Derivatives

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives:

The Company utilizes derivative financial instruments as part of its ongoing efforts to manage its interest rate risk exposure as well as interest rate exposure for its customers. Derivative financial instruments are included in the consolidated balance sheets line items “Other assets” or “Other liabilities” at fair value in accordance with ASC 815, “Derivatives and Hedging.”

Derivatives not designated as hedging instruments

The Company enters into interest rate-lock commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding. Under such commitments, interest rates for these loans are typically locked in for between 45 to 90 days with the customer. These interest rate lock commitments are recorded at fair value in the Company’s consolidated balance sheets. The Company also enters into best effort or mandatory delivery forward commitments to sell these loans to third party private investors or government sponsored agencies in the secondary market. Gains and losses arising from changes in the valuation of the interest rate-lock commitments and forward commitments are recognized currently in earnings and are reflected under the line item “Mortgage banking income” on the consolidated statements of income.

The Company also enters into forward commitments, futures and options contracts as economic hedges to offset the changes in fair value of mortgage servicing rights. Gains and losses associated with these instruments are included in earnings and are reflected under the line item “Mortgage banking income” on the consolidated statements of income.

Additionally, the Company enters into derivative instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with customer contracts, the Company enters into an offsetting derivative contract. The Company manages its credit risk, or potential risk of default by its commercial customers through credit limit approval and monitoring procedures.

The following tables provide details on the Company’s non-designated derivative financial instruments as of the dates presented:

	September 30, 2023
	Notional Amount		Asset		Liability
Interest rate contracts	$	579,054	$	48,635	$	48,568
Forward commitments	226,250		1,118		—
Interest rate-lock commitments	112,810		1,075		—
Futures contracts	259,000		—		1,981
Total	$	1,177,114	$	50,828	$	50,549

	December 31, 2022
	Notional Amount		Asset		Liability
Interest rate contracts	$	560,310	$	45,775	$	45,762
Forward commitments	207,000		306		—
Interest rate-lock commitments	118,313		1,433		—
Futures contracts	494,300		—		3,790
Total	$	1,379,923	$	47,514	$	49,552

(Losses) gains included in the consolidated statements of income related to the Company’s non-designated derivative financial instruments were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Included in mortgage banking income:
Interest rate lock commitments	$	(537)	$	(3,980)	$	(358)	$	(7,419)
Forward commitments	1,418		4,795		2,154		57,130
Futures contracts	(7,009)		(10,105)		(7,593)		(35,805)
Option contracts	—		—		(1,125)		36
Total	$	(6,128)	$	(9,290)	$	(6,922)	$	13,942

Derivatives designated as cash flow hedges

The Company also maintains two interest rate swap agreements with notional amounts totaling $30,000 used to hedge interest rate exposure on outstanding subordinated debentures included in long-term debt totaling $30,930. The interest rate swap contracts, which mature in June of 2024, are designated as cash flow hedges with the objective of reducing the variability in cash flows resulting from changes in interest rates. Under these agreements, the Company receives a variable rate of interest equal to the ISDA recommended fallback rate of SOFR plus a credit spread adjustment and pays a weighted average fixed rate of interest of 2.08%.

The following presents a summary of the Company's designated cash flow hedges as of the dates presented:

			September 30, 2023			December 31, 2022
	Notional Amount		Estimated fair value		Balance sheet location	Estimated fair value		Balance sheet location
Interest rate swap agreements-    subordinated debt	$	30,000	$	875	Other assets	$	1,255	Other assets

The Company's consolidated statements of income included gains of $267 and $696 for the three and nine months ended September 30, 2023, respectively, and a gain of $26 and loss of $214 for the three and nine months ended September 30, 2022, respectively, in interest expense on borrowings related to these cash flow hedges. The cash flow hedges were effective during the periods presented and as a result qualified for hedge accounting treatment. As such, no amounts were reclassified from accumulated other comprehensive loss into earnings during either period presented.

