DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2023

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 12 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Corporation uses various financial instruments, including derivatives, to manage its exposure to interest rate risk. The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash receipts and cash payments principally related to specific assets and short-term wholesale funding positions. The Corporation entered into four swap contracts effective September 20, 2023.

Fair Values of Derivative Instruments on the Statement of Financial Condition

The tables below present the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets as of December 31, 2023, and December 31, 2022:

(Dollars in thousands)	December 31, 2023
	Derivative Assets			Derivative Liabilities
	Location		Fair Value	Location		Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps	Other Assets	$	—	Other Liabilities	$	4,501
Total		$	—		$	4,501

(Dollars in thousands)	December 31, 2022
	Derivative Assets			Derivative Liabilities
	Location		Fair Value	Location		Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps	Other Assets	$	—	Other Liabilities	$	—
Total		$	—		$	—

The following table presents the derivative liabilities subject to an enforceable master netting arrangement as of December 31, 2023 and 2022.

			Gross		Net Amounts
			Amounts		of Liabilities
			Offset		Presented
	Gross		in the		in the
(Dollars in thousands)	Amounts of		Consolidated		Consolidated				Cash
	Recognized		Balance		Balance		Financial		Collateral		Net
	Liabilities		Sheet		Sheet		Instruments		Pledge		Amount
December 31, 2023
Derivatives	$	4,501	$	—	$	4,501	$	—	$	(4,501)	$	—
December 31, 2022
Derivatives	$	—	$	—	$	—	$	—	$	—	$	—

The following table presents the remaining contractual maturity of the master netting arrangements as of December 31, 2023.

	Remaining Contractual Maturity of the Agreements
							Greater
(Dollars in thousands)	Up to		1 to 3		3 to 5		than
	1 Year		Years		Years		5 Years		Total
December 31, 2023:
Derivatives	$	—	$	—	$	4,501	$	—	$	4,501
Total	$	—	$	—	$	4,501	$	—	$	4,501

Fair Value Hedges of Interest Rate Risk

The Corporation is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates. The Corporation uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rates. Interest rate swaps designated as fair

value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Corporation receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. Such derivatives are used to hedge the changes in fair value of certain of its pools of fixed rate assets. As of December 31, 2023, the Corporation had a total of two interest rate swaps with a combined notional amount of $50,000,000 hedging fixed-rate available-for-sale debt securities.

As of December 31, 2023, and December 31, 2022, the following amounts were recorded on the balance sheet related to the cumulative basis adjustment for fair value hedges:

(Dollars in thousands)		December 31,		December 31,
		2023		2022
Carrying amount of hedged assets:		Closed Portfolio Amount		Closed Portfolio Amount
Available-for-sale - Municipals	$	50,964	$	—
Available-for-sale - MBS		35,806		—
Total	$	86,770	$	—
Interest rate swaps notional amount	$	50,000	$	—

(Dollars in thousands)		December 31,		December 31,
		2023		2022
Cumulative amount of fair value hedging adjustment included in the carrying amount of assets:
Available-for-sale - Municipals	$	(1,230)	$	—
Available-for-sale - MBS		(407)		—
Total	$	(1,637)	$	—

The table below presents the pre-tax effects of the Corporation’s derivative instruments designated as fair value hedges on the consolidated statements of income for the years ended December 31, 2023, and 2022:

(Dollars in thousands)		December 31,
		2023		2022
Amount of loss recognized in other comprehensive loss	$	(1,637)	$	—
Amount of gain, net of fair value re-measurements, included in interest income		168		—

Cash Flow Hedges of Interest Rate Risk

The Corporation uses derivatives to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Corporation has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate products are designated as cash flow hedges. As of December 31, 2023, the Corporation had a total of two interest rate swaps with a combined notional amount of $100,000,000 hedging specific short-term wholesale funding positions.

For derivatives designated as cash flow hedges, the gain or loss on the derivatives is recorded in other comprehensive loss and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. During the next twelve months, it is estimated that an additional $404,000 will be reclassified as a decrease to interest expense.

Interest rate swaps designated as cash flow hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Corporation receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. For cash flow hedges on the Corporation’s short-term wholesale funding positions, amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense

as interest payments are made on the Corporation’s hedged variable rate short-term wholesale funding positions. During the year ended December 31, 2023, the Corporation reclassified $274,000 as a reduction in interest expense.

The table below presents the pre-tax effects of the Corporation’s derivative instruments designated as cash flow hedges on the Consolidated Statements of Income for the years ended December 31, 2023, and 2022:

(Dollars in thousands)		December 31,
		2023		2022
Amount of loss recognized in other comprehensive loss	$	(2,885)	$	—
Amount of gain reclassified from accumulated other comprehensive loss to interest expense		274		—
Interest rate swaps notional amount	$	100,000	$	—

Credit Risk-Related Contingent Features

The Corporation has agreements with each of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, then the Corporation could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty. The Corporation also has agreements with its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well-capitalized institution, then the Corporation could be required to terminate its derivative positions with the counterparty. As of December 31, 2023, the Corporation’s derivatives were in a net liability position resulting in the Corporation having collateral in the amount of $4,650,000 posted with the counterparty at December 31, 2023. As of December 31, 2022, the Corporation had no derivatives in a net liability position and accordingly did not have to post any collateral.