| Derivatives and Hedging Activities |
Note 15 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
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 objective in using interest rate derivatives is to add stability to interest income and interest expense by managing its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps and caps as part of its interest rate risk management strategy.
Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives are used to hedge the cash flows associated with variable-rate assets and liabilities. During the third quarter of 2026, the Company entered into a $180.0 million notional interest rate swap, designated as a cash flow hedge, with an effective date of December 15, 2026 and a maturity date of December 15, 2028. The interest rate swap hedges against fluctuations in interest rates upon the semiannual renewal of time deposits from the State of California, which totaled $181.3 million at September 30, 2026. The variable leg of the swap is indexed to overnight SOFR. Within the next twelve months, the Company estimates that $0.1 million will be reclassified as a reduction to interest expense as it relates to the interest rate swap.
Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. Such derivatives are used to hedge the cash flows associated with variable-rate liabilities. During the third quarter of 2026, the Company entered into a $26.0 million notional interest rate cap, designated as a cash flow hedge, with an effective date of September 15, 2026 and a maturity date of September 15, 2028. The interest rate cap, which has a benchmark index of three-month term SOFR, hedges against rising interest rates associated with our trust preferred securities. See “Note 8 – Borrowings and Subordinated Debentures” for more details on the Company's trust preferred securities. The interest rate cap includes a contractual strike rate of 4.00%. The Company paid an initial up-front premium of $332 thousand, which is being amortized on a straight-line basis through the maturity date of the interest rate cap. Within the next twelve months, the Company estimates that less than one hundred thousand dollars will be reclassified as a net increase to interest expense as it relates to the interest rate cap.
For derivatives designated and that qualified as cash flow hedges of interest rate risk, the gain or loss on the derivative was recorded in accumulated other comprehensive income and subsequently reclassified into interest income in the same period(s) during
which the hedged transaction affected earnings. Management evaluated the effectiveness of the Company’s derivatives designated as cash flow hedges at inception and at the balance sheet dates during which they were outstanding and determined they were effective.
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 instruments 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 consolidated balance sheets as of September 30, 2026 and December 31, 2025.
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|
|
|
|
|
|
|
|
As of September 30, 2026 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Back-to-back interest rate swaps related to customer loans |
|
$ |
59,099 |
|
|
Other Assets |
|
$ |
3,164 |
|
|
$ |
59,099 |
|
|
Other Liabilities |
|
$ |
3,138 |
|
Total derivatives not designated as hedging instruments |
|
|
|
|
|
|
$ |
3,164 |
|
|
|
|
|
|
|
$ |
3,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest rate swap related to State of California time deposits |
|
$ |
180,000 |
|
|
Other Assets |
|
$ |
853 |
|
|
$ |
— |
|
|
Other Liabilities |
|
$ |
— |
|
Interest rate cap related to trust preferred securities |
|
|
26,000 |
|
|
Other Assets |
|
|
380 |
|
|
|
— |
|
|
Other Liabilities |
|
|
— |
|
Total derivatives designated as hedging instruments |
|
|
|
|
|
|
$ |
1,233 |
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2025 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Back-to-back interest rate swaps related to customer loans |
|
$ |
61,350 |
|
|
Other Assets |
|
$ |
2,579 |
|
|
$ |
61,350 |
|
|
Other Liabilities |
|
$ |
2,568 |
|
Total derivatives not designated as hedging instruments |
|
|
|
|
|
|
$ |
2,579 |
|
|
|
|
|
|
|
$ |
2,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest rate swaps related to customer loans |
|
$ |
175,000 |
|
|
Other Assets |
|
$ |
140 |
|
|
$ |
— |
|
|
Other Liabilities |
|
$ |
— |
|
Total derivatives designated as hedging instruments |
|
|
|
|
|
|
$ |
140 |
|
|
|
|
|
|
|
$ |
— |
|
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, 2026 and 2025.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2026 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest rate swap related to State of California time deposits |
|
$ |
853 |
|
|
$ |
853 |
|
|
$ |
— |
|
|
Interest Expense |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Interest rate cap related to trust preferred securities |
|
|
48 |
|
|
|
48 |
|
|
|
- |
|
|
Interest Expense |
|
|
(2 |
) |
|
|
- |
|
|
|
(2 |
) |
Total |
|
$ |
901 |
|
|
$ |
901 |
|
|
$ |
— |
|
|
|
|
$ |
(2 |
) |
|
$ |
— |
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2025 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest rate swaps related to customer loans |
|
$ |
(94 |
) |
|
$ |
(94 |
) |
|
$ |
— |
|
|
Interest Income |
|
$ |
(241 |
) |
|
$ |
(241 |
) |
|
$ |
— |
|
Total |
|
$ |
(94 |
) |
|
$ |
(94 |
) |
|
$ |
— |
|
|
|
|
$ |
(241 |
) |
|
$ |
(241 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2026 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest rate swap related to State of California time deposits |
|
$ |
853 |
|
|
$ |
853 |
|
|
$ |
— |
|
|
Interest Expense |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Interest rate cap related to trust preferred securities |
|
|
48 |
|
|
|
48 |
|
|
|
— |
|
|
Interest Expense |
|
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
Pay-fixed interest rate swaps related to customer loans |
|
|
(57 |
) |
|
|
(57 |
) |
|
|
— |
|
|
Interest Income |
|
|
82 |
|
|
|
82 |
|
|
|
— |
|
Total |
|
$ |
844 |
|
|
$ |
844 |
|
|
$ |
— |
|
|
|
|
$ |
80 |
|
|
$ |
82 |
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2025 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest rate swaps related to customer loans |
|
$ |
(139 |
) |
|
$ |
(139 |
) |
|
$ |
— |
|
|
Interest Income |
|
$ |
(734 |
) |
|
$ |
(734 |
) |
|
$ |
— |
|
Total |
|
$ |
(139 |
) |
|
$ |
(139 |
) |
|
$ |
— |
|
|
|
|
$ |
(734 |
) |
|
$ |
(734 |
) |
|
$ |
— |
|
The table below presents the effect of cash flow hedge accounting on the consolidated statements of income for the three and nine months ended September 30, 2026 and 2025.
