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Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2020
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.
 
United accounts for its derivative financial instruments in accordance with ASC Topic 815 which requires all derivative instruments to be carried at fair value on the balance sheet. United has designated certain derivative instruments used to manage interest rate risk as hedge relationships with certain assets, liabilities or cash flows being hedged. Certain derivatives used for interest rate risk management are not designated in a hedge relationship.
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.
For a fair value hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to the hedged financial instrument. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a fair value hedge are offset in current period earnings. For a cash flow hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to other comprehensive income within shareholders’ equity, net of tax. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a cash flow hedge are offset to other comprehensive income, net of tax. The portion of a hedge that is ineffective is recognized immediately in earnings.
During the three months ended June 30, 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. As of June 30, 2020, United has determined that no forecasted transactions related to
 the
cash flow hedge 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 $1,095 will be re
classified from AOCI
 as an increase
to
interest expense
over the next
12-months
following June 30, 2020
related to the cash flow hedge. As of June 30
, 2020, the maximum length of time over which forecasted transactions are hedged is ten 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. The portion of a hedge that is ineffective is recognized immediately in earnings.
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 $250,000 for a liability derivative as of June 30, 2020. The related fair value on a net basis approximate 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 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 sells mortgage loans on either a best efforts or mandatory delivery basis. For loans sold on a mandatory delivery basis, United enters into forward mortgage-backed securities (the “residual hedge”) to mitigate the effect of interest rate risk. Both the rate lock commitment under mandatory delivery and the residual hedge are recorded at fair value through earnings and are not designated as accounting hedges. At the closing of the loan, the loan commitment derivative expires and United records a loan held for sale at fair value and continues to mark these assets to market under the election of fair value option. United closes out of the trading mortgage-backed securities assigned within the residual hedge and replaces the securities with a forward sales contract once a price has been accepted by an investor and recorded at fair value. For those loans selected to be sold under best efforts delivery, at the closing of the loan, the rate lock commitment derivative expires and the Company records a loan held for sale at fair value under the election of fair value option and continues to be obligated under the same forward loan sales contract entered into at inception of the rate lock commitment.
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, 2020 and December 31, 2019.
 
 
  
Asset Derivatives
 
 
  
June 30, 2020
 
  
December 31, 2019
 
 
  
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
 
assets
 
  
$
73,432
 
  
$
1,745
 
  
 
Other
 
assets
 
  
$
27,260
 
  
$
9
 
Interest rate lock commitments
  
 
Other assets
 
  
 
878,925
 
  
 
27,833
 
  
 
Other assets
 
  
 
117,252
 
  
 
4,518
 
     
 
 
     
 
 
        
 
 
     
 
 
  
Total derivatives not designated as hedging instruments
  
  
$
952,357
 
  
$
29,578
 
  
  
$
144,512
 
  
$
4,527
 
     
 
 
     
 
 
        
 
 
     
 
 
  
Total asset derivatives
  
  
$
952,357
 
  
$
29,578
 
  
  
$
144,512
 
  
$
4,527
 
     
 
 
     
 
 
        
 
 
     
 
 
  
 
  
Liability Derivatives
 
 
  
June 30, 2020
 
  
December 31, 2019
 
 
  
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
 
  
$
79,225
 
  
$
8,424
 
  
 
Other liabilities
 
  
$
82,243
 
  
$
2,394
 
     
 
 
     
 
 
        
 
 
     
 
 
  
Total Fair Value Hedges
  
  
$
79,225
 
  
$
8,424
 
  
  
$
82,243
 
  
$
2,394
 
Cash Flow Hedge:
  
  
    
  
    
  
  
    
  
    
Interest rate swap contract (hedging FHLB borrowing)
  
 
Other liabilities
 
  
$
250,000
 
  
$
1,659
 
  
 
Other liabilities
 
  
$
0
 
  
$
0
 
     
 
 
     
 
 
        
 
 
     
 
 
  
Total Cash Flow Hedge
  
  
$
250,000
 
  
$
1,659
 
  
  
$
0
 
  
$
0
 
     
 
 
     
 
 
        
 
 
     
 
 
  
Total derivatives designated as hedging instruments
  
  
$
329,225
 
  
$
10,083
 
  
  
