DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company enters into interest rate swap agreements primarily to facilitate the risk management strategies of certain commercial customers. The interest rate swap agreements entered into by the Company are all entered into under what is referred to as a back-to-back interest rate swap, as such, the net positions are offsetting assets and liabilities, as well as income and expenses. All derivative instruments are recorded in the consolidated statement of financial condition at their respective fair values, as components of other assets and other liabilities. Under a back-to-back interest rate swap program, the Company enters into an interest rate swap with the customer and another offsetting swap with a counterparty. The result is two mirrored interest rate swaps, absent a credit event, that will offset in the financial statements. These swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. The change in fair value is recognized in the income statement as other income and fees. As part of the BBI acquisition, the Bank acquired 33 loans with related interest rate swaps.

The following table provides outstanding interest rate swaps at December 31, 2022.


($ in thousands)	December 31, 2022
Notional amount	$	328,756
Weighted average pay rate	4.6		%
Weighted average receive rate	4.3		%
Weighted average maturity in years	6.11

The following table provides the fair value of interest rate swap contracts at December 31, 2022 included in other assets and other liabilities.


($ in thousands)	December 31, 2022
	Derivative Assets		Derivative Liabilities
Interest rate swap contracts	$	12,825	12,825

The Company also enters into a collateral agreement with the counterparty requiring the Company to post cash or

cash equivalent collateral to mitigate the credit risk in the transaction. At December 31, 2022, the Company had $500 thousand of collateral posted with its counterparties, which is included in the consolidated statement of financial condition as cash and cash equivalents as "restricted cash". The Company also receives a swap spread to compensate it for the credit exposure it takes on the customer-facing portion of the transaction and this upfront cash payment from the counterparty is recorded in other income, net of any transaction execution expenses, in the consolidated statement of operations. For the year ended December 31, 2022, net swap spread income included in other income was $193 thousand.

Entering into derivative contracts potentially exposes the Company to the risk of counterparties' failure to fulfill their legal obligations, including, but not limited to, potential amounts due or payable under each derivative contract. Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. The Company assesses the credit risk of its dealer counterparties by regularly monitoring publicly available credit rating information, evaluating other market indicators, and periodically reviewing detailed financials.

The Company records the fair value of its interest rate swap contracts separately within other assets and other liabilities as current accounting rules do not permit the netting of customer and counterparty fair value amounts in the consolidated statement of financial condition.