Derivatives Financial Instruments

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives Financial Instruments

Note 18. Derivatives Financial Instruments

Derivatives designated as fair value hedges:

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative net investment hedge instrument as well as the offsetting gain or loss 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. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate tax-exempt callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. The Company has elected early adoption of ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, which allows such partial term hedge designations. During the fourth quarter of 2022 the Company dissolved this hedging relationship.

A summary of the Company’s fair value hedge relationships for the periods presented are as follows (dollars in thousands):

		Weighted
		Average
	Balance	Remaining	Weighted
	Sheet	Maturity	Average		Receive	Notional		Estimated
Asset/Liability derivatives	Location	(In Years)	Pay Rate		Rate	Amount		Fair Value
December 31, 2022:
Interest rate swap agreements - securities - dissolved	—	—	—	%	—	$	—	$	—
December 31, 2021:
Interest rate swap agreements - securities	Other liabilities	6.20	3.09	%	3 month LIBOR	$	36,000	$	(3,567)

The effects of the Company’s fair value hedge relationships reported in interest income on tax-exempt available-for-sale securities on the consolidated income statement were as follows (in thousands):

	Year Ended
	December 31,
	2022		2021		2020
Interest income on tax-exempt securities	$	1,550	$	2,205	$	2,150
Effects of fair value hedge relationships		(336)		(1,050)		(781)
Reported interest income on tax-exempt securities	$	1,214	$	1,155	$	1,369

	Year Ended
	December 31,
Gain (loss) on fair value hedging relationship	2022		2021
Interest rate swap agreements - securities:
Hedged items	$	—	$	(3,567)
Derivative designated as hedging instruments		—		3,567
Carry amount of hedged assets - securities available-for-sale		—		43,119

Derivatives Designated as Cash Flow Hedges:

During the third quarter of 2022, the Company entered into interest rate derivatives contracts that were designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate. Specifically, the Company executed $100 million, notional amount, in interest rate collars to hedge the variable rate index on a portion of the Company’s commercial loan portfolio. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge. At inception, a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax, see - Consolidated Statements of Comprehensive Income (Loss). Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset, as future interest payments are made on the underlying assets. The Company estimates that an additional $362 thousand will be reclassified as a decrease in interest income during 2023.  

At December 31, 2022 and 2021, respectively, cash flow hedges are as follows (in thousands):

		December 31, 2022				December 31, 2021
	Balance Sheet	Notional		Estimated		Notional		Estimated
	Location	Amount		Fair Value		Amount		Fair Value
Cash flow hedges:
Assets	Other assets	$	-	$	-	$	-	$	-
Liabilities	Other liabilities		100,000		(1,304)		-		-

Non-hedged derivatives:

During the second quarter of 2021, the Company initiated a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a dealer bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. Since the income statement impact of the offsetting positions is limited, any changes in fair value is recognized as other noninterest income in the current period.

At December 31, 2022, and 2021, respectively, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):

	December 31, 2022				December 31, 2021
		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	216,656	$	11,834	$	48,125	$	1,326
Liabilities		216,656		(11,834)		48,125		(1,326)

The Company establishes limits and monitors exposures for customer swap positions.  Any fees received to enter the swap agreements at inception are recognized in earnings when received and is included in noninterest income. Such fees were as follows (in thousands):

	Year Ended
	December 31,
	2022		2021		2020
Interest rate swap agreements	$	2,162	$	965	$	—

Collateral requirements:

These derivative rate contracts have collateral requirements, both at inception of the trade and as the value of each derivative position changes. At December 31, 2022 and 2021, respectively, collateral totaling $1.4 million and $2.4 million, respectively, was pledged to the derivative counterparties to comply with collateral requirements.