$
82,243
 
  
$
2,394
 
     
 
 
     
 
 
        
 
 
     
 
 
  
 
  
Liability Derivatives
 
 
  
June 30, 2020
 
  
December 31, 2019
 
 
  
Balance

Sheet

Location
 
  
Notional

Amount
 
  
Fair

Value
 
  
Balance

Sheet

Location
 
  
Notional

Amount
 
  
Fair

Value
 
Derivatives not designated as hedging instruments
  
  
    
  
    
  
  
    
  
    
TBA mortgage-backed securities
  
 
Other
 
liabilities
 
  
$
186,500
 
  
$
4,224
 
  
 
Other
 
liabilities
 
  
$
274,000
 
  
$
671
 
     
 
 
     
 
 
        
 
 
     
 
 
  
Total derivatives not designated as hedging instruments
  
  
$
186,500
 
  
$
4,224
 
  
  
$
274,000
 
  
$
671
 
     
 
 
     
 
 
        
 
 
     
 
 
  
Total liability derivatives
  
  
$
515,725
 
  
$
14,307
 
  
  
$
356,243
 
  
$
3,065
 
     
 
 
     
 
 
        
 
 
     
 
 
  
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, 2020 and December 31, 2019.
 
Derivatives in Fair Value
Hedging Relationships
  
Location in the Statement
of Condition
  
June 30, 2020
 
  
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
  
$
80,048
 
  
$
(8,424
) 
 
$
0
 
 
Derivatives in Fair Value
Hedging Relationships
  
Location in the Statement
of Condition
  
December 31, 2019
 
  
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
  
$
81,397
 
  
$
(2,394
) 
 
$
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, 2020 and 2019 are presented as follows:
 
 
 
  
Three Months Ended
 
 
  
Income Statement

Location
 
  
June 30,
2020
 
 
June 30,
2019
 
Derivatives in hedging relationships
  
  
  
Fair Value Hedges:
 
 
 
Interest rate swap contracts
  
 
Interest and fees on loans
 
  
$
(277
) 
  
$
(68
) 
     
 
 
     
 
 
  
Total derivatives in hedging relationships
  
  
$
(277
) 
  
$
(68
) 
     
 
 
     
 
 
  
Derivatives not designated as hedging instruments
  
  
  
Forward loan sales commitments
  
 
Income from Mortgage Banking Activities
 
  
 
(553
) 
  
 
492
 
TBA mortgage-backed securities
  
 
Income from Mortgage Banking Activities
 
  
 
17,204
 
  
 
(962
) 
Interest rate lock commitments
  
 
Income from Mortgage Banking Activities
 
  
 
(1,527
) 
  
 
3,833
 
     
 
 
     
 
 
  
Total derivatives not designated as hedging instruments
  
  
$
15,124
 
  
$
3,363
 
     
 
 
     
 
 
  
Total derivatives
  
  
$
14,847
 
  
$
3,295
 
     
 
 
     
 
 
  
 
 
  
 
 
  
Six Months Ended
 
 
  
Income Statement

Location
 
  
June 30,
2020
 
 
June 30,
2019
 
Derivatives in fair value hedging relationships
  
 
  
  
Fair Value Hedges:
 
 
 
 
Interest rate swap contracts
  
 
Interest and fees on loans
 
  
$
(720
) 
  
$
(98
) 
  
 
   
 
 
     
 
 
  
Total derivatives in hedging relationships
  
 
  
$
(720
) 
  
$
(98
) 
  
 
   
 
 
     
 
 
  
Derivatives not designated as hedging instruments
  
 
  
  
Forward loan sales commitments
  
 
Income from Mortgage Banking Activities
 
  
 
207
 
  
 
872
 
TBA mortgage-backed securities
  
 
Income from Mortgage Banking Activities
 
  
 
(1,771
) 
  
 
(474
) 
Interest rate lock commitments
  
 
Income from Mortgage Banking Activities
 
  
 
12,169
 
  
 
5,870
 
  
 
   
 
 
     
 
 
  
Total derivatives not designated as hedging instruments
  
 
  
$
10,605
 
  
$
6,268
 
  
 
   
 
 
     
 
 
  
Total derivatives
  
 
  
$
9,885
 
  
$
6,170