Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

v3.21.1
Derivative Financial Instruments
3 Months Ended
Mar. 31, 2021
Derivative Instrument Detail [Abstract]  
Derivative Financial Instruments

NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company offers a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a correspondent bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. The changes in fair value is recognized in the income statement in other income and fees. The Company is required to hold cash as collateral for the swaps. Total cash held as collateral for swaps was $3.0 million and $2.6 million at March 31, 2021 and December 31, 2020, respectively.

 

At March 31, 2021 and December 31, 2020 interest rate swaps related to the Company’s loan hedging program that were outstanding is presented in the following table:

 

 

March 31, 2021

 

 

December 31, 2020

 

 

(Dollars in thousands)

 

Interest rate swaps on loans with customers

 

 

 

 

 

 

 

Notional amount

$

85,618

 

 

$

85,696

 

Weighted average remaining term (years)

 

4.33

 

 

 

4.58

 

Receive fixed rate (weighted average)

 

3.31

%

 

 

4.23

%

Pay variable rate (weighted average)

 

4.52

%

 

 

4.52

%

Estimated fair value

$

1,492

 

 

$

3,009

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

(Dollars in thousands)

 

Interest rate swaps on loans with correspondents

 

 

 

 

 

 

 

Notional amount

$

85,618

 

 

$

85,696

 

Weighted average remaining term (years)

 

4.33

 

 

 

4.58

 

Receive fixed rate (weighted average)

 

4.52

%

 

 

4.23

%

Pay variable rate (weighted average)

 

3.31

%

 

 

4.52

%

Estimated fair value

$

1,492

 

 

$

3,009

 

 

 

 

Interest rate swaps with correspondents are subject to a master netting agreement. The Company has elected to net interest rate swap positions on the consolidated balance sheet.

 

On January 6, 2021, we entered into an $80.0 million 0.5515% pay-fixed receive-float forward starting interest rate swap in order to hedge our risk of variability in cash flows (future interest payments) attributable to changes in the 1-month Federal Funds benchmark interest rate from January 6, 2021 through January 6, 2026.  The interest rate swap (the hedging instrument) was designated and qualifies under hedge accounting as a cash flow hedge.  The hedge is highly effective, and any future changes in value will be recorded in Other Comprehensive Income until the time that the underlying cash flows (future interest payments) are recorded in the income statement.  The hedge is expected to remain highly effective and effectiveness will be assessed periodically throughout the term of the hedge relationship.  At March 31, 2021, the Company recorded $1.3 million in Other Comprehensive Income related to the interest rate swap.