Derivative Instruments

9 Months Ended

Sep. 30, 2023

Derivative Instruments

Derivative Instruments

NOTE 17 Derivative Instruments

The company uses a variety of derivative instruments to mitigate exposure to both market and credit risks inherent in its business activities. The Company manages these risks as part of its overall asset and liability management process and through its policies and procedures. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.

Derivatives are often measured in terms of notional amount, but this amount is generally not exchanged, and it is not recorded on the Company’s consolidated balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate, security price, credit spread, or other index. Residential and commercial real estate loan commitments associated with loans to be sold also qualify as derivative instruments.

Derivatives Designated as Hedging Instruments

The Company uses derivative instruments to hedge its exposure to economic risks, including interest rate, liquidity and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP. On the date the Company enters into a derivative contract designated as a hedging instrument, the derivative is designated as either a fair value hedge, cash flow hedge, or a net investment hedge. When a derivative is designated as a fair value, cash flow, or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s). As of September 30, 2023, the Company only uses fair value and cash flow hedges.

Fair value hedges: These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying mortgage-backed investment securities and mortgage loan pools. The interest rate swaps are carried on the Company’s Consolidated Balance Sheet at their fair value in other assets (when the fair value is positive) or in accrued expenses and other liabilities (when the fair value is negative). The changes in fair value of the interest rate swaps are recorded in interest income. The unrealized gains or losses due to changes in fair value of the interest rate swaps due to changes in benchmark interest rates are recorded as an adjustment to the hedged instruments and offset in the same interest income line items.

Cash flow hedges: These derivatives are interest rate swaps the Company uses to hedge the variability of expected future cash flows due to market interest changes. The interest rate swap is carried on the Company’s consolidated balance sheet at its fair value in other assets (when the fair value is positive) or in accrued expenses and

other liabilities (when the fair value is negative). Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within accumulated other comprehensive income (loss). There were no cash flow hedges at December 31, 2022. The Company estimates that an additional $1.0 million will be reclassified as a decrease to interest expense over the next 12 months. All cash flow hedges were highly effective for the three months ended September 30, 2023. As of September 30, 2023, the maximum length of time over which forecasted transactions are hedged is 15 months.

Derivatives Not Designated as Hedging Instruments

Interest rate swaps: The Company periodically enters into commercial loan interest rate swap agreements in order to provide commercial loan customers with the ability to convert from variable to fixed interest rates. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer, while simultaneously entering into an offsetting interest rate swap with an institutional counterparty.

Interest rate lock commitments, forward loan sales commitments and to be announced (TBA) mortgage backed securities: The Company enters into forward delivery contracts to sell mortgage loans at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage interest rate lock commitments.

The following table presents the total notional amounts and gross fair values of the Company’s derivatives as of September 30, 2023 and December 31, 2022:

		September 30, 2023				December 31, 2022
		Fair		Notional		Fair		Notional
(dollars in thousands)		Value		Amount		Value		Amount
Designated as hedging instruments:	Consolidated Balance Sheet Location
Fair value hedges:
Interest rate swaps	Other assets	$	3,899	$	600,000	$	—	$	—
Cash flow hedges:
Interest rate swaps	Other assets		1,011		200,000		—		—
Total derivatives designated as hedging instruments		$	4,910	$	800,000	$	—	$	—
Not designated as hedging instruments:
Asset Derivatives
Interest rate swaps	Other assets	$	6,819	$	67,716	$	6,277	$	43,430
Interest rate lock commitments	Other assets		247		23,352		121		10,462
Forward loan sales commitments	Other assets		62		3,467		7		351
To-be-announced mortgage backed securities	Other assets		155		41,250		—		—
Total asset derivatives not designated as hedging instruments		$	7,283	$	135,785	$	6,405	$	54,243
Liability Derivatives
Interest rate swaps	Accrued expenses and other liabilities	$	6,820	$	67,716	$	6,277	$	43,430
To-be-announced mortgage backed securities	Accrued expenses and other liabilities		—		—		26		25,750
Total liability derivatives not designated as hedging instruments		$	6,820	$	67,716	$	6,303	$	69,180

The following table shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses), before tax, reclassified from other comprehensive income (loss) into earnings for the periods indicated:

	Three months ended September 30,				Nine months ended September 30,
	Gains (Losses)		Gains (Losses)		Gains (Losses)		Gains (Losses)
	Recognized in		Reclassified		Recognized in		Reclassified
	Other		from Other		Other		from Other
	Comprehensive		Comprehensive		Comprehensive		Comprehensive
	Income		Income (Loss)		Income		Income (Loss)
(dollars in thousands)	(Loss)		into Earnings		(Loss)		into Earnings
Derivatives designated as hedging instruments	2023		2023		2023		2023
Cash flow hedges:
Interest rate swaps	$	1,216	$	205	$	1,216	$	205

