Note 7: Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments, which consist of interest rate swaps, interest rate caps, and fair value swaps to assist in its interest rate risk management. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative financial instruments are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship and classification as either a cash flow hedge or fair value hedge for those derivatives which are designated as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

​

Non-hedge Derivatives

​

The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Company enters into offsetting positions with large U.S. financial institutions in order to minimize the risk to the Company. These swaps are derivatives, but are not designated as hedging instruments.

Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or client owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the client or counterparty and therefore, the Company has no credit risk.

The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of June 30, 2025 and December 31, 2024:

​

The Company has entered into a risk participation agreement (“RPA”) to share credit exposure with a counterparty related to an interest rate swap agreement associated with a loan participation. Under the RPA, the Company sold a portion of its credit exposure, receiving an up-front fee, and will be required to make a payment if the loan client defaults on its obligations. The notional amount of the RPA reflects the Company’s pro-rata share of the derivative instrument consistent with its share of the related participated loan.

​

Any gain or loss related to changes in the fair value of the RPA is recorded to earnings. For the three and six months ended June 30, 2025, the total loss recorded to earnings was $19,000. There was no gain or loss recorded to earnings for the three and six months ended June 30, 2024.

​

The following table presents a summary of the Company’s RPA as of June 30, 2025 and December 31, 2024:

​

​

Cash Flow Hedging Derivatives

​

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered deposit and wholesale borrowing portfolios. During the next 12 months, the Company estimates that $4.5 million will be reclassified to interest expense, as a reduction of the expense.

​

The following table presents a summary of the Company’s interest rate swaps designated as cash flow hedges as of June 30, 2025 and December 31, 2024:

​

The Company purchases interest rate caps, designated as cash flow hedges, of certain liabilities. The interest rate caps require receipt of variable amounts from the counterparties when interest rates rise above the strike price in the contracts. For the three and six months ended June 30, 2025, the Company recognized amortization expense on the interest rate caps of $198,000 and $393,000, respectively, which was recorded as a component of interest expense on FHLB advances. For the three and six months ended June 30, 2024, the Company recognized amortization expense on the interest rate caps of $200,000 and $395,000, respectively, which was recorded as a component of interest expense on brokered deposits and FHLB advances.

​

The following table presents a summary of the Company’s interest rate caps designated as cash flow hedges as of June 30, 2025 and December 31, 2024:

​

​

The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three and six months ended June 30, 2025 and 2024:

​

No amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the three and six months ended June 30, 2025 and 2024, and no amounts are expected to be reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness over the next twelve months.

Fair Value Hedging Derivatives

​

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate available for sale securities. The hedging strategy converts the fixed interest rates to variable interest rates based on Secured Overnight Financing Rate (“SOFR”).

​

The following table presents a summary of the Company’s interest rate swaps designated as fair value hedges as of June 30, 2025 and December 31, 2024:

​

​

The effects of the Company’s fair value hedge relationships on the income statement during the three and six months ended June 30, 2025 and 2024 were as follows:

​

The following table presents amounts that were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at June 30, 2025 and December 31, 2024:

​

The following table presents a summary of the Company’s interest rate contracts as of June 30, 2025 and December 31, 2024:

​

The Company is party to collateral support agreements with certain derivative counterparties. These agreements require that the Company maintain collateral based on the fair values of derivative transactions. In the event of default by the Company, the counterparty would be entitled to the collateral. As of June 30, 2025 and December 31, 2024, the Company had pledged no cash collateral for the Company’s derivative contracts. As of June 30, 2025 and December 31, 2024, the Company’s counterparties had pledged cash collateral to the Company of $28.4 million and $44.2 million, respectively.

​

The following table summarizes gross and net information about derivative instruments that are eligible for offset in the balance sheet at June 30, 2025 and December 31, 2024:

​

​