Derivatives Financial Instruments

9 Months Ended

Sep. 30, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives Financial Instruments

Note 10.Derivatives Financial Instruments

Derivatives designated as fair value hedges:

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative net investment hedge instrument as well as the offsetting gain or loss on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of certain fixed rate securities designated as available-for-sale. The hedging strategy converts the fixed interest rates to SOFR-based variable interest rates. These derivatives are designated as partial term hedges covering specified periods of time prior to the maturity date of the hedged securities. The Company adopted ASU 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities” in 2018, which allows such partial term hedge designations.

A summary of the Company’s fair value hedge relationships for the periods presented are as follows (dollars in thousands):

		Weighted
		Average
	Balance	Remaining	Weighted
	Sheet	Maturity	Average		Receive	Notional		Estimated
Asset/Liability derivatives	Location	(In Years)	Pay Rate		Rate	Amount		Fair Value
September 30, 2024:
Interest rate swap agreements - securities	Other liabilities	2.03	4.30	%	SOFR	$	55,507	$	(955)
December 31, 2023:
Interest rate swap agreements - securities	Other liabilities	3.40	4.25	%	SOFR	$	27,050	$	(536)

The effects of the Company’s fair value hedge relationships reported in interest income on taxable securities on the consolidated income statement were as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Interest income on taxable securities	$	5,091	$	4,335	$	14,710	$	7,986
Effects of fair value hedge relationships		142		—		391		—
Reported interest income on taxable securities	$	5,233	$	4,335	$	15,101	$	7,986

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Gain (loss) on fair value hedging relationship	2024		2023		2024		2023
Interest rate swap agreements - securities:
Hedged items	$	(1,069)	$	—	$	(955)	$	—
Derivative designated as hedging instruments		1,069		—		955		—
Carry amount of hedged assets - mortgage-backed securities		48,886		—		48,886		—

Derivatives Designated as Cash Flow Hedges:

The Company enters into interest rate derivative contracts on assets and liabilities that are designated as qualifying cash flow hedges.  The Company hedges the exposure to variability in expected future cash flows attributable to changes in contractual specified interest rates.  To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in offsetting cash flows attributable to the hedged risk.  At inception, a statistical regression analysis is prepared to determine hedge effectiveness.  At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in accumulated other comprehensive income (“AOCI”) is recognized in earnings immediately.  The cash flow hedges are recorded at fair value in other assets and liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax, see – Consolidated Statements of Comprehensive Income (Loss).  Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability, as future interest payments are made on the underlying assets.  At September 30, 2024, the Company estimates that in the next 12 months an additional $126 thousand will be reclassified as a decrease in interest income and $634 thousand will be reclassified as an increase in interest expense.

At September 30, 2024 and December 31, 2023, cash flow hedges are as follows (in thousands):

	September 30, 2024					December 31, 2023
	Balance Sheet	Notional		Estimated		Balance Sheet	Notional		Estimated
	Location	Amount		Fair Value		Location	Amount		Fair Value
Cash flow hedges:
Assets	Other liabilities	$	50,000	$	(37)	Other liabilities	$	100,000	$	(556)
Assets	Other assets		50,000		13	Other assets		-		-
Liabilities	Other liabilities		150,000		(636)	Other liabilities		150,000		(881)
Liabilities	Other assets		25,000		2	Other assets		25,000		7

The following table presents the effect of fair value and cash flow hedge accounting on AOCI (in thousands):

Derivatives in cash flow hedging relationships:		Amount of Gain (Loss) Recognized on OCI on Derivative	Location of Gain or (Loss) Recognized from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income
Three Months Ended September 30, 2024
Interest rate swaps - Assets	$	1,177	Interest income	$	(203)
Interest rate swaps - Liabilities		(943)	Interest expense		227
Three Months Ended September 30, 2023
Interest rate swaps - Assets	$	(432)	Interest income	$	(173)
Interest rate swaps - Liabilities		587	Interest expense		157
Nine Months Ended September 30, 2024
Interest rate swaps - Assets	$	532	Interest income	$	(610)
Interest rate swaps - Liabilities		240	Interest expense		724
Nine Months Ended September 30, 2023
Interest rate swaps - Assets	$	(861)	Interest income	$	(275)
Interest rate swaps - Liabilities		698	Interest expense		165

The following table presents the effect of fair value and cash flow hedge accounting on the income statement (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Total interest income	$	64,159	$	55,448	$	185,633	$	160,823
Effects of cash flow hedge relationships		(203)		(173)		(610)		(275)
Reported total interest income	$	63,956	$	55,275	$	185,023	$	160,548
Total interest expense	$	29,151	$	24,426	$	86,180	$	62,150
Effects of cash flow hedge relationships		(227)		(157)		(724)		(165)
Reported total interest expense	$	28,924	$	24,269	$	85,456	$	61,985

Non-hedged derivatives:

The Company provides 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 dealer 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. Since the income statement impact of the offsetting positions is limited, any changes in fair value are recognized as other noninterest income in the current period.

At September 30, 2024 and December 31, 2023, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):

	September 30, 2024				December 31, 2023
		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	360,003	$	12,373	$	294,133	$	12,813
Liabilities		360,003		(12,373)		294,133		(12,813)

The Company establishes limits and monitors exposures for customer swap positions.  Any fees received to enter the swap agreements at inception are recognized in earnings when received and is included in noninterest income.  Such fees were as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Interest rate swap agreements	$	1,103	$	326	$	1,378	$	823

Collateral requirements:

These derivative rate contracts have collateral requirements, both at inception of the trade and as the value of each derivative position changes.  At September 30, 2024, collateral totaling $150 thousand and $390 thousand at December 31, 2023, was pledged to the derivative counterparties to comply with collateral requirements.