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|
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|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
|
|
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 |
|
$ |
— |
|
|
$ |
(2 |
) |
|
$ |
(241 |
) |
|
$ |
— |
|
|
$ |
82 |
|
|
$ |
(2 |
) |
|
$ |
(734 |
) |
|
$ |
— |
|
Amount of gain or (loss) reclassified from accumulated other comprehensive loss into income - included component |
|
|
— |
|
|
|
— |
|
|
|
(241 |
) |
|
|
— |
|
|
|
82 |
|
|
|
— |
|
|
|
(734 |
) |
|
|
— |
|
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the consolidated statements of income for the three and nine months ended September 30, 2026 and 2025.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
|
|
|
|
(in thousands) |
|
Back-to-back interest rate swaps related to customer loans |
|
Other income |
|
$ |
7 |
|
|
$ |
(1 |
) |
|
$ |
14 |
|
|
$ |
(29 |
) |
Total |
|
|
|
$ |
7 |
|
|
$ |
(1 |
) |
|
$ |
14 |
|
|
$ |
(29 |
) |
No fee income was recognized from the Company’s derivative financial instruments for the nine months ended September 30, 2026 or 2025.
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2026 and December 31, 2025. 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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Assets |
|
|
Gross Amounts Offset in the Statement of Financial Position |
|
|
Net Amounts of Assets presented in the Statement of Financial Position |
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
|
|
|
Financial Instruments |
|
|
Cash Collateral Received |
|
|
Net Amount |
|
|
|
(in thousands) |
|
Derivatives |
|
$ |
4,397 |
|
|
$ |
— |
|
|
$ |
4,397 |
|
|
$ |
— |
|
|
$ |
3,890 |
|
|
$ |
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Liabilities |
|
|
Gross Amounts Offset in the Statement of Financial Position |
|
|
Net Amounts of Liabilities presented in the Statement of Financial Position |
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
|
|
|
Financial Instruments |
|
|
Cash Collateral Received |
|
|
Net Amount |
|
|
|
(in thousands) |
|
Derivatives |
|
$ |
3,138 |
|
|
$ |
— |
|
|
$ |
3,138 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Assets |
|
|
Gross Amounts Offset in the Statement of Financial Position |
|
|
Net Amounts of Assets presented in the Statement of Financial Position |
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
|
|
|
Financial Instruments |
|
|
Cash Collateral Received |
|
|
Net Amount |
|
|
|
(in thousands) |
|
Derivatives |
|
$ |
2,719 |
|
|
$ |
— |
|
|
$ |
2,719 |
|
|
$ |
397 |
|
|
$ |
1,938 |
|
|
$ |
384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Offsetting of Derivative Liabilities |
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As of December 31, 2025 |
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Gross Amounts of Recognized Liabilities |
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Gross Amounts Offset in the Statement of Financial Position |
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Net Amounts of Liabilities presented in the Statement of Financial Position |
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Gross Amounts Not Offset in the Consolidated Balance Sheets |
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Financial Instruments |
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Cash Collateral Received |
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Net Amount |
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(in thousands) |
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Derivatives |
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$ |
2,568 |
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$ |
— |
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$ |
2,568 |
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$ |
397 |
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$ |
— |
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$ |
2,171 |
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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, 2026 and December 31, 2025, 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, 2026 and December 31, 2025, no collateral was provided related to these agreements.
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