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

Note 10.Derivatives Financial Instruments

Derivatives designated as fair value hedges:

Financial derivatives 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. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative net investment hedge 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 interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of certain fixed rate securities designated as available-for-sale. The hedging strategy converts the fixed interest rates to SOFR-based variable interest rates. These derivatives are designated as partial term hedges covering specified periods of time prior to the maturity date of the hedged securities. The Company adopted ASU 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities” in 2018, which allows such partial term hedge designations.

A summary of the Company’s fair value hedge relationships for the periods presented are as follows (dollars in thousands):

    

    

Weighted

    

    

    

    

 

Average

 

Balance

Remaining

Weighted

 

Sheet

Maturity

Average

Receive

Notional

Estimated

Asset/Liability derivatives

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value

June 30, 2025:

Interest rate swap agreements - securities

Other liabilities

 

1.20

 

4.31

%

SOFR

$

51,507

 

$

(394)

 

December 31, 2024:

Interest rate swap agreements - securities

 

Other liabilities

 

1.70

 

4.31

%

SOFR

$

51,507

 

$

(224)

The effects of the Company’s fair value hedge relationships reported in interest income on taxable securities on the consolidated income statement were as follows (in thousands):

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2025

2024

2025

2024

Interest income on taxable securities

 

$

4,846

$

5,177

$

9,620

$

9,620

Effects of fair value hedge relationships

 

2

 

143

 

3

 

249

Reported interest income on taxable securities

$

4,848

$

5,320

$

9,623

$

9,869

Three Months Ended

Six Months Ended

June 30, 

June 30, 

Gain (loss) on fair value hedging relationship

    

2025

2024

2025

2024

Interest rate swap agreements - securities:

 

 

  

  

 

  

  

Hedged items

 

$

(14)

$

123

$

(394)

$

114

Derivative designated as hedging instruments

14

(123)

394

(114)

Carry amount of hedged assets - mortgage-backed securities

48,617

47,132

48,617

47,132

Derivatives Designated as Cash Flow Hedges:

The Company enters into interest rate derivative contracts on assets and liabilities that are designated as qualifying cash flow hedges.  The Company hedges the exposure to variability in expected future cash flows attributable to changes in contractual specified interest rates.  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 offsetting cash flows attributable to the hedged risk.  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. 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 accumulated other comprehensive income (“AOCI”) is recognized in earnings immediately.  The cash flow hedges are recorded at fair value in other assets and liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax, see – Consolidated Statements of Comprehensive Income (Loss).  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, as future interest payments are made on the underlying assets.  At June 30, 2025, the Company estimates that there will not be any reclassifications into interest income or interest expense over the next 12 months.

At June 30, 2025 and December 31, 2024, cash flow hedges are as follows (in thousands):

June 30, 2025

December 31, 2024

Balance Sheet

Notional

Estimated

Balance Sheet

Notional

Estimated

Location

Amount

Fair Value

Location

Amount

Fair Value

Cash flow hedges:

Assets

Other assets

$

100,000

$

41

Other assets

$

-

$

-

Assets

Other liabilities

-

-

Other liabilities

100,000

(559)

Liabilities

Other assets

25,000

-

Other assets

-

-

Liabilities

Other liabilities

-

-

Other liabilities

150,000

(280)

The following table presents the effect of fair value and cash flow hedge accounting on AOCI (in thousands):

Derivatives in cash flow hedging relationships:

Amount of Gain (Loss) Recognized on OCI on Derivative

Location of Gain or (Loss) Recognized from AOCI into Income

Amount of Gain or (Loss) Reclassified from AOCI into Income

Three Months Ended June 30, 2025

Interest rate swaps - Assets

$

213

Interest income

$

(14)

Interest rate swaps - Liabilities

79

Interest expense

(74)

Three Months Ended June 30, 2024

Interest rate swaps - Assets

$

(80)

Interest income

$

(202)

Interest rate swaps - Liabilities

102

Interest expense

254

Six Months Ended June 30, 2025

Interest rate swaps - Assets

$

600

Interest income

$

(2)

Interest rate swaps - Liabilities

280

Interest expense

(237)

Six Months Ended June 30, 2024

Interest rate swaps - Assets

$

(1,201)

Interest income

$

(406)

Interest rate swaps - Liabilities

309

Interest expense

496

The following table presents the effect of fair value and cash flow hedge accounting on the income statement (in thousands):

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2025

2024

2025

2024

Total interest income

 

$

69,467

$

61,487

$

135,832

$

121,473

Effects of cash flow hedge relationships

 

(14)

 

(202)

 

(2)

 

(406)

Reported total interest income

$

69,453

$

61,285

$

135,830

$

121,067

Total interest expense

 

$

29,036

$

28,725

$

57,011

$

57,028

Effects of cash flow hedge relationships

 

74

 

(254)

 

237

 

(496)

Reported total interest expense

$

29,110

$

28,471

$

57,248

$

56,532

Non-hedged derivatives:

The Company provides a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a dealer bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. Since the income statement impact of the offsetting positions is limited, any changes in fair value are recognized as other noninterest income in the current period.

At June 30, 2025, and December 31, 2024, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):

June 30, 2025

December 31, 2024

Notional

Estimated

Notional

Estimated

Amount

Fair Value

Amount

Fair Value

Interest rate swap agreements:

Assets

$

484,139

$

13,487

$

393,268

$

12,135

Liabilities

484,139

(13,487)

393,268

(12,135)

The Company establishes limits and monitors exposures for customer swap positions.  Any fees received to enter the swap agreements at inception are recognized in earnings when received and is included in noninterest income.  Such fees were as follows (in thousands):

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2025

2024

2025

2024

Interest rate swap agreements

 

$

542

$

163

$

998

$

275

Collateral requirements:

These derivative rate contracts have collateral requirements, both at inception of the trade and as the value of each derivative position changes.  At June 30, 2025, and December 31, 2024, collateral totaling $150 thousand was pledged to the derivative counterparties to comply with collateral requirements.