Derivatives Financial Instruments

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives Financial Instruments

Note 11.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 adopted 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.  The effects of the Company’s fair value hedge relationships reported in interest income in 2022 on tax-exempt available-for-sale securities on the consolidated income statement were as follows (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2022		2022
Interest income on tax-exempt securities	$	403	$	1,183
Effects of fair value hedge relationships		(83)		(527)
Reported interest income on tax-exempt securities	$	320	$	656

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
Gain (loss) on fair value hedging relationship	2022		2022
Interest rate swap agreements - securities:
Hedged items	$	1,808	$	5,319
Derivative designated as hedging instruments		(1,808)		(5,319)
Carry amount of hedged assets - securities available-for-sale		36,165		36,165

Derivatives Designated as Cash Flow Hedges:

The Company enters into interest rate derivative contracts on assets and liabilities that are designated as qualifying cash flow hedges.  The Company hedges the exposure to variability in expected future cash flows attributable to changes in contractual specified interest rates.  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 offsetting cash flows attributable to the hedged risk. 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 accumulated other comprehensive income (“AOCI”) is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and 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 or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability, as future interest payments are made on the underlying assets.  At September 30, 2023, the Company estimates that in the next 12 months an additional $797 thousand will be reclassified as a decrease in interest income and $969 thousand will be reclassified as a decrease in interest expense.

At September 30, 2023 and December 31, 2022, cash flow hedges are as follows (in thousands):

		September 30, 2023				December 31, 2022
	Balance Sheet	Notional		Estimated		Notional		Estimated
	Location	Amount		Fair Value		Amount		Fair Value
Cash flow hedges:
Assets	Other assets	$	150,000	$	698	$	-	$	-
Liabilities	Other liabilities		100,000		(2,165)		100,000		(1,304)

The following table presents the effect of fair value and cash flow hedge accounting on AOCI (in thousands):

Derivatives in cash flow hedging relationships:		Amount of Gain (Loss) Recognized on OCI on Derivative	Location of Gain or (Loss) Recognized from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income
Three months ended September 30, 2023
Interest rate swaps - Assets	$	(432)	Interest income	$	(173)
Interest rate swaps - Liabilities		585	Interest expense		(157)
Three months ended September 30, 2022
Interest rate swaps - Assets	$	(1,775)	—	$	—
Interest rate swaps - Liabilities		—	—		—
Nine months ended September 30, 2023
Interest rate swaps - Assets	$	(2,165)	Interest income	$	(275)
Interest rate swaps - Liabilities		698	Interest expense		(165)
Nine months ended September 30, 2022
Interest rate swaps - Assets	$	(1,775)	—	$	—
Interest rate swaps - Liabilities		—	—		—

The following table presents the effect of fair value and cash flow hedge accounting on the income statement (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Total interest income	$	55,448	$	—	$	160,823	$	—
Effects of cash flow hedge relationships		(173)		—		(275)		—
Reported total interest income	$	55,275	$	—	$	160,548	$	—
Total interest expense	$	24,426	$	—	$	62,150	$	—
Effects of cash flow hedge relationships		(157)		—		(165)		—
Reported total interest expense	$	24,269	$	—	$	61,985	$	—

Non-hedged derivatives:

The Company provides 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 are recognized as other noninterest income in the current period.

At September 30, 2023 and December 31, 2022, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):

	September 30, 2023				December 31, 2022
		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	243,239	$	15,482	$	216,656	$	11,834
Liabilities		243,239		(15,482)		216,656		(11,834)

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):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Interest rate swap agreements	$	326	$	53	$	823	$	1,449

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 September 30, 2023, collateral totaling $910 thousand and $1.4 million at December 31, 2022, was pledged to the derivative counterparties to comply with collateral requirements.