Derivative Financial Instruments

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

(11) DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into oil and gas swaps and options contracts to accommodate the business needs of its customers. Upon the origination of an oil or gas swap or option contract with a customer, to mitigate the exposure to fluctuations in oil and gas prices, the Company simultaneously enters into an offsetting contract with a counterparty. These derivatives are not designated as hedged instruments and are recorded on the Company's consolidated balance sheet at fair value and are included in other assets. The Company's derivative financial instruments require a daily margin to be posted, which fluctuates with oil and gas prices. The Company had a margin asset included in other assets in the amount of $22.3 million at September 30, 2023 and $6.6 million at December 31, 2022.

The Company utilizes dealer quotations and observable market data inputs to substantiate internal valuation models. The notional amounts and estimated fair values of oil and gas derivative positions outstanding are presented in the following table:


		September 30, 2023						December 31, 2022
Oil and Natural Gas Swaps and Options	Notional Units	Notional Amount			Estimated Fair Value			Notional Amount			Estimated Fair Value
		(Notional amounts and dollars in thousands)
Oil
Derivative assets	Barrels		4,041		$	12,352			2,698		$	8,868
Derivative liabilities	Barrels		(4,041	)		(11,204	)		(2,698	)		(8,259	)

Gas/Natural Gas Liquids
Derivative assets	MMBTUs/Gallons		54,266			9,334			25,059			11,877
Derivative liabilities	MMBTUs/Gallons		(54,266	)		(8,354	)		(25,059	)		(11,424	)

Total Fair Value	Included in
Derivative assets	Other assets					21,686						20,745
Derivative liabilities	Other liabilities					(19,558	)					(19,683	)

The following table is a summary of the Company's recognized income related to the activity, which was included in other noninterest income:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(Dollars in thousands)				(Dollars in thousands)
Derivative income	$	115	$	118	$	464	$	406

The Company's credit exposure on oil and gas swaps and options varies based on the current market prices of oil and natural gas. Other than credit risk, changes in the fair value of customer positions will be offset by equal and opposite changes in the counterparty positions. The net positive fair value of the contracts represents the profit derived from the activity and is unaffected by the market price movements. The Company's share of total profit is approximately 35%.

Customer credit exposure is managed by strict position limits and is primarily offset by first liens on production while the remainder is offset by cash. Counterparty credit exposure is managed by selecting highly rated counterparties (rated A- or better by Standard and Poor's) and monitoring market information.

The following table is a summary of the Company's net credit exposure relating to oil and gas swaps and options with bank counterparties:


	September 30, 2023		December 31, 2022
	(Dollars in thousands)
Credit exposure	$	—	$	6,560

Balance Sheet Offsetting

Derivatives may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements. The Company's derivative transactions with upstream financial institution counterparties and bank customers are generally executed under International Swaps and Derivative Association ("ISDA") master agreements, which include "right of set-off" provisions. In such cases

there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset such financial instruments for financial reporting purposes.