The following discloses the amount included in other comprehensive (loss) income, net of tax, for derivative instruments designated as cash flow hedges for the periods presented: 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Amount of (loss) gain recognized in other comprehensive (loss) income, net of tax (benefit) expense of $(35), $145, $(99) and $517	$	(101)	$	409	$	(281)	$	1,466

Derivatives designated as fair value hedges

The Company utilizes designated fair value hedges to mitigate the effect of changing rates on the fair value of various fixed rate liabilities, including certain money market deposits and subordinated debt. The hedging strategy converts the fixed interest rates of the hedged items to the daily compounded SOFR in arrears paid monthly. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain 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. As of September 30, 2023 and December 31, 2022, the fair value hedges were deemed effective.

				September 30, 2023				December 31, 2022
	Remaining Maturity (In Years)	Receive Fixed Rate	Pay Floating Rate	Notional Amount		Estimated fair value		Notional Amount		Estimated fair value
Derivatives included in other liabilities:
Interest rate swap     agreement- fixed rate     money market deposits	0.89	1.50%	SOFR	75,000		(2,556)		75,000		(3,693)
Interest rate swap     agreement- fixed rate     money market deposits	0.89	1.50%	SOFR	125,000		(4,259)		125,000		(6,154)
Interest rate swap     agreement- subordinated     debt	0.42	1.46%	SOFR	$	100,000	$	(1,661)	$	100,000	$	(3,830)
Total	0.73	1.48%		$	300,000	$	(8,476)	$	300,000	$	(13,677)

The following discloses the amount of (expense) income included in interest expense on borrowings and deposits, related to these fair value hedging instruments:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Designated fair value hedge:
Interest (expense) income on deposits	$	(1,927)	$	(331)	$	(5,204)	$	377
Interest (expense) income on borrowings	(977)		(181)		(2,631)		167
Total	$	(2,904)	$	(512)	$	(7,835)	$	544

The following amounts were recorded on the balance sheet related to cumulative adjustments of fair value hedges as of the dates presented:

	Carrying Amount of the Hedged Item					Cumulative Decrease in Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Item
Line item on the balance sheet	September 30, 2023		December 31, 2022			September 30, 2023		December 31, 2022
Money market and savings deposits	196,757		196,520		(1)	(6,815)		(9,847)
Borrowings	$	97,630	$	95,171	(2)	$	(1,661)	$	(3,830)

(1) The carrying value also includes an unaccreted purchase accounting fair value premium of $3,572 and $6,367 as of September 30, 2023 and December 31, 2022,

respectively.

(2) The carrying value also includes unamortized subordinated debt issuance costs of $709 and $999 as of September 30, 2023 and December 31, 2022, respectively.

Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheets when the “right of offset” exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements, however the Company has not elected to offset such financial instruments in the consolidated balance sheets. The following table presents the Company's gross derivative positions as recognized in the consolidated balance sheets as well as the net derivative positions, including collateral pledged to the extent the application of such collateral did not reduce the net derivative liability position below zero, had the Company elected to offset those instruments subject to an enforceable master netting agreement:

							Gross amounts not offset in the consolidated balance sheets
	Gross amounts recognized		Gross amounts offset in the consolidated balance sheets		Net amounts presented in the consolidated balance sheets		Financial instruments		Financial collateral pledged		Net Amount
September 30, 2023
Derivative financial assets	$	49,510	$	—	$	49,510	$	9,428	$	—	$	40,082
Derivative financial liabilities	$	15,980	$	—	$	15,980	$	9,428	$	6,552	$	—
December 31, 2022
Derivative financial assets	$	44,273	$	—	$	44,273	$	14,229	$	—	$	30,044
Derivative financial liabilities	$	20,251	$	—	$	20,251	$	14,229	$	6,022	$	—

Most derivative contracts with customers are secured by collateral. Additionally, in accordance with the interest rate agreements with derivative counterparties, the Company may be required to post collateral with these derivative counterparties. As of September 30, 2023 and December 31, 2022, the Company had collateral posted of $11,339 and $23,325, respectively, against its obligations under these agreements. Cash pledged as collateral on derivative contracts is recorded in "Other assets" on the consolidated balance sheets.