instruments

3 Months Ended

Mar. 31, 2020

Derivative Financial Instruments

Derivative Financial Instruments

Note 13: Derivative Financial Instruments

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into derivative financial instruments, including interest rate lock commitments issued to residential loan customers for loans that will be held for sale, forward sales commitments to sell residential mortgage loans to investors and interest rate swaps with customers and other third parties. See “Note 14: Fair Value Measurements” for further discussion of the fair value measurement of such derivatives.

Interest Rate Swaps Designated as Cash Flow Hedges: Starting in the third quarter of 2019, the Company entered into derivative instruments designated as cash flow hedges. For derivative instruments that are designated and qualify as a

cash flow hedge, the change in fair value of the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Change in fair value of components excluded from the assessment of effectiveness are recognized in current earnings.

Interest rate swaps with notional amounts totaling $70.0 million as of March 31, 2020 and December 31, 2019 were designated as cash flow hedges to hedge the risk of variability in cash flows (future interest payments) attributable to changes in the contractually specified 3 month LIBOR benchmark interest rate on the Company’s junior subordinated debt owed to unconsolidated trusts and were determined to be highly effective during the period. The gross aggregate fair value of the swaps of $3.4 million and $0.3 million is recorded in other liabilities in the unaudited consolidated financial statements at March 31, 2020 and December 31, 2019, respectively, with changes in fair value recorded net of tax in other comprehensive income (loss). The Company expects the hedges to remain highly effective during the remaining terms of the swaps.

A summary of the interest-rate swaps designated as cash flow hedges is presented below (dollars in thousands):

	March 31, 2020			December 31, 2019
Notional amount	$	70,000		$	70,000
Weighted average fixed pay rates		1.80	%		1.80	%
Weighted average variable 3 month LIBOR receive rates		0.77	%		1.90	%
Weighted average maturity		3.61	yrs		3.86	yrs
Unrealized gains (losses), net of tax	$	(2,448)		$	(200)

Interest income (expense) recorded on these swap transactions were insignificant during the three months ended March 31, 2020. The Company expects $0.2 million of the unrealized loss to be reclassified from Other Comprehensive Income (Loss) (“OCI”) to interest expense during the next 12 months. This reclassified 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, 2020. 

The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the unaudited Consolidated Statements of Income relating to cash flow derivative instruments for the period presented (dollars in thousands):

	Three Months Ended March 31, 2020
		Amount of (gain) loss recognized in OCI		Amount of (gain) loss reclassified from OCI to interest income
Interest rate contracts	$	2,237	$	(11)

The Company pledged $3.3 million and $0.3 million in cash to secure its obligation under these contracts at March 31, 2020 and December 31, 2019, respectively.

Interest Rate Lock Commitments. At March 31, 2020 and December 31, 2019, the Company had issued $268.7 million and $69.1 million, respectively, of unexpired interest rate lock commitments to loan customers. Such interest rate lock commitments that meet the definition of derivative financial instruments under ASC Topic 815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the unaudited consolidated financial statements, with changes in the fair values of the corresponding derivative financial assets or liabilities recorded as either a charge or credit to current earnings during the period in which the changes occurred.

Forward Sales Commitments. At March 31, 2020 and December 31, 2019, the Company had issued $353.6 million and $135.3 million, respectively, of unexpired forward sales commitments to mortgage loan investors. Typically, the Company economically hedges mortgage loans held for sale and interest rate lock commitments issued to its residential loan customers related to loans that will be held for sale by obtaining corresponding best-efforts forward sales commitments with an investor to sell the loans at an agreed-upon price at the time the interest rate locks are issued to the customers. Forward sales commitments that meet the definition of derivative financial instruments under ASC Topic

815, Derivatives and Hedging, are carried at their fair values in other assets or other liabilities in the unaudited consolidated financial statements. While such forward sales commitments generally served as an economic hedge to the mortgage loans held for sale and interest rate lock commitments, the Company did not designate them for hedge accounting treatment. Changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

The fair values of derivative assets and liabilities related to interest rate lock commitments and forward sales commitments recorded in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands):

	March 31, 2020		December 31, 2019
Fair value recorded in other assets	$	5,146	$	1,046
Fair value recorded in other liabilities		7,344		2,187

The gross gains and losses on these derivative assets and liabilities related to interest rate lock commitments and forward sales commitments recorded in non-interest income and expense in the unaudited Consolidated Statements of Income are summarized as follows (dollars in thousands):

	Three Months Ended March 31,
		2020		2019
Gross gains	$	6,670	$	1,078
Gross (losses)		(7,344)		(1,118)
Net gains (losses)	$	(674)	$	(40)

The impact of the net gains or losses on derivative financial instruments related to interest rate lock commitments issued to residential loan customers for loans that will be held for sale and forward sales commitments to sell residential mortgage loans to loan investors are almost entirely offset by a corresponding change in the fair value of loans held for sale.

Interest Rate Swaps Not Designated as Hedges. The Company may offer derivative contracts to its customers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer. With notional values of $650.2 million and $580.8 million at March 31, 2020 and December 31, 2019, respectively, these contracts support variable rate, commercial loan relationships totaling $325.1 million and $290.4 million, respectively. These derivatives generally worked together as an economic interest rate hedge, but the Company did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

The fair values of derivative assets and liabilities related to derivatives for customers for interest rate swaps recorded in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands):

		March 31, 2020		December 31, 2019
Fair value recorded in other assets	$	35,832	$	12,354
Fair value recorded in other liabilities		35,832		12,354

The gross gains and losses on these derivative assets and liabilities recorded in non-interest income and non-interest expense in the unaudited Consolidated Statements of Income are summarized as follows (dollars in thousands):

	Three Months Ended March 31,
		2020		2019
Gross gains	$	23,478	$	3,713
Gross losses		(23,478)		(3,713)
Net gains (losses)	$	—	$	—

The Company pledged $36.5 million and $18.1 million in cash to secure its obligation under these contracts at March 31, 2020 and December 31, 2019, respectively.