DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2022

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS

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. 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 September 30, 2022 and December 31, 2021, management determined there was no such deterioration.

At September 30, 2022 and December 31, 2021, the Company had 14 and 19 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 September 30, 2022 and December 31, 2021, the Company had three and one 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 outstanding as of the dates indicated below were as follows:

								Weighted
								Average
		Notional		Fair				Maturity
(Dollars in thousands)	Classification	Amounts		Value		Fixed Rate	Floating Rate	(Years)
September 30, 2022
Interest rate swaps with financial institutions	Other assets	$	87,537	$	8,485	3.25% - 5.58%	LIBOR 1M + 2.50% - 3.00%	4.58
Interest rate swaps with customers	Other assets		22,676		1,021	5.35% - 5.40%	SOFR CME 1M + 2.50%	10.22
Interest rate swaps with financial institutions	Other assets		5,057		438	4.99%	U.S. Prime	5.21
Interest rate swaps with customers	Other liabilities		5,057		(438)	4.99%	U.S. Prime	5.21
Interest rate swaps with financial institutions	Other liabilities		22,676		(1,021)	5.35% - 5.40%	SOFR CME 1M + 2.50%	10.22
Interest rate swaps with customers	Other liabilities		87,537		(8,485)	3.25% - 5.58%	LIBOR 1M + 2.50% - 3.00%	4.58
Credit risk participation agreement with financial institution	Other assets		13,163		2	3.50%	LIBOR 1M + 2.50%	7.49
Credit risk participation agreement with financial institution	Other assets		8,503		25	5.35% - 5.40%	SOFR CME 1M + 2.50%	10.22
Total derivatives		$	252,206	$	27
December 31, 2021
Interest rate swaps with customers	Other assets	$	56,440	$	2,474	4.00% - 5.60%	LIBOR 1M + 2.50% - 3.00%	5.10
Interest rate swaps with financial institutions	Other assets		66,650		875	3.25% - 3.50%	LIBOR 1M + 2.50%	5.59
Interest rate swaps with customers	Other assets		5,141		194	4.99%	U.S. Prime	5.96
Interest rate swaps with financial institutions	Other liabilities		5,141		(194)	4.99%	U.S. Prime	5.96
Interest rate swaps with financial institutions	Other liabilities		56,440		(2,474)	4.00% - 5.60%	LIBOR 1M + 2.50% - 3.00%	5.10
Interest rate swaps with customers	Other liabilities		66,650		(875)	3.25% - 3.50%	LIBOR 1M + 2.50%	5.59
Credit risk participation agreement with financial institution	Other assets		13,563		15	3.50%	LIBOR 1M + 2.50%	8.24
Total derivatives		$	270,025	$	15