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Derivative Instruments

12 Months Ended

Dec. 31, 2023

Derivative Instruments

Derivative Instruments

NOTE 25 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 December 31, 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), or OCI, 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 OCI 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 OCI 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), or AOCI. There were no cash flow hedges at December 31, 2022. The Company estimates that an additional $0.3 million will be reclassified as an increase to interest expense over the next 12 months. All cash flow hedges were highly effective for the year ended December 31, 2023. As of December 31, 2023, the maximum length of time over which forecasted transactions are hedged is 12 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 December 31, 2023 and 2022:


				December 31, 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		Accrued expenses and other liabilities		$	352		$	600,000		$	—		$	—
Cash flow hedges:
Interest rate swaps		Accrued expenses and other liabilities			297			200,000			—			—
Total derivatives designated as hedging instruments				$	649		$	800,000		$	—		$	—
Not designated as hedging instruments:
Asset Derivatives
Interest rate swaps ⁽¹⁾		Other assets		$	8,327		$	120,671		$	6,277		$	43,430
Interest rate lock commitments		Other assets			179			8,126			121			10,462
Forward loan sales commitments		Other assets			6			190			7			351
Total asset derivatives not designated as hedging instruments				$	8,512		$	128,987		$	6,405		$	54,243
Liability Derivatives
Interest rate swaps ⁽¹⁾		Accrued expenses and other liabilities		$	8,348		$	120,671		$	6,277		$	43,430
To-be-announced mortgage backed securities		Accrued expenses and other liabilities			183			20,500			26			25,750
Total liability derivatives not designated as hedging instruments				$	8,531		$	141,171		$	6,303		$	69,180

(1)	Reported fair values include accrued interest receivable and payable.

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 OCI into earnings for the periods indicated:


					Gains (Losses)
		Gains (Losses)			Reclassified
		Recognized in			from OCI
(dollars in thousands)		OCI			into Earnings
Derivatives designated as hedging instruments
For the year ended December 31, 2023
Cash flow hedges:
Interest rate swaps		$	176		$	473

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
For the year ended December 31, 2023
Total amounts in the Consolidated Statements of Income		$	136,918		$	24,262		$	20,976
Fair value hedges:
Interest rate swaps			252			1,881			—
Cash flow hedges:
Interest rate swaps			—			—			(473)

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 December 31, 2023:


		December 31, 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		$	200,241		$	241
Mortgage loan pools ⁽²⁾			400,000			400,098			98
Total		$	600,000		$	600,339		$	339

(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 December 31, 2023, the amortized cost of the closed portfolios used in these hedging relationships was $323.4 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 December 31, 2023, the amortized cost basis of the residential real estate loans used in these hedging relationships was $687.5 million.

The gain (loss) recognized on derivatives not designated as hedging relationships for years ended December 31, 2023, 2022, and 2021 was as follows:



(dollars in thousands)				Year ended December 31,
Derivatives not designated as hedging instruments		Consolidated Statements of Income Location		2023			2022			2021
Interest rate swaps		Other noninterest income		$	(20)		$	2		$	1
Interest rate lock commitments		Mortgage banking			165			(1,464)			(8,660)
Forward loan sales commitments		Mortgage banking			(1)			(483)			(2,174)
To-be-announced mortgage backed securities		Mortgage banking			118			4,916			5,220
Total gain (loss) from derivatives not designated as hedging instruments				$	262		$	2,971		$	(5,613)

The Company has third-party agreements that require 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 December 31, 2023 and 2022, respectively, was $550 thousand and $309 thousand. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change a well as any additional amounts that may be required as a result of a change in the specified credit measures.

Credit Risk-Related Contingent Features

By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote.

The Company has agreements with its derivative counterparties that contain a provision where, if the Company defaults on any of its indebtedness, including defaults where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations. In addition, the Company also has agreements with certain of its derivative counterparties that contain a provision where, if the Company fails to maintain its status as a well-capitalized institution, the counterparty could terminate the derivative position(s) and the Company could be required to settle its obligations under the agreements.

As of December 31, 2023 and 2022, the fair value of derivatives in a net liability position, which included accrued interest but excludes any adjustment for non-performance risk, related to these agreements was $649 thousand and $0, respectively. As of December 31, 2023 and 2022, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $550 thousand and $309, respectively. If the Company had breached any of these provisions at December 31, 2023 or 2022, it could have been required to settle its obligations under the agreements at their termination value of $649 thousand and $0, respectively.

Balance Sheet Offsetting

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
December 31, 2023
Derivative assets:
Interest rate swaps - Company ⁽¹⁾		$	—		$	—		$	—		$	—		$	—
Interest rate swaps - dealer bank ⁽¹⁾			8,327			—			8,327			(1,740)			6,587
To-be-announced mortgage backed securities			—			—			—			—			—
Total		$	8,327		$	—		$	8,327		$	(1,740)		$	6,587
Derivative liabilities:
Interest rate swaps - Company ⁽¹⁾		$	649		$	—		$	649		$	550		$	99
Interest rate swaps - customer ⁽²⁾			8,348			—			8,348			—			8,348
To-be-announced mortgage backed securities			183			—			183			—			183
Total		$	9,180		$	—		$	9,180		$	550		$	8,630
December 31, 2022
Derivative assets:
Interest rate swaps - Company ⁽¹⁾		$	—		$	—		$	—		$	—		$	—
Interest rate swaps - dealer bank ⁽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 ⁽²⁾		$	6,277		$	—		$	6,277		$	309		$	5,968
To-be-announced mortgage backed securities			26			—			26			—			26
Total		$	6,303		$	—		$	6,303		$	309		$	5,994

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

(2)	The Company manages its net exposure on its customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting practices. The Company does not post collateral to its customers as part of its contract.