| Derivatives and Hedging Activities |
Note 15 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivative
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
Derivatives Designated as Hedging Instruments - Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with existing variable-rate assets. During the fourth quarter of 2023, the Company entered into a $100.0 million notional interest rate swap designated as a cash flow hedge, with an effective date of May 1, 2024 and a maturity date of May 1, 2026, to hedge a pool of Prime-indexed loans against falling rates. The principal balance of the loan pool designated for the Prime-indexed loans was $137.6 million as of September 30, 2024. During the first quarter of 2024, the Company entered into a $75.0 million notional interest rate swap designated as a cash flow hedge, with an effective date of May 1, 2024 and a maturity date of May 1, 2026, to hedge a pool of one-month SOFR-indexed loans against falling rates. The principal balance of the loan pool designated for the SOFR-indexed loans was $102.8 million as of September 30, 2024.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Management evaluated the effectiveness of the Company’s derivatives designated as cash flow hedges at inception and at the balance sheet date and determined they are effective. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate asset. During the next 12 months, the Company estimates that an additional $0.1 million will be reclassified as an increase to interest income.
Derivatives Not Designated as Hedging Instruments
The Company also enters into interest rate swap agreements between the Company and its customers and other third-party counterparties. The Company enters into “back to back swap” arrangements whereby the Company executes interest rate swap
agreements with its customers and acquires an offsetting swap position from a third-party counterparty. These derivative financial statements are accounted for at fair value, with changes in fair value recognized in the Company’s Consolidated Statements of Income.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2024 and December 31, 2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2024 |
|
Derivative Assets |
|
|
Derivative Liabilities |
|
|
|
Notional Amount |
|
|
Balance Sheet Location |
|
Fair Value |
|
|
Notional Amount |
|
|
Balance Sheet Location |
|
Fair Value |
|
|
|
(in thousands) |
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
|
$ |
102,569 |
|
|
Other Assets |
|
$ |
4,559 |
|
|
$ |
102,569 |
|
|
Other Liabilities |
|
$ |
4,559 |
|
Total derivatives not designated as hedging instruments |
|
|
|
|
|
|
$ |
4,559 |
|
|
|
|
|
|
|
$ |
4,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
|
$ |
175,000 |
|
|
Other Assets |
|
$ |
725 |
|
|
$ |
— |
|
|
Other Liabilities |
|
$ |
— |
|
Total derivatives designated as hedging instruments |
|
|
|
|
|
|
$ |
725 |
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2023 |
|
Derivative Assets |
|
|
Derivative Liabilities |
|
|
|
Notional Amount |
|
|
Balance Sheet Location |
|
Fair Value |
|
|
Notional Amount |
|
|
Balance Sheet Location |
|
Fair Value |
|
|
|
(in thousands) |
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
|
$ |
104,571 |
|
|
Other Assets |
|
$ |
5,939 |
|
|
$ |
104,571 |
|
|
Other Liabilities |
|
$ |
5,920 |
|
Total derivatives not designated as hedging instruments |
|
|
|
|
|
|
$ |
5,939 |
|
|
|
|
|
|
|
$ |
5,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
|
$ |
100,000 |
|
|
Other Assets |
|
$ |
306 |
|
|
$ |
— |
|
|
Other Liabilities |
|
$ |
— |
|
Total derivatives designated as hedging instruments |
|
|
|
|
|
|
$ |
306 |
|
|
|
|
|
|
|
$ |
— |
|
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income for the three and nine months ended September 30, 2024 and 2023.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Subtopic 815-20 Hedging Relationships |
|
Amount of Gain or (Loss) Recognized in OCI on Derivative |
|
|
Amount of Gain or (Loss)
Recognized in OCI Included
Component |
|
|
Amount of Gain or (Loss)
Recognized in OCI Excluded
Component |
|
|
Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income |
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income |
|
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component |
|
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Excluded Component |
|
|
|
(in thousands) |
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products |
|
$ |
2,427 |
|
|
$ |
2,427 |
|
|
$ |
— |
|
|
Interest Income |
|
$ |
(673 |
) |
|
$ |
(673 |
) |
|
$ |
— |
|
Total |
|
$ |
2,427 |
|
|
$ |
2,427 |
|
|
$ |
— |
|
|
|
|
$ |
(673 |
) |
|
$ |
(673 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Subtopic 815-20 Hedging Relationships |
|
Amount of Gain or (Loss) Recognized in OCI on Derivative |
|
|
Amount of Gain or (Loss)
Recognized in OCI Included
Component |
|
|
Amount of Gain or (Loss)
Recognized in OCI Excluded
Component |
|
|
Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income |
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income |
|
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component |
|
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Excluded Component |
|
|
|
(in thousands) |
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Interest Income |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Subtopic 815-20 Hedging Relationships |
|
Amount of Gain or (Loss) Recognized in OCI on Derivative |
|
|
Amount of Gain or (Loss)
Recognized in OCI Included
