XML 33 R22.htm IDEA: XBRL DOCUMENT v3.21.2
Derivative Instruments and Hedging Activities
 6 Months Ended
Jun. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Derivative Instruments and Hedging Activities
 
A.Derivatives not designated as hedging instruments

Derivative financial instruments involve, to varying degrees, interest rate, market and credit risk. Management manages these risks as part of its asset and liability management process and through credit policies and procedures. Management seeks to minimize counterparty credit risk by establishing credit limits and collateral agreements and utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The Corporation enters into derivative transactions as an economic hedge of derivative offerings to Bank customers. The Corporation does not use derivative financial instruments for trading purposes.
 
Customer Derivatives – Interest Rate Swaps. The Corporation enters into interest rate swaps with commercial loan customers and correspondent banks wishing to manage interest rate risk. The Corporation then enters into corresponding swap agreements with swap dealer counterparties to economically hedge the exposure arising from these contracts. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. As of June 30, 2021, there were no fair value adjustments related to credit quality.

Foreign Exchange Forward Contracts. The Corporation enters into foreign exchange forward contracts (“FX forwards”) with customers to exchange one currency for another on an agreed date in the future at an agreed exchange rate. The Corporation then enters into corresponding FX forwards with swap dealer counterparties to economically hedge its exposure on the exchange rate component of the customer agreements. The FX forwards with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. Exposure to gains and losses on these contracts increase or decrease over their respective lives as currency exchange and interest rates fluctuate. As the FX forwards are structured to offset each other, changes to the underlying term structure of currency exchange rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. As of June 30, 2021, there were no fair value adjustments related to credit quality.

Risk Participation Agreements. The Corporation may enter into a risk participation agreement (“RPA”) with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA sold.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation may purchase an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA purchased.”
The following table details the derivatives not designated as hedging instruments as of June 30, 2021 and December 31, 2020:
 Asset DerivativesLiability Derivatives
(dollars in thousands)Notional
Amount
Fair
Value(1)
Notional
Amount
Fair
Value(2)
Derivatives not designated as hedging instruments    
As of June 30, 2021:
Customer derivatives – interest rate swaps$1,188,491 $87,483 $1,188,491 $87,483 
FX forwards1,036 20 269 3 
RPAs sold— — 44,675 18 
RPAs purchased59,101 230 — — 
Total derivatives$1,248,628 $87,733 $1,233,435 $87,504 
As of December 31, 2020:
Customer derivatives – interest rate swaps$1,102,753 $113,848 $1,102,753 $113,848 
FX forwards9,146 52 9,856 70 
RPAs sold— — 33,111 30 
RPAs purchased55,415 342 — — 
Total derivatives$1,167,314 $114,242 $1,145,720 $113,948 
(1) Included within Other Assets on the Unaudited Consolidated Balance Sheet.
(2) Included within Other Liabilities on the Unaudited Consolidated Balance Sheet.
 
B.Derivatives designated as hedging instruments

Management's objectives in using interest rate derivative financial instruments are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Corporation has entered into interest rate swaps designated as cash flow hedges that involve the receipt of fixed rate amounts from a counterparty in exchange for the Corporation making variable rate payments. As of June 30, 2021, the Corporation had entered into three interest rate swaps with an aggregate notional value of $150.0 million. The Corporation will pay a floating rate component of interest equal to the one-month LIBOR rate for up to ten years while receiving a fixed rate of interest. The interest paid on the variable rate component is intended to offset the interest received on variable rate commercial mortgages within the Corporation's loan portfolio. The notional amount of the interest rate swap does not represent the amount exchanged by the parties. The exchange of cash flows is determined by reference to the notional amount and the other terms of the interest rate swap agreement.

The following table summarizes information about the interest rate swaps designated as cash flow hedges as of June 30, 2021:
(dollars in thousands)
Notional Amount$150,000 
Weighted average fixed-receive rate1.19 %
Weighted average pay-float rate0.10 %
Weighted average maturity in years8.99

The following table details the derivatives designated as hedging instruments as of June 30, 2021. The Corporation did not have derivatives designated as hedging instruments as of December 31, 2020:
 Asset DerivativesLiability Derivatives
(dollars in thousands)Notional
Amount
Fair
Value(1)
Notional
Amount
Fair
Value(2)
Derivatives designated as hedging instruments    
As of June 30, 2021:
Interest rate swaps$100,000 $342 $50,000 $764 
(1) Included within Other Assets on the Unaudited Consolidated Balance Sheet.
(2) Included within Other Liabilities on the Unaudited Consolidated Balance Sheet.
The following table presents the effect of cash flow hedge accounting on accumulated other comprehensive income for the three months ended June 30, 2021:
(dollars in thousands)Amount of Gain (Loss) Recognized in OCI on DerivativeLocation of Gain (Loss) Reclassified from OCI into IncomeAmount of Gain (Loss) Reclassified from OCI into Income
Interest rate swaps$4,948 Interest Income$413 

The following table presents the effect of cash flow hedge accounting on accumulated other comprehensive income for the six months ended June 30, 2021:
(dollars in thousands)Amount of Gain (Loss) Recognized in OCI on DerivativeLocation of Gain (Loss) Reclassified from OCI into IncomeAmount of Gain (Loss) Reclassified from OCI into Income
Interest rate swaps$176 Interest Income$599 

During the next twelve months, the Corporation estimates that $679 thousand will be reclassified from OCI as an increase to interest income.

Gains and losses on interest rate swaps related to funding liabilities are recorded in interest income. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of OCI in the Unaudited Consolidated Statement of Changes in Shareholders’ Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in other income or expense.

C.Pledged Collateral

The Corporation has International Swaps and Derivatives Association agreements with third parties that requires a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties at June 30, 2021 and December 31, 2020 was $82.5 million and $124.8 million, respectively, and is comprised of a combination of cash and investment securities. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $78.9 million and $113.2 million as of June 30, 2021 and December 31, 2020, respectively.