Derivative Financial Instruments

9 Months Ended

Sep. 30, 2024

Derivative Financial Instruments

Derivative Financial Instruments

Note 9– Derivative Financial Instruments

As a part of managing interest rate risk, the Corporation entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities. The Corporation has designated its interest rate swap agreements as cash flow hedges under the guidance of ASC Subtopic 815-30, Derivatives and Hedging – Cash Flow Hedges. Cash flow hedges have the effective portion of changes in the fair value of the derivative, net of taxes, recorded in net accumulated other comprehensive income.

In March 2016, the Corporation entered into four interest rate swap contracts totaling $30.0 million notional amount, hedging future cash flows associated with floating rate trust preferred debt. As of September 30, 2024, $15.0 million notional amount remains.   The interest rate swap creates an effective fixed interest rate of 4.6550% on the $15.0 million notional amount of the Corporation’s junior subordination debt until the interest rate swap’s maturity in March 2026.  The fair value of the interest rate swap contracts was $0.4 million and $0.8 million at September 30, 2024 and December 31, 2023, respectively.

For the nine- and three-month periods ended September 30, 2024, the Corporation recorded decreases in the value of the derivatives of $319,000 and $323,000, respectively, and the related deferred tax benefits of $84,000 and $85,000, respectively, in net accumulated other comprehensive income to reflect the effective portion of cash flow hedges.  This compares to an increases of $30,000 and $14,000, respectively, and related deferred taxes of $7,000 and $3,000, respectively, for the nine-and three-months ended September 30, 2023.  ASC Subtopic 815-30 requires the net accumulated other comprehensive income/(loss) to be reclassified to earnings if the hedge becomes ineffective or is terminated. There was no hedge ineffectiveness recorded for any of the nine-month periods or three-month periods ended September 30, 2024 or 2023. The Corporation does not expect any material losses relating to these hedges to be reclassified into earnings within the next 12 months.

Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant as of September 30, 2024.

The table below discloses the impact of derivative financial instruments on the Corporation’s Consolidated Financial Statements for the nine- and three-month periods ended September 30, 2024 and 2023.

Derivative in Cash Flow Hedging Relationships
					Amount of gain or
					(loss) recognized in
	Amount of gain or		Amount of gain or		income or derivative
	(loss) recognized in		(loss) reclassified from		(ineffective portion
	OCI on derivative		accumulated OCI into		and amount excluded
	(effective portion),		income (effective		from effectiveness
(in thousands)	net of tax		portion) (a)		testing) (b)
Interest rate contracts:
Nine months ended:
September 30, 2024	$	(235)	$	—	$	—
September 30, 2023		23		—		—
Three months ended:
September 30, 2024	$	(238)	$	—	$	—
September 30, 2023		11		—		—

Notes:

(a) Reported as interest expense

(b) Reported as other income