The following table shows the effect of fair value and cash flow hedge accounting on derivatives designated as hedging instruments in the Consolidated Statements of Income:

	Location and Amount of Gains (Losses) Recognized in Income
	Interest Income				Interest Expense
	Loans,		Investment
	including		securities -		Short-term
(dollars in thousands)	fees		Taxable		borrowings
Three months ended September 30, 2023
Total amounts in the Consolidated Statements of Income	$	34,986	$	6,146	$	6,528
Fair value hedges:
Interest rate swaps		71		606		—
Cash flow hedges:
Interest rate swaps		—		—		(205)
Nine months ended September 30, 2023
Total amounts in the Consolidated Statements of Income	$	99,187	$	18,222	$	15,684
Fair value hedges:
Interest rate swaps		71		1,229		—
Cash flow hedges:
Interest rate swaps		—		—		(205)

The following table shows the notional amount, carrying amount and associated cumulative basis adjustments related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships at September 30, 2023:

	September 30, 2023
					Cumulative Fair
					Value Hedging
					Adjustment in the
			Carrying Amount		Carrying Amount of
	Notional		of Hedged Assets/		Hedged Assets/
(dollars in thousands)	Amount		Liabilities		Liabilities
Mortgage-backed securities
Residential agency (1)	$	200,000	$	196,793	$	(3,207)
Mortgage loan pools (2)		400,000		399,284		(716)
Total	$	600,000	$	596,077	$	(3,923)

(1) Includes amounts related to residential agency mortgage-backed securities currently designated as the hedged item in a fair value hedge using the portfolio layer method. At September 30, 2023, the amortized cost of the closed portfolios used in these hedging relationships was $331 million.

(2) These amounts include the amortized cost basis of residential real estate loans that were used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At September 30, 2023, the amortized cost basis of the residential real estate loans used in these hedging relationships was $706.8 million.

The gain (loss) recognized on derivatives not designated as hedging relationships for the three and nine months ended September 30, 2023 and 2022 was as follows:

(dollars in thousands)		Three months ended September 30,				Nine months ended September 30,
Derivatives not designated as hedging instruments	Consolidated Statements of Income Location	2023		2022		2023		2022
Interest rate swaps	Other noninterest income	$	121	$	1	$	121	$	2
Interest rate lock commitments	Mortgage banking		(342)		(1,724)		87		(1,871)
Forward loan sales commitments	Mortgage banking		(9)		(532)		55		(480)
To-be-announced mortgage backed securities	Mortgage banking		221		1,317		350		5,066
Total gain (loss) from derivatives not designated as hedging instruments		$	(9)	$	(938)	$	613	$	2,717

The Company has third party agreements that require a minimum dollar transfer amount upon a margin call. These requirements are dependent on certain specified credit measures. The amount of collateral posted with third parties was $290 thousand at September 30, 2023 and $309 thousand at December 31, 2022. The amount of collateral posted with third parties was deemed to be sufficient as of those dates 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 following table presents the Company’s derivative positions and the potential effect of netting arrangements on its financial position as of the dates indicated:

							Gross Amount
							Not Offset in the
							Consolidated
							Balance Sheets
	Gross Amount		Gross Amount		Net Amount
	Recognized in the		Offset in the		Presented in the
	Consolidated		Consolidated		Consolidated		Cash Collateral
(dollars in thousands)	Balance Sheets		Balance Sheets		Balance Sheets		Pledged (Received)		Net Amount
September 30, 2023
Derivative assets:
Interest rate swaps - Company (1)	$	4,910	$	—	$	4,910	$	(10,150)	$	(5,240)
Interest rate swaps - customer (1)		6,819		—		6,819		—		6,819
To-be-announced mortgage backed securities		155		—		155		—		155
Total	$	11,884	$	—	$	11,884	$	(10,150)	$	1,734
Derivative liabilities:
Interest rate swaps - customer (1)	$	6,820	$	—	$	6,820	$	—	$	6,820
To-be-announced mortgage backed securities		—		—		—		290		(290)
Total	$	6,820	$	—	$	6,820	$	290	$	6,530
December 31, 2022
Derivative assets:
Interest rate swaps - Company (1)	$	—	$	—	$	—	$	—	$	—
Interest rate swaps - customer (1)		6,277		—		6,277		(6,030)		247
To-be-announced mortgage backed securities		—		—		—		—		—
Total	$	6,277	$	—	$	6,277	$	(6,030)	$	247
Derivative liabilities:
Interest rate swaps - customer (1)	$	6,277	$	—	$	6,277	$	—	$	6,277
To-be-announced mortgage backed securities		26		—		26		309		(283)
Total	$	6,303	$	—	$	6,303	$	309	$	5,994

(1) The Company maintains a master netting arrangement with each counterparty and settles collateral on a net basis for all interest rate swaps.