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Derivative Financial Instruments
9 Months Ended
Sep. 30, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
17.
Derivative Financial Instruments

Cash Flow Hedges

During September 2024 and as part of its hedging strategy, the Company entered into a five-year pay-fixed interest rate swap agreement with a notional amount of $100 million. The facility is scheduled to mature on September 4, 2029. The instrument is designated as a cash flow hedge and changes in fair value are recognized in other comprehensive income.

During December 2023, the Company entered into two five-year pay-fixed interest rate swap agreements with notional amounts of $100 million each. The facilities, which were scheduled to mature on December 6, 2028 and December 21, 2028, were discontinued on April 10, 2024, and a combined gain of $5.4 million was recognized by the Company. The gain is being accreted from other comprehensive income, net of deferred taxes, into interest expense through the maturity date of the contracts.

During March 2023, the Company entered into a five-year pay-fixed interest rate swap agreement with a notional amount of $200 million. The facility, which was scheduled to mature on March 31, 2028, was discontinued on May 26, 2023, and a gain of $5.0 million was recognized by the Company. The gain is being accreted from other comprehensive income, net of deferred taxes, into interest expense through the maturity date of the contract.

During July 2022, the Company entered into a five-year pay-fixed interest rate swap agreement with a notional amount of $200 million on its floating rate deposits. The facility, which was designated as a cash flow hedge, was discontinued on August 24, 2022, and a gain on the terminated hedge of $3.0 million was recognized by the Company. The gain is being accreted from other comprehensive income, net of deferred taxes, into interest expense through the maturity date of the contract, or July 9, 2027.

On February 18, 2021, a $100.0 million pay-fixed interest rate swap facility designated as a cash flow hedge was discontinued and a gain on the terminated hedge of $945,000 was recognized by the Company. The gain is being accreted from other comprehensive income, net of deferred taxes, into interest expense through the maturity date of the contract, or September 4, 2025.

For the nine months ended September 30, 2024 and 2023, approximately $2.0 million and $1.2 million, respectively, was reclassified out of accumulated other comprehensive income and recognized as a reduction of interest expense on discontinued hedges. For the three months ended September 30, 2024 and 2023, approximately $756,000 and $450,000, respectively, was reclassified out of accumulated other comprehensive income and recognized as a reduction of interest expense on discontinued hedges.

Fair Value Hedges

The Company offers certain interest rate swap products directly to its qualified commercial banking customers. These financial instruments are not designated as hedging instruments. The interest rate swap derivative positions relate to transactions in which the Company enters into an interest rate swap with a customer, while at the same time entering into an offsetting interest rate swap with another financial institution. An interest rate swap transaction allows customers to effectively convert a variable rate loan to a fixed rate. In connection with each swap, the Company agrees to pay interest 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 agrees to pay another 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 would 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, 2024, no such deterioration was determined by management.

The Company also offers one-way interest rate swap products to its customers. Under this type of arrangement, the Company extends a conventional fixed-rate loan to the borrower and then subsequently hedges the interest rate risk of that loan by entering into a swap for its own balance sheet to convert the fixed-rate loan to a synthetic floating rate asset. These types of swaps lock in the Company's spread over its cost of funds for the life of the loan.

For some of its loan participation facilities, the Company enters into RPAs with other banks in order to hedge or share a portion of the risk of borrower default related to the interest rate swap on a participated loan.

All derivatives are carried at fair value in either derivative assets or derivative liabilities in the accompanying consolidated balance sheets. At September 30, 2024, the Company's derivative assets and liabilities totaled $5.8 million and $6.9 million, respectively. The following tables provide the outstanding notional balances and fair values of outstanding derivative positions at September 30, 2024 and December 31, 2023:

(Dollars in thousands)

 

Outstanding
Notional
 Balance

 

 

Asset
 Derivative
Fair Value

 

 

Liability
 Derivative
Fair Value

 

 

Pay
Rate
 (1)

 

Receive
Rate
(1)

 

Remaining
Term
 (2)

 

September 30, 2024:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pay-fixed interest rate swaps

 

$

100,000

 

 

$

 

 

$

187

 

 

3.19%

 

USD Fed
Funds-H.
15

 

 

4.9

 

Total cash flow hedges

 

 

100,000

 

 

 

 

 

 

187

 

 

 

 

 

 

 

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk participation agreements purchased

 

$

12,455

 

 

$

15

 

 

$

 

 

 

5.90%

 

 

1.9

 

Risk participation agreements sold

 

 

99,549

 

 

 

 

 

 

3

 

 

 

4.68%

 

 

2.7

 

Commercial loan one-way interest rate swaps

 

 

51,797

 

 

 

2

 

 

 

915

 

 

6.73%

 

 

 

2.8

 

Commercial loan pass-through interest rate swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan customer counterparty

 

 

202,451

 

 

 

1,735

 

 

 

4,034

 

 

 

5.87%

 

 

2.9

 

Financial institution counterparty

 

 

202,451

 

 

 

4,034

 

 

 

1,735

 

 

5.87%

 

 

 

2.9

 

Total fair value hedges

 

 

568,703

 

 

 

5,786

 

 

 

6,687

 

 

 

 

 

 

 

 

Total derivatives

 

$

668,703

 

 

$

5,786

 

 

$

6,874

 

 

 

 

 

 

 

 

 

December 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pay-fixed interest rate swap

 

$

200,000

 

 

$

 

 

$

1,541

 

 

3.60%

 

USD Fed
Funds-H.
15

 

 

5.0

 

Total cash flow hedges

 

 

200,000

 

 

 

 

 

 

1,541

 

 

 

 

 

 

 

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk participation agreements purchased

 

 

13,935

 

 

 

 

 

 

20

 

 

 

5.80%

 

 

2.5

 

Risk participation agreements sold

 

 

54,383

 

 

 

6

 

 

 

 

 

 

5.06%

 

 

3.9

 

Commercial loan one-way interest rate swaps

 

 

32,477

 

 

 

48

 

 

 

352

 

 

7.02%

 

 

 

3.1

 

Commercial loan pass-through interest rate swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan customer counterparty

 

 

216,766

 

 

 

2,327

 

 

 

6,447

 

 

 

5.86%

 

 

3.7

 

Financial institution counterparty

 

 

216,766

 

 

 

6,447

 

 

 

2,327

 

 

5.86%

 

 

 

3.7

 

Total fair value hedges

 

 

534,327

 

 

 

8,828

 

 

 

9,146

 

 

 

 

 

 

 

 

Total derivatives

 

$

734,327

 

 

$

8,828

 

 

$

10,687

 

 

 

 

 

 

 

 

 

(1) Weighted average rate.

(2) Weighted average life (in years).