Derivatives and hedging activities

12 Months Ended

Dec. 31, 2023

Derivatives and hedging activities

Derivatives and hedging activities

13. Derivatives and hedging activities:

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts principally related to the Company’s assets and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income/expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and floors as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up-front premium. Such derivatives have been used to hedge the variable cash flows associated with existing variable-rate assets and issuances of debt.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive loss, (AOCI) and subsequently reclassified into interest expense/income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense/income as interest payments are made/received on the Company’s variable-rate debt/assets. During the next twelve months, the Company estimates that no amount will be reclassified as a reduction to interest income. 

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed-rate pools of assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, SOFR. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

As of December 31, 2023, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:

Line Item in the Statement of Financial Position in Which the Hedged Item is Included		Amortized Amount of the Hedged Assets/(Liabilities)				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
(Dollars in thousands)		2023		2022		2023		2022
AFS Securities (1)	$	143,573	$		$	871	$
Fixed Rate Loans (2)		50,462				462
Total	$	194,035	$		$	1,333	$

(1) Fixed Rate AFS Securities. These amounts include the amortized cost basis of closed portfolios of fixed rate assets 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 closed portfolios used in these hedging relationships was $143.6 million. The amounts of the designated hedged items were $100.0 million.

(2) Fixed Rate Loan Assets. These amounts include the carrying value of fixed rate loan assets 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 principal value of the hedged item was $50.0 million.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. As of December 31, 2023, the Company had 109 interest rate swaps with an aggregate notional amount of $476.5 million related to this program.

The Company’s existing credit derivatives result from participations in or out of interest rate swaps provided by or to external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of December 31, 2023 and December 31, 2022.

Fair Values of Derivative Instruments
		Derivative Assets								Derivative Liabilities
		As of December 31, 2023				As of December 31, 2022 (1)				As of December 31, 2023				As of December 31, 2022
(Dollars in thousands)		Notional Amount	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value		Notional Amount	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Interest Rate Products	$		Other Assets	$		Other Assets	$	1	$	150,000	Other Liabilities	$	1,270	Other Liabilities	$
Total derivatives designated as hedging instruments				$			$	1				$	$1,270		$
Derivatives not designated as hedging instruments
Interest Rate Products	$	230,323	Other Assets	$	19,833	Other Assets	$	22,195	$	230,323	Other Liabilities	$	19,364	Other Liabilities	$	21,466
Other Contracts		8,403	Other Assets		3	Other Assets				7,408	Other Liabilities			Other Liabilities
Total derivatives not designated as hedging instruments				$	19,836		$	22,195				$	19,364		$	21,466

(1) The notional amount of interest rate floor at December 31, 2022 was $25.0 million. Notional asset amount of interest rate swaps at December 31, 2022 was $187.3 million and $1.5 million for risk participation agreements.

Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive (Loss) Income

The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive (loss) income as of December 31, 2023 and December 31, 2022.

(Dollars in thousands) Twelve months ended December 31, 2023		Amount of (Loss) Recognized in OCI on Derivative		Amount of (Loss) Recognized in OCI Included Component		Amount of (Loss) Recognized in OCI Excluded Component	Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income		Amount of (Loss) Reclassified from Accumulated OCI into Income		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component		Amount of (Loss) Reclassified from Accumulated OCI into Income Excluded Component
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(1)	$		$	(1)	Interest Income	$	(48)	$		$	(48)
Total	$	(1)	$		$	(1)		$	(48)	$		$	(48)
(Dollars in thousands) Twelve months ended December 31, 2022		Amount of (Loss) Recognized in OCI on Derivative		Amount of (Loss) Recognized in OCI Included Component		Amount of (Loss) Recognized in OCI Excluded Component	Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income		Amount of Gain Reclassified from Accumulated OCI into Income		Amount of Gain Reclassified from Accumulated OCI into Income Included Component		Amount of (Loss) Reclassified from Accumulated OCI into Income Excluded Component
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(515)	$	(497)	$	(18)	Interest Income	$	212	$	276	$	(64)
Total	$	(515)	$	(497)	$	(18)		$	212	$	276	$	(64)

*     Amounts disclosed are gross and not net of taxes.

Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income and Comprehensive Income (Loss)

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of income and comprehensive income (loss) as of December 31, 2023 and December 31, 2022.

	Location and Amount of Gain or (Loss)
	Recognized in Income on Fair Value and
	Cash Flow Hedging Relationships
	For the twelve months ended December 31,
		2023		2022
(Dollars in thousands)		Interest Income		Interest Income
Total amounts of income and expense line items presented in the statements of income and comprehensive
income (loss) in which the effects of fair value or cash flow hedges are recorded.	$	142	$	212
The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships
Interest contracts
Hedged items		871
Derivatives designated as hedging instruments		(681)
Gain or (loss) on cash flow hedging relationships
Interest contracts
Amount of (loss) gain reclassified from AOCI into income		(48)		212
Amount of gain reclassified from AOCI into income - Included Component				276
Amount of (loss) reclassified from AOCI into income - Excluded Component	$	(48)	$	(64)

Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income (Loss)

The tables below present the effect of the Company’s other derivative financial instruments on the consolidated statements of income and comprehensive income (loss) for the years ended December 31, 2023 and 2022.

		Amount of Gain or (Loss)		Amount of Gain
		Recognized in		Recognized in
	Location of Gain or (Loss)	Income on Derivative		Income
	Recognized in Income on	Twelve Months Ended		Twelve Months Ended
(Dollars in thousands)	Derivative	December 31, 2023		December 31, 2022
Derivatives Not Designated as Hedging Instruments:
Interest Rate Products	Other income / (expense)	$	(262)	$	516
Other Contracts	Other income / (expense)		(6)		5
Total		$	(268)	$	521
Fee Income	Fee income	$	652	$	106

Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of December 31, 2023 and December 31, 2022. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.

Offsetting of Derivative Assets
as of December 31, 2023
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial		Cash Collateral		Net
(Dollars in thousands)	Assets		Balance Sheet	Balance Sheet		Instruments		Posted		Amount
Derivatives	$	19,833	$	$	19,833	$		$	17,590	$	2,243
Offsetting of Derivative Liabilities
as of December 31, 2023
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Liabilities
	Recognized		Offset in the	presented in the		Financial		Cash Collateral		Net
(Dollars in thousands)	Liabilities		Balance Sheet	Balance Sheet		Instruments		Posted*		Amount
Derivatives	$	20,633	$	$	20,633	$	20,633	$		$
*Cash collateral of $2,450 was paid but not presented as an offset above.
Offsetting of Derivative Assets
as of December 31, 2022
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Assets
	Recognized		Offset in the	presented in the		Financial		Cash Collateral		Net
(Dollars in thousands)	Assets		Balance Sheet	Balance Sheet		Instruments		Posted		Amount
Derivatives	$	22,196	$	$	22,196	$		$	14,530	$	7,666
Offsetting of Derivative Liabilities
as of December 31, 2022
						Gross Amounts Not Offset in the Balance Sheet
	Gross			Net Amounts
	Amounts of		Gross Amounts	of Liabilities
	Recognized		Offset in the	presented in the		Financial		Cash Collateral		Net
(Dollars in thousands)	Liabilities		Balance Sheet	Balance Sheet		Instruments		Posted		Amount
Derivatives	$	21,466	$	$	21,466	$	21,466	$		$

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

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, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of December 31, 2023, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $2.7 million. As of December 31, 2022, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $2.0 thousand.

The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $2.5 million against its obligations under these agreements as of December 31, 2023 and had no posted collateral at December 31, 2022. Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the agreement. The cash collateral is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the cash collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. If the Company had breached any of these provisions it could have been required to settle its obligations under the agreements at the termination value.