DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2024

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 9 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company uses various financial instruments, including derivatives, to manage its exposure to interest rate risk. 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 and cash payments principally related to specific assets and short-term wholesale funding positions. The Company entered into four swap contracts effective September 20, 2023 and one additional swap contract effective September 4, 2024.

Fair Values of Derivative Instruments on the Statement of Financial Condition

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023:

(Dollars in thousands)	September 30, 2024
	Derivative Assets			Derivative Liabilities
	Location		Fair Value	Location		Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps	Other Assets	$	567	Other Liabilities	$	5,781
Total		$	567		$	5,781

(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

The following table presents the derivative liabilities subject to an enforceable master netting arrangement as of September 30, 2024 and December 31, 2023:

			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
September 30, 2024
Derivatives	$	5,781	$	567	$	5,214	$	—	$	(5,214)	$	—
December 31, 2023
Derivatives	$	4,501	$	—	$	4,501	$	—	$	(4,501)	$	—

The following table presents the remaining contractual maturity of the master netting arrangements as of September 30, 2024:

	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
September 30, 2024:
Derivative Assets	$	—	$	567	$	—	$	—	$	567
Derivative Liabilities		—		(2,130)		(3,651)				(5,781)
Total	$	—	$	(1,563)	$	(3,651)	$	—	$	(5,214)

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed-rate 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 rates. 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. Such derivatives are used to hedge the changes in fair value of certain of its pools of fixed rate assets. As of September 30, 2024, the Company 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 and one interest rate swap with a notional amount of $75,000,000 hedging fixed-rate loans.

As of September 30, 2024 and December 31, 2023, the following amounts were recorded on the balance sheet related to the cumulative basis adjustment for fair value hedges:

(Dollars in thousands)		September 30,		December 31,
		2024		2023
Carrying amount of hedged assets:		Closed Portfolio Amount		Closed Portfolio Amount
Fixed Rate Loans	$	138,826		—
Available-for-sale - Municipals		50,731	$	50,964
Available-for-sale - MBS		33,565		35,806
Total	$	223,122	$	86,770
Interest rate swaps notional amount	$	125,000	$	50,000

(Dollars in thousands)		September 30,		December 31,
		2024		2023
Cumulative amount of fair value hedging adjustment included in the carrying amount of assets:
Fixed Rate Loans	$	—	$	—
Available-for-sale - Municipals		(1,467)		(1,230)
Available-for-sale - MBS		(484)		(407)
Total	$	(1,951)	$	(1,637)

The table below presents the pre-tax effects of the Company’s derivative instruments designated as fair value hedges on the Consolidated Statements of Income for the year-to-date periods ended September 30, 2024 and 2023:

(Dollars in thousands)		September 30,
		2024		2023
Amount of loss recognized in other comprehensive loss	$	(1,541)	$	132
Amount of gain, net of fair value re-measurements, included in interest income		526		7

Cash Flow Hedges of Interest Rate Risk

The Company uses derivatives to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company 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 September 30, 2024, the Company 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 $435,000 will be reclassified as interest expense.

Interest rate swaps designated as cash flow 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 cash flow hedges on the Company'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 Company’s hedged variable rate short-term wholesale funding positions. During the year-to-date period ended September 30, 2024, the Company reclassified $757,000 as a reduction in interest expense.

The table below presents the pre-tax effects of the Company’s derivative instruments designated as cash flow hedges on the Consolidated Statements of Income for the year-to-date periods ended September 30, 2024 and 2023:

(Dollars in thousands)		September 30,
		2024		2023
Amount of loss recognized in other comprehensive loss	$	(2,618)	$	102
Amount of gain reclassified from accumulated other comprehensive loss to interest expense		757		24
Interest rate swaps notional amount	$	100,000	$	100,000

Credit Risk-Related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty. The Company also has agreements with its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the Company could be required to terminate its derivative positions with the

counterparty. As of September 30, 2024 and December 31, 2023, the Company’s derivatives were in a net liability position resulting in the Company having collateral in the amount of $6,570,000 posted with the counterparty at September 30, 2024 and collateral in the amount of $4,650,000 posted with the counterparty at December 31, 2023.