Component |
|
|
Amount of Gain or (Loss)
Recognized in OCI Excluded
Component |
|
|
Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income |
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income |
|
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component |
|
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Excluded Component |
|
|
|
(in thousands) |
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products |
|
$ |
(526 |
) |
|
$ |
(526 |
) |
|
$ |
— |
|
|
Interest Income |
|
$ |
(1,133 |
) |
|
$ |
(1,133 |
) |
|
$ |
— |
|
Total |
|
$ |
(526 |
) |
|
$ |
(526 |
) |
|
$ |
— |
|
|
|
|
$ |
(1,133 |
) |
|
$ |
(1,133 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Subtopic 815-20 Hedging Relationships |
|
Amount of Gain or (Loss) Recognized in OCI on Derivative |
|
|
Amount of Gain or (Loss)
Recognized in OCI Included
Component |
|
|
Amount of Gain or (Loss)
Recognized in OCI Excluded
Component |
|
|
Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income |
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income |
|
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component |
|
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Excluded Component |
|
|
|
(in thousands) |
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Interest Income |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
The table below presents the effect of cash flow hedge accounting on the Income Statement for the three and nine months ended September 30, 2024 and 2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationship |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
|
Interest Income |
|
|
Interest Expense |
|
|
Interest Income |
|
|
Interest Expense |
|
|
Interest Income |
|
|
Interest Expense |
|
|
Interest Income |
|
|
Interest Expense |
|
|
|
(in thousands) |
|
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive loss into income |
|
$ |
(673 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(1,133 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Amount of gain or (loss) reclassified from accumulated other comprehensive loss into income - included component |
|
|
(673 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,133 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement for the three and nine months ended September 30, 2024 and 2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging
Instruments under Subtopic 815-20 |
|
Location of Gain or (Loss) Recognized in Income on Derivative |
|
Amount of Gain or (Loss)
Recognized in Income on Derivative |
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
|
|
|
(in thousands) |
|
Interest rate products |
|
Other income |
|
$ |
(44 |
) |
|
$ |
62 |
|
|
$ |
(18 |
) |
|
$ |
(23 |
) |
Total |
|
|
|
$ |
(44 |
) |
|
$ |
62 |
|
|
$ |
(18 |
) |
|
$ |
(23 |
) |
No fee income was recognized from its derivative financial instruments for the three and nine months ended September 30, 2024. The Company recognized $0.6 million of fee income for the nine months ended September 30, 2023.
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2024 and December 31, 2023. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The derivative assets are located within the prepaid and other assets line item on the Consolidated Balance Sheets and the derivative liabilities are located within the accrued expenses and other liabilities line item on the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
Gross Amounts of Recognized Assets |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts of Assets presented in the Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Received |
|
|
Net Amount |
|
|
|
(in thousands) |
|
Derivatives |
|
$ |
5,284 |
|
|
$ |
— |
|
|
$ |
5,284 |
|
|
$ |
631 |
|
|
$ |
4,653 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
Gross Amounts of Recognized Liabilities |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts of Liabilities presented in the Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Provided |
|
|
Net Amount |
|
|
|
(in thousands) |
|
Derivatives |
|
$ |
4,559 |
|
|
$ |
— |
|
|
$ |
4,559 |
|
|
$ |
631 |
|
|
$ |
— |
|
|
$ |
3,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
Gross Amounts of Recognized Assets |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts of Assets presented in the Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Received |
|
|
Net Amount |
|
|
|
(in thousands) |
|
Derivatives |
|
$ |
6,245 |
|
|
$ |
— |
|
|
$ |
6,245 |
|
|
$ |
284 |
|
|
$ |
5,731 |
|
|
$ |
230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
Gross Amounts of Recognized Liabilities |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts of Liabilities presented in the Consolidated Balance Sheets |
|
|
Financial Instruments |
|
|
Cash Collateral Provided |
|
|
Net Amount |
|
|
|
(in thousands) |
|
Derivatives |
|
$ |
5,920 |
|
|
$ |
— |
|
|
$ |
5,920 |
|
|
$ |
284 |
|
|
$ |
— |
|
|
$ |
5,636 |
|
The Company has agreements with each of its derivative counterparties that contain a provision stating if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. In addition, these agreements may also require the Company to post additional collateral should it fail to maintain its status as a well- or adequately- capitalized institution.
As of September 30, 2024 and December 31, 2023, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0. As of September 30, 2024 and December 31, 2023, no collateral was provided related to these agreements.
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