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DERIVATIVE INSTRUMENTS
 3 Months Ended
Mar. 31, 2025
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS DERIVATIVE INSTRUMENTS
The Company enters into derivative instruments, which may include interest rate swaps and interest rate options, in connection with our risk-management activities. Our primary objective for using derivative financial instruments is to manage interest rate risk associated with our fixed-rate and variable-rate assets and liabilities.
Interest Rate Risk
We monitor our mix of fixed-rate and variable-rate assets and liabilities and may enter into interest rate swaps, forwards, and options to achieve a more desired mix of fixed-rate and variable-rate assets and liabilities. We execute these trades to modify our exposure to interest rate risk by converting certain fixed-rate instruments to a variable-rate and certain variable-rate instruments to a fixed-rate. We use a mix of both derivatives that qualify for hedge accounting treatment and economic hedges that do not qualify for hedge accounting treatment.
Derivatives qualifying for hedge accounting treatment can include receive-fixed swaps designated as fair value hedges of specific fixed-rate unsecured debt obligations, receive-fixed swaps designated as fair value hedges of specific fixed-rate FHLB advances, and pay-fixed swaps designated as fair value hedges of securities within our available-for-sale portfolio. Other derivatives qualifying for hedge accounting consist of interest rate floor contracts designated as cash flow hedges of the expected future cash flows in the form of interest receipts on a portion of our commercial and commercial real estate loans. Both the fair value hedges and cash flow hedges were determined to be effective during all periods presented and the Company expects the hedges to remain effective during the remaining terms of the swaps.
We have the ability to execute economic hedges, which could consist of interest rate swaps, interest rate caps, forwards, and options to mitigate interest rate risk.
We also enter into interest rate lock commitments and forward commitments that are executed as part of our mortgage business that do not meet the accounting definition of hedges, as well as interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with mirror-image terms. Because of the mirror-image terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in the fair value subsequent to initial recognition have a minimal effect on earnings.
Balance Sheet Presentation
The following table summarizes the fair value of derivative instruments reported on our consolidated balance sheet. The amounts are presented on a gross basis, are segregated by derivatives that are designated and qualifying as hedging instruments or those that are not, and are further segregated by type of contract within those two categories. Derivative assets and derivative liabilities are included in other assets and other liabilities, respectively, on the consolidated balance sheet.
Notional amounts are reference amounts from which contractual obligations are derived and are not recorded on the balance sheet. In our view, derivative notional is not an accurate measure of our derivative exposure when viewed in isolation from other factors, such as market rate fluctuations and counterparty credit risk.
March 31, 2025December 31, 2024
Fair ValueFair Value
(dollars in thousands)AssetsLiabilitiesNotional amountAssetsLiabilitiesNotional amount
Derivatives designated as accounting hedges
Interest rate contracts
Fair value hedges
Investment securities available for sale$1,263 $2,750 $285,818 $2,653 $654 $167,363 
Cash flow hedges
Investment securities available for sale1,197 — 90,000 — — — 
Pools of commercial and commercial real estate loans2,285 3,125 300,000 — 4,502 200,000 
FHLB advances, brokered CDs and other borrowings439 347 125,000 863 281 75,000 
Total derivatives designated as accounting hedges$5,184 $6,222 $800,818 $3,516 $5,437 $442,363 
Derivatives not designated as accounting hedges
Interest rate contracts
Swaps$150 $150 $53,952 $218 $218 $54,390 
Interest rate lock commitments226 — 8,570 71 — 3,907 
Forward commitments to sell mortgage-backed securities— 53 10,750 32 — 10,198 
Total derivatives not designated as accounting hedges$376 $203 $73,272 $321 $218 $68,495 
The following table presents amounts recorded in the consolidated balance sheets related to cumulative basis adjustments for fair value hedges.
Carrying amount of the hedged itemsCumulative amount of fair value hedging adjustment included in the carrying amount of the hedged items
(dollars in thousands)March 31, 2025December 31, 2024March 31, 2025December 31, 2024
Investment securities available for sale$373,958 $286,982 $1,837 $3,323 
Statement of Income Presentation
The following table summarizes the effect of derivative instruments in fair value hedging relationships on the consolidated statements of income.
Location of gain (loss) recognized in income on derivativeGain (loss) recognized in income on derivativeLocation of gain (loss) recognized in income on related hedged itemGain (loss) recognized in income on related hedged items
(dollars in thousands)2025202420252024
Three Months Ended March 31,
Gain (loss) on fair value hedging relationships
Interest rate contracts
Fixed-rate mortgage-backed securitiesInterest income on investment securities available for sale$(3,486)$1,015 Interest income on investment securities available for sale$3,491 $(1,018)
The following table summarizes the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income.
Gain (loss) recognized in AOCI on derivativeLocation of gain (loss) recognized in income on derivativeGain (loss) reclassified from AOCI into income
(dollars in thousands)2025202420252024
Three Months Ended March 31,
Gain (loss) on cash flow hedging relationships
Interest rate contracts
Pools of commercial and commercial real estate loans$1,117 $(3,070)Interest income on loans$(1,005)$(1,546)
Investment securities available for sale446 — Interest income on investment securities28 — 
FHLB advances, brokered CDs and other borrowings(699)1,423 Interest expense140 194 
Total loss on cash flow hedging relationships$864 $(1,647)$(837)$(1,352)
During the next 12 months, we estimate $1.5 million of losses will be reclassified into pretax earnings from derivatives designated as cash flow hedges.
The following table summarizes the effect of derivative instruments not designated as accounting hedges on the consolidated statements of income.
Location of gain recognized in income on derivativeThree Months Ended March 31,
(dollars in thousands)20252024
Three Months Ended March 31,
Gain on derivative instruments not designated as accounting hedges
Interest rate contractsResidential mortgage banking revenue$70 $117 
Total gain on derivative instruments not designated as accounting hedges$70 $117 
Credit Enhancement Derivatives
The Company has recognized derivative instruments associated with agreements entered into with third-party providers that support loan programs for which the Company originates and holds loans on its balance sheet. Th third-party agreements include contractual credit enhancements that transfer certain risks and benefits to or from the Company, resulting in recognition of a derivative. The value of this derivative consists primarily of two components: (1) the credit loss reimbursement value, representing the present value of expected future payments from the third party for loan losses, and (2) the interest yield guarantee value, representing the present value of cash flows the Company expects to receive to ensure a minimum yield on the portfolio when actual borrower payments fall short.
The fair value of the derivatives was $5.6 million and $16.8 million as of March 31, 2025 and December 31, 2024, respectively. The Company utilizes a third-party valuation specialist to estimate fair value using the income approach, based on the present value of expected future cash flows. The valuation relies on Level 3 unobservable inputs, including assumptions
regarding credit loss rates, borrower prepayments, program yield performance, and discount rates. Changes in fair value are recorded in noninterest income, and the Company does not apply hedge accounting to these instruments
The following table summarizes the most significant inputs and assumptions in determining the value of the credit enhancement derivatives as well as the resulting fair value as of March 31, 2025 and December 31, 2024:
March 31, 2025December 31, 2024
Weighted average interest rate9.50 %9.50 %
Implied/selected cohort default rate (CDR)15.00 %15.00 %
Selected LGD85.00 %85.00 %
Annual expected loss12.75 %12.75 %
Credit mark(21.86)%(20.66)%
Interest mark11.80 %10.04 %
Fair value of derivative10.06 %10.61 %