DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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.

Derivatives designated as cash flow hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company uses forward cash flow hedges in an effort to manage future interest rate exposure on liabilities. The hedging strategy converts the variable interest rate on liabilities to a fixed interest rate and is used in an effort to protect the Company from floating interest rate variability.

During the year ended December 31, 2021, the Company terminated this interest rate swap prior to its maturity date resulting in a net gain of approximately $225 thousand, recognized in other noninterest expense as the forecasted transaction did not occur. During the year ended December 31, 2021, the Company recognized a gain of $1.3 million, before tax, recognized in other comprehensive income. The Company did not have any derivatives designated as cash flow hedges outstanding at December 31, 2022 or 2021.

Derivatives not designated as hedges

The Company has outstanding interest rate swap contracts with certain customers and equal and offsetting interest rate swaps with other financial institutions entered into at the same time, which were obtained as part of the Merger. See Note 2 – Acquisitions for further information. These interest rate swap contracts are not designated as hedging instruments for mitigating interest rate risk. The objective of the transactions is to allow customers to effectively convert a variable rate loan to a fixed rate.

In connection with each swap transaction, the Company agreed to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agreed to pay a third-party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and do not significantly impact the Company’s operating results except in certain situations where there is a significant deterioration in the customer’s credit worthiness or that of the counterparties. At December 31, 2022, management determined there was no such deterioration.

At December 31, 2022, the Company had 14 interest rate swap agreements outstanding with borrowers and financial institutions, respectively. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in other noninterest income. Fair value amounts are included in other assets and other liabilities.

At December 31, 2022, the Company had three credit risk participation agreements with another financial institution, respectively, that are associated with interest rate swaps related to loans for which the Company is the lead agent bank and the other financial institution provides credit protection to the Company should the borrower fail to perform under the terms of the interest rate swap agreements. The fair value of the agreements is determined based on the market value of the underlying interest rate swaps adjusted for credit spreads and recovery rates.

Derivative instruments not designated as hedges outstanding as of December 31, 2022 were as follows (dollars in thousands):


								Weighted
								Average
		Notional		Fair				Maturity
	Classification	Amounts		Value		Fixed Rate	Floating Rate	(Years)
Interest rate swaps with financial institutions	Other assets	$	109,242	$	8,856	3.25% - 5.58%	SOFR 1M + 2.50% - 3.00%	5.49
Interest rate swaps with financial institutions	Other assets	5,029		407		4.99%	U.S. Prime	4.96
Interest rate swaps with customers	Other liabilities	5,029		(407)		4.99%	U.S. Prime	4.96
Interest rate swaps with customers	Other liabilities	109,242		(8,856)		3.25% - 5.58%	SOFR CME 1M + 2.50%	5.49
Credit risk participation agreement with financial institution	Other assets	13,028		2		3.50%	LIBOR 1M + 2.50%	7.24
Credit risk participation agreement with financial institution	Other assets	8,485		25		5.35% - 5.40%	SOFR CME 1M + 2.50%	9.97