v3.25.4
Derivatives and Hedging Activities
 6 Months Ended
Dec. 31, 2025
General Discussion of Derivative Instruments and Hedging Activities [Abstract]  
Derivatives and Hedging Activities

6. DERIVATIVES AND HEDGING ACTIVITIES

The Company is exposed to changes in the fair value of certain of its pools of fixed-rate assets due to changes in benchmark interest rates. In the prior quarter, the Company entered into an interest rate swap agreement to manage its exposure to changes in the fair value of these instruments attributable to changes in the designated benchmark interest rate. The interest rate swap agreement is designated as a fair value hedge and involves the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreement without the exchange of the underlying notional amount. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

Interest Rate Swaps

An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. The Company has entered into an interest rate swap in which it pays fixed and receives floating rate interest in order to manage its interest rate risk exposure to the changes in fair value on certain fixed-rate investments. For interest rate swaps that are accounted for as

fair value hedges, changes in fair value are included in net income. The following table reflects the Company’s derivative position for an interest rate swap which qualifies as fair value hedges for accounting purposes as of December 31, 2025:

 

 

 

 

 

 

Weighted Average Rate

 

 

 

 

 

Notional Amount

 

 

Weighted Average Maturity

 

Fixed Rate Paid

 

 

Current SOFR Rate Received

 

 

Fair Value

 

 

(in thousands)

 

 

(in years)

 

 

 

 

 

 

 

(in thousands)

 

Interest rate swap on investments

 

 

9,583

 

 

7.9 yrs

 

 

3.74

%

 

 

3.82

%

 

$

118

 

The table below presents the fair value of the Company’s derivative financial instrument, as well as the classification on the Consolidated Balance Sheet as of December 31, 2025:

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

Balance Sheet

 

Fair Value at

 

 

Balance Sheet

 

Fair Value at

 

 

Location

 

December 31, 2025

 

 

Location

 

December 31, 2025

 

 

(in thousands)

 

Interest rate swap on investments

 

Securities

 

$

118

 

 

Other Liabilities

 

$

118

 

The Company has an agreement with its derivative counterparty that contains a provision where if the Company 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, and it could be required to terminate its derivative positions with the counterparty. In order to mitigate counterparty default risk in conjunction with its derivative contract, the Company was required to maintain $200,000 of collateral in a deposit account with the counterparty as of December 31, 2025.

Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of the swap plus any initial margin collateral posted. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring credit losses on the derivative contract with the counterparty is remote.