DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2022

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 8 – DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments are negotiated contracts entered into by two issuing counterparties containing specific agreement terms, including the underlying instrument, amount, exercise price, and maturities. The derivatives accounting guidance requires that the Company recognize all derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets. The Company may utilize interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position.

Interest Rate Swaps Designated as Cash Flow Hedges

The Company designated certain interest rate swap agreements as cash flow hedges on variable-rate borrowings. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on interest rate swaps designated as cash flow hedging instruments, net of tax, is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.

The interest rate swap agreements designated as cash flow hedges are summarized as follows:

	September 30, 2022				December 31, 2021
	Notional		Fair		Notional		Fair
	Amount		Value		Amount		Value
	(dollars in thousands)
Fair value recorded in other assets	$	17,000	$	614	$	—	$	—
Fair value recorded in other liabilities		—		—		17,000		(680)

As of September 30, 2022, the interest rate swap agreements designated as cash flow hedges had contractual maturities between 2024 and 2025. As of September 30, 2022, counterparties had cash pledged and held on deposit by the Company of $0.6 million. As of December 31, 2021, the Company had cash pledged and held on deposit at counterparties of $0.8 million.

The effect of interest rate swap agreements designated as cash flow hedges on the consolidated statements of income are summarized as follows:

Location of gross gain (loss) reclassified	Amounts of gross gain (loss)
from accumulated other	reclassified from accumulated
comprehensive income (loss) to income	other comprehensive income
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Designated as cash flow hedges:	(dollars in thousands)
Junior subordinated debentures interest expense	$	(14)	$	(105)	$	(177)	$	(306)

Interest Rate Swaps Not Designated as Hedging Instruments

The Company may offer interest rate swap agreements to its commercial borrowers in connection with their risk management needs. The Company manages the interest rate risk associated with these contracts by entering into an equal and offsetting derivative with a third-party financial institution. While these interest rate swap agreements generally work together as an economic interest rate hedge, the Company did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

The interest rate swap agreements not designated as hedging instruments are summarized as follows:

	September 30, 2022				December 31, 2021
	Notional		Fair		Notional		Fair
	Amount		Value		Amount		Value
	(dollars in thousands)
Fair value recorded in other assets:
Interest rate swaps with a commercial borrower counterparty	$	—	$	—	$	112,041	$	8,622
Interest rate swaps with a financial institution counterparty		109,468		7,431		3,880		75
Total fair value recorded in other assets	$	109,468	$	7,431	$	115,921	$	8,697
Fair value recorded in other liabilities:
Interest rate swaps with a commercial borrower counterparty	$	109,468	$	(7,431)	$	3,880	$	(75)
Interest rate swaps with a financial institution counterparty		—		—		112,041		(8,622)
Total fair value recorded in other liabilities	$	109,468	$	(7,431)	$	115,921	$	(8,697)

As of September 30, 2022, the interest rate swap agreements not designated as hedging instruments had contractual maturities between 2022 and 2042. As of December 31, 2021, the carrying value of debt securities pledged and held in safekeeping at a financial institution counterparty was $7.5 million.

The effect of interest rate contracts not designated as hedging instruments recognized in other noninterest income on the consolidated statements of income are summarized as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Not designated as hedging instruments:	(dollars in thousands)
Gross gains	$	5,209	$	1,843	$	15,303	$	12,281
Gross losses		(5,209)		(1,843)		(15,303)		(12,281)
Net gains (losses)	$	—	$	—	$	—	$	—