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DERIVATIVES AND HEDGING ACTIVITIES
 12 Months Ended
Dec. 31, 2025
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVES AND HEDGING ACTIVITIES

11.DERIVATIVES AND HEDGING ACTIVITIES

 

Risk Management Objective of Using Derivatives.

 

The Company is exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our assets and liabilities and the use of derivative financial instruments. Specifically, we entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to certain variable rate loan assets and variable rate borrowings.

Fair Value Hedges of Interest Rate Risk.

 

The Company is exposed to changes in the fair value of certain pools of fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. The Company's interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements 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.

 

In October of 2024, $200 million in notional amount of designated fair value hedges matured. As of December 31, 2024, the Company did not have any outstanding fair value hedges on the balance sheet at December 31, 2025 and December 31, 2024.

 

Non-hedging Derivatives.

 

Derivatives not designated as hedges are not speculative, but rather result from a service the Company provides to certain customers. The Company executes loan-level derivative products such as interest-rate swap agreements with commercial banking customers to aid them in managing their interest-rate risk by converting floating-rate loan payments to fixed-rate loan payments. The Company concurrently enters into offsetting swaps with a third-party financial institution, effectively minimizing the Company’s net risk exposure resulting from such transactions. The third-party financial institution exchanges the customer's fixed-rate loan payments for floating-rate loan payments. As the interest-rate swap agreements associated with this program do not meet hedge accounting requirements, changes in the fair value are recognized directly in earnings.

 

Fair Values of Derivative Instruments on the Balance Sheet.

 

The tables below present the fair value of our derivative financial instruments designated as hedging and non-hedging instruments as well as our classification on the balance sheet as of December 31, 2025 and December 31, 2024.

 

December 31, 2025  Asset Derivatives  Liability Derivatives
   Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
   (Dollars in thousands)
    
Derivatives not designated as hedging instruments:   
Interest rate swap – with customer counterparties     $821      $4,142 
Interest rate swap – with dealer counterparties      4,142       821 
Total derivatives  Other Assets  $4,963   Other Liabilities  $4,963 

 

December 31, 2024  Asset Derivatives  Liability Derivatives
   Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
   (Dollars in thousands)
    
Derivatives not designated as hedging instruments:   
Interest rate swap – with customer counterparties     $—      $5,883 
Interest rate swap – with dealer counterparties      5,883       — 
Total derivatives  Other Assets  $5,883   Other Liabilities  $5,883 

 

 

Effect of Derivative Instruments in the Consolidated Statements of Net Income.

 

The table below presents the effect of the Company’s derivative financial instruments on the statements of net income for the years ended December 31, 2024 and 2023. There were no gains or losses on fair value hedging relationships recorded through interest income for the year ended December 31, 2025.

 

         
     Location and Amount of Gain (Loss) Recognized in Income on Fair Value Hedging Relationships 
   Year Ended December 31, 
   2024   2023 
   (Dollars in thousands) 
         
Balance sheet location  Interest Income   Interest Income 
Total amounts of income line items presented in the statements of net income in which the effects of fair value hedges are recorded  $1,398   $1,085 
           
Gain (loss) on fair value hedging relationships          
Interest rate contracts:          
Hedged items  $607   $(607)
Derivatives designated as hedging instruments   791    1,692 

 

There were no gains or losses recognized in accumulated other comprehensive income related to derivative financial instruments during the years ended December 31, 2025 and December 31, 2024, respectively.

 

Credit-risk-related Contingent Features

 

By using derivative financial instruments, we expose ourselves to credit risk. Credit risk is the risk of failure by the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative is negative, we owe the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that we believe to be creditworthy and by limiting the amount of exposure to each counterparty.

 

We have agreements with our derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. We also have agreements with certain of our derivative counterparties that contain a provision where if we fail to maintain our status as well capitalized, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements. Certain of our agreements with our derivative counterparties contain provisions where if a formal administrative action by a federal or state regulatory agency occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.

 

At December 31, 2025, we had minimum collateral posting thresholds with certain of our derivative counterparties. As of December 31, 2025, we were not required to post collateral under these agreements because we did not have any derivatives in a net liability position with those counterparties.