v3.25.2
Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2025
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments

9. DERIVATIVE FINANCIAL INSTRUMENTS

 

Derivatives Not Designated as Hedging Instruments

 

The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of June 30, 2025, the Bank has entered into 108 interest-rate swap agreements with customers with a notional amount totaling $352.7 million. The Bank then entered into identical offsetting swaps with counterparties. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

 

The structure of the swaps is as follows. The Bank enters into an interest rate swap with its customers in which the Bank pays the customer a variable rate and the customer pays the Bank a fixed rate, therefore allowing customers to convert variable rate loans to fixed rate loans. At the same time, the Bank enters into a swap with a counterparty bank in which the Bank pays the counterparty a fixed rate and the counterparty in return pays the Bank a variable rate. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on SOFR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations, although the Company does incur credit and counterparty risk with respect to performance on the swap agreements by the Bank’s customer and counterparty, respectively. These instruments contain language outlining collateral pledging requirements for each counterparty, in which collateral must be posted if market value exceeds certain agreed upon threshold limits. Cash or securities are pledged as collateral. Our interest rate swap derivatives are subject to a master netting arrangement with our counterparties. None of our derivative assets and liabilities are offset in the Company’s condensed consolidated balance sheet.

 

We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.

 

Derivatives Designated as Hedging Instruments

 

Fair Value Hedges

 

To manage interest rate risk on our AFS securities portfolio, we have entered into pay-fixed, receive-floating interest rate swap contracts to hedge against exposure to changes in the fair value of such securities resulting from changes in interest rates. We designate these interest rate swap contracts as fair value hedges that qualify for hedge accounting under ASC 815, Derivatives and Hedging. We elected to account for the fair value hedges using the portfolio layer method in accordance with ASU 2022-01. We record the interest rate swaps in the line items "accrued interest receivable and other assets" and "other liabilities" on our consolidated balance sheet. For qualifying fair value hedges, both the changes in the fair value of the derivative and the portion of the fair value adjustments associated with the portfolio layer attributable to the hedged risk are recognized into earnings as they occur. Derivative amounts impacting earnings are recognized consistent with the classification of the hedged item in the line item "investment securities available for sale" as part of interest income, a component of consolidated net income.

 

In June 2023, fair value hedging transactions were executed in which $1 billion notional pay-fixed interest rate swaps were consummated with maturities ranging from four to five years, wherein the Company pays a weighted average fixed rate of approximately 3.8% and receives daily SOFR. In December 2024, we terminated one of these swaps which had a notional value of $300 million, a maturity date of June 2027, and a pay-fixed rate of 3.95%. In May 2025, the remaining $700 million notional pay-fixed interest rate swaps, with a weighted average fixed rate of approximately 3.7%, that were scheduled to mature in June of 2028 were terminated and replaced with new pay-fixed interest rate swaps with maturity dates in May of 2029, 2030 and 2031, with a weighted pay-fixed rate of 3.68%. The new $700 million of fair value hedges have approximately equal nominal values maturing each of the three years and had a fair value which totaled $9.6 million and was reflected as a liability at June 30, 2025.

 

Cash Flow Hedges

 

To manage our interest rate risk associated with brokered CDs, FHLB advances or other fixed rate advances for specified periods, the Company enters into interest rate derivative contracts that are designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rates. During

the first quarter of 2024, $300 million of 3-month term brokered CDs were issued and cash flow hedging transactions were also executed in which $300 million notional pay-fixed interest rate swaps were consummated with maturities of three years, wherein the Company pays a weighted average fixed rate of approximately 4.2% and receives daily SOFR. The $300 million of brokered CDs were renewed for 3-month terms during the second quarter of 2025 and as of June 30, 2025, the cash flow hedges have remaining maturities of approximately 20 months.

 

To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge. At inception a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed to determine hedge effectiveness. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax. All related cash flows are reported in the operating activities section of the consolidated statement of cash flows. Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability.

 

Balance Sheet Classification of Derivative Financial Instruments

 

As of June 30, 2025 and December 31, 2024, the notional amount, the location of the asset and liability, and their respective fair values, are summarized in the tables below.

 

 

 

June 30, 2025

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

Notional

 

 

Balance Sheet Location

 

Fair Value

 

 

Notional

 

 

Balance Sheet Location

 

Fair Value

 

 

 

(Dollars in thousands)

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

352,677

 

 

Other assets

 

$

188

 

 

$

352,677

 

 

Other liabilities

 

$

188

 

Total derivatives

 

 

 

 

 

 

$

188

 

 

 

 

 

 

 

$

188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges: interest rate swaps

 

$

700,000

 

 

Other assets

 

$

—

 

 

 

 

 

Other liabilities

 

$

9,585

 

Cash flow hedges: interest rate swaps

 

 

 

 

Other assets

 

 

—

 

 

 

300,000

 

 

Other liabilities

 

 

2,855

 

Total

 

 

 

 

 

 

$

—

 

 

 

 

 

 

 

$

12,440

 

 

 

 

 

December 31, 2024

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

Notional

 

 

Balance Sheet Location

 

Fair Value

 

 

Notional

 

 

Balance Sheet Location

 

Fair Value

 

 

 

(Dollars in thousands)

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

363,440

 

 

Other assets

 

$

30

 

 

$

363,440

 

 

Other liabilities

 

$

30

 

Total derivatives

 

 

 

 

 

 

$

30

 

 

 

 

 

 

 

$

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges: interest rate swaps

 

$

700,000

 

 

Other assets

 

$

7,222

 

 

$

—

 

 

Other liabilities

 

$

—

 

Cash flow hedges: interest rate swaps

 

 

—

 

 

Other assets

 

 

—

 

 

 

300,000

 

 

Other liabilities

 

 

517

 

Total

 

 

 

 

 

 

$

7,222

 

 

 

 

 

 

 

$

517

 

 

 

The Effect of Derivatives Financial Instruments on the Condensed Consolidated Statements of Earnings

 

The following table summarizes the effect of derivative financial instruments on the condensed consolidated statements of earnings for the periods presented.

 

 

 

Location of Gain Recognized in
Income on Derivative Instruments

 

Amount of Gain Recognized in
Income on Derivative Instruments

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

2025

 

 

2024

 

 

2025

 

 

2024

 

 

 

 

 

(Dollars in thousands)

 

Derivatives Not Designated
  as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Interest rate swaps

 

Other income

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Total

 

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

 

 

Location of Gain Recognized in
Income on Derivative Instruments

 

Amount of Gains (Losses) Recognized in Interest
Income on Derivative Instruments

OCI Impact on Derivatives-Gains (Losses) recorded in OCI

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

2025

 

 

2024

 

 

2025

 

 

2024

 

 

2025

 

 

2024

 

 

2025

 

 

2024

 

 

 

 

 

(Dollars in thousands)

(Dollars in thousands)

 

Derivatives Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Fair value hedges: interest rate swaps

 

Interest income

 

$

1,257

 

 

$

4,097

 

 

$

2,309

 

 

$

7,784

 

 

$

(6,124

)

 

$

1,888

 

 

$

(6,905

)

 

$

14,758

 

   Cash flow hedges: interest rate swaps

 

Interest expense

 

 

162

 

 

 

918

 

 

 

330

 

 

 

1,096

 

 

 

(425

)

 

 

560

 

 

 

(2,015

)

 

 

1,116

 

Total

 

 

 

$

1,419

 

 

$

5,015

 

 

$

2,639

 

 

$

8,880

 

 

$

(6,549

)

 

$

2,448

 

 

$

(8,920

)

 

$

15,874