Derivative Instruments

6 Months Ended

Jun. 30, 2024

Derivative Instruments

Derivative Instruments

NOTE 19 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 June 30, 2024, the Company only used 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. The Company estimates that an additional $0.4 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 and six months ended June 30, 2024. As of June 30, 2024, the maximum length of time over which forecasted transactions are hedged is 7 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 June 30, 2024 and December 31, 2023:

	Derivative Assets (1)				Derivative Liabilities (2)
	Notional		Fair		Notional		Fair
(dollars in thousands)	Amount		Value		Amount		Value
June 30, 2024
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	600,000	$	1,975	$	600,000	$	—
Cash flow hedges:
Interest rate swaps		200,000		412		200,000		—
Total derivatives designated as hedging instruments	$	800,000	$	2,387	$	800,000	$	—
Not designated as hedging instruments:
Interest rate swaps (3)	$	154,244	$	6,773	$	154,244	$	6,773
Interest rate lock commitments		27,749		434		—		—
Forward loan sales commitments		8,299		176		—		—
To-be-announced mortgage backed securities		—		—		56,250		25
Total asset derivatives not designated as hedging instruments	$	190,292	$	7,383	$	210,494	$	6,798
December 31, 2023
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	600,000	$	—	$	600,000	$	352
Cash flow hedges:
Interest rate swaps		200,000		—		200,000		297
Total derivatives designated as hedging instruments	$	800,000	$	—	$	800,000	$	649
Not designated as hedging instruments:
Interest rate swaps (3)	$	120,671	$	8,327	$	120,671	$	8,348
Interest rate lock commitments		8,126		179		—		—
Forward loan sales commitments		190		6		—		—
To-be-announced mortgage backed securities		—		—		20,500		183
Total asset derivatives not designated as hedging instruments	$	128,987	$	8,512	$	141,171	$	8,531

(1) Derivative assets are included in other assets on the Company’s consolidated balance sheet.

(2) Derivative liabilities are included in accrued expenses and other liabilities on the Company’s consolidated balance sheet.

(3) 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 other comprehensive income (loss) 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 three months ended June 30, 2024
Cash flow hedges:
Interest rate swaps	$	296	$	270
For the three months ended June 30, 2023
Cash flow hedges:
Interest rate swaps	$	—	$	—
For the six months ended June 30, 2024
Cash flow hedges:
Interest rate swaps	$	1,241	$	532
For the six months ended June 30, 2023
Cash flow hedges:
Interest rate swaps	$	—	$	—

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 three months ended June 30, 2024
Total amounts in the Consolidated Statements of Income	$	41,663	$	4,845	$	7,053
Fair value hedges:
Interest rate swaps		168		659		—
Cash flow hedges:
Interest rate swaps		—		—		(270)
For the three months ended June 30, 2023
Total amounts in the Consolidated Statements of Income	$	33,267	$	6,125	$	4,763
Fair value hedges:
Interest rate swaps		—		470		—
Cash flow hedges:
Interest rate swaps		—		—		—
For the six months ended June 30, 2024
Total amounts in the Consolidated Statements of Income	$	80,958	$	9,413	$	13,042
Fair value hedges:
Interest rate swaps		321		1,301		—
Cash flow hedges:
Interest rate swaps		—		—		(532)
For the six months ended June 30, 2023
Total amounts in the Consolidated Statements of Income	$	64,200	$	12,076	$	9,156
Fair value hedges:
Interest rate swaps		—		623		—
Cash flow hedges:
Interest rate swaps		—		—		—

The following tables show 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 June 30, 2024 and December 31, 2023, respectively:

	June 30, 2024
					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	$	198,046	$	(1,954)
Mortgage loan pools (2)		400,000		399,955		(45)
Total	$	600,000	$	598,001	$	(1,999)

(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 June 30, 2024, the amortized cost of the closed portfolios used in these hedging relationships was $313.0 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 June 30, 2024, the amortized cost basis of the residential real estate loans used in these hedging relationships was $644.7 million.

	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 the three and six months ended June 30, 2024 and 2023 was as follows:

(dollars in thousands)		Three months ended June 30,				Six months ended June 30,
Derivatives not designated as hedging instruments	Consolidated Statements of Income Location	2024		2023		2024		2023
Interest rate swaps	Other noninterest income	$	—	$	—	$	21	$	—
Interest rate lock commitments	Mortgage banking		59		89		210		429
Forward loan sales commitments	Mortgage banking		176		70		171		64
To-be-announced mortgage backed securities	Mortgage banking		84		302		126		129
Total gain (loss) from derivatives not designated as hedging instruments		$	319	$	461	$	528	$	622

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. There was no collateral posted with third parties at June 30, 2024. The amount of collateral posted with third parties was $550 thousand at December 31, 2023. 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.

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 June 30, 2024 and December 31, 2023, the fair value of derivatives in a net liability position, which included accrued interest but excluded any adjustment for non-performance risk, related to these agreements was $0 and $649 thousand, respectively. As of June 30, 2024 and December 31, 2023, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $0 and $550 thousand, respectively. If the Company had breached any of these provisions at June 30, 2024 or December 31, 2023, it could have been required to settle its obligations under the agreements at their termination value of $0 and $649 thousand, respectively.

Balance Sheet Offsetting

The following tables present 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
June 30, 2024
Derivative assets:
Interest rate swaps − Company (1)	$	2,387	$	—	$	2,387	$	(2,720)	$	(333)
Interest rate swaps − dealer bank (1)		6,773		—		6,773		(4,620)		2,153
To-be-announced mortgage backed securities		—		—		—		—		—
Total	$	9,160	$	—	$	9,160	$	(7,340)	$	1,820
Derivative liabilities:
Interest rate swaps − Company (1)	$	—	$	—	$	—	$	—	$	—
Interest rate swaps − customer (2)		6,773		—		6,773		—		6,773
To-be-announced mortgage backed securities		25		—		25		—		25
Total	$	6,798	$	—	$	6,798	$	—	$	6,798

(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.

							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

(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.