v3.26.1
Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2026
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments

11. DERIVATIVE FINANCIAL INSTRUMENTS

 

Derivatives Not Designated as Hedging Instruments

 

As part of its ongoing asset/liability management strategy, the Company utilizes interest rate swap agreements (“swaps”) to manage exposure to interest rate risk. As of June 30, 2026, the Company has entered into 97 interest-rate swap agreements with customers with an aggregate notional amount totaling $277.6 million. Under the terms of the interest rate swap agreements with customers, the Company pays a variable rate and receives a fixed rate. Concurrently, the Company entered into a corresponding offsetting swap with a third-party financial institution to mitigate the Company's interest rate risk exposure arising from the customer swap. The net effect of these arrangements allows the Company to retain a variable rate loan exposure, while providing the customer with economic equivalent of a fixed rate loan. The variable rate received by the Company is based on Secured Overnight Financing Rate (“SOFR”) plus a contractual spread.

 

These swaps do not qualify for hedge accounting and are accounted for as freestanding derivatives. Accordingly, these instruments are recorded at fair value as components of other assets and other liabilities on the Company’s consolidated balance sheet. Changes in the fair value of these swaps are recognized in the Company’s statement of earnings as a component of noninterest income. The changes in the fair value of the customer swaps and the corresponding counterparty swaps generally offset each other; therefore, these derivative instruments are not expected to have a material impact on the Company’s results of operations. However, the Company is exposed to credit risk related to both customer and counterparty’s performance under these agreements. The swaps are subject to a master netting arrangement with its counterparties and include provisions that require the posting of collateral when the fair value of the derivative exceeds certain agreed upon threshold limits.

 

Management believes that the potential credit risk associated with customer interest rate swaps is mitigated through the loan underwriting process that consider the additional exposure arising from the related derivative, as well as through ongoing monitoring of counterparty creditworthiness. Nevertheless, these derivatives are subject to market and counterparty credit risk, and there can be no assurance that mitigation efforts will be fully effective.

 

Derivatives Designated as Hedging Instruments

 

Fair Value Hedges

 

To manage interest rate risk associated with our AFS MBS securities portfolio, the Company entered into pay-fixed, receive-floating interest rate swap contracts to hedge exposure to changes in the fair value of the hedged portfolio attributable to changes in interest rates. These interest rate swap contracts are designated as fair value hedges that qualify for hedge accounting under ASC 815, Derivatives and Hedging. The Company has elected to apply the portfolio layer method for these fair value hedges in accordance with ASU 2022-01. Under this method, the hedged item is defined as a stated amount of the closed AFS portfolio. Basis adjustments resulting from hedge accounting are recorded at the portfolio level and are not allocated to individual securities. These basis adjustments impact the unrealized gains and losses of the AFS securities within the closed portfolio and are reflected in accumulated other comprehensive income (“AOCI”). The related interest rate swaps are recorded within other assets and other liabilities on our consolidated balance sheet. For qualifying fair value hedges, changes in the fair value of the derivative instruments are recorded through earnings and offset against changes in the fair value of the hedged portfolio layer attributable to the hedged risk. Amounts recognized in earnings are recorded in “investment securities available-for-sale” as part of interest income in the consolidated statements of earnings, consistent with the classification of the hedged AFS securities.

 

In May 2025, the Company terminated $700 million notional of pay-fixed interest rate swaps with a weighted average fixed rate of approximately 3.7%, which were originally scheduled to mature in June of 2028. These swaps were 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%. At June 30, 2026 and December 31, 2025, interest rate swaps with an aggregate notional amount of $700 million were designated as fair value hedges.

 

Cash Flow Hedges

 

To manage our interest rate risk associated with brokered certificates of deposit (“CDs”), FHLB advances or other fixed rate advances, the Company enters into interest rate derivative contracts designated as qualifying cash flow hedges to mitigate the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate. In 2024, the Company issued $300 million of three-month term brokered CDs and entered into three-year pay-fixed, receive-floating interest rate swaps with a notional amount of $300 million maturing in the first quarter of 2027. The swaps carry a weighted average fixed rate of approximately 4.10%, with the Company receiving daily SOFR. During the second quarter of 2026, upon the maturity of the brokered CDs, the Company replaced the funding with two $150 million, three-month FHLB advances and redesignated the related interest rate swaps as cash flow hedges of the variable cash flows associated with those advances.

 

To qualify for hedge accounting, the Company performs a formal effectiveness assessment at inception using statistical regression analysis, and continues to monitor effectiveness each reporting period through quantitative or qualitative methods. If a hedge is determined to be ineffective, hedge accounting is discontinued and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets or 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 hedged item. As of June 30, 2026, the Company estimates that a net loss of approximately $293,000 reported in AOCI will be reclassified into earnings within the next 12 months.

 

Balance Sheet Classification of Derivative Financial Instruments

 

As of June 30, 2026 and December 31, 2025, the notional amount, the location of the asset and liability, and their respective fair values, are summarized in the tables below.

 

 

 

June 30, 2026

 

 

 

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

 

$

277,647

 

 

Other assets

 

$

25,321

 

 

$

277,647

 

 

Other liabilities

 

$

25,321

 

Total derivatives

 

 

 

 

 

 

$

25,321

 

 

 

 

 

 

 

$

25,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges: interest rate swaps

 

$

700,000

 

 

Other assets

 

$

3,820

 

 

$

—

 

 

Other liabilities

 

$

—

 

Cash flow hedges: interest rate swaps

 

 

—

 

 

Other assets

 

 

—

 

 

 

300,000

 

 

Other liabilities

 

 

414

 

Total

 

 

 

 

 

 

$

3,820

 

 

 

 

 

 

 

$

414

 

 

 

 

 

December 31, 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

 

$

318,385

 

 

Other assets

 

$

161

 

 

$

318,385

 

 

Other liabilities

 

$

161

 

Total derivatives

 

 

 

 

 

 

$

161

 

 

 

 

 

 

 

$

161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges: interest rate swaps

 

$

—

 

 

Other assets

 

$

—

 

 

$

700,000

 

 

Other liabilities

 

$

8,650

 

Cash flow hedges: interest rate swaps

 

 

—

 

 

Other assets

 

 

—

 

 

 

300,000

 

 

Other liabilities

 

 

2,619

 

Total

 

 

 

 

 

 

$

—

 

 

 

 

 

 

 

$

11,269

 

 

The following table presents amounts recorded on our condensed consolidated balance sheet related to cumulative basis adjustments for fair value hedges as of the dates indicated.

 

 

 

Amortized Cost of the Hedged Assets

 

 

Cumulative Amount of Fair Value Hedging Adjustments included in the Carrying Amount of the Hedged Assets

 

 

 

June 30, 2026

 

 

December 31, 2025

 

 

June 30, 2026

 

 

December 31, 2025

 

 

 

(Dollars in thousands)

 

Line Item in the Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale (1)

 

$

1,634,283

 

 

$

1,719,962

 

 

$

(2,038

)

 

$

10,866

 

Total

 

$

1,634,283

 

 

$

1,719,962

 

 

$

(2,038

)

 

$

10,866

 

 

(1)
These amounts were included in the amortized cost basis of closed portfolios of available-for-sale securities designated in hedging relationships in which the hedged item is the stated amount of assets in the closed portfolios anticipated to be outstanding for the designated hedge period. At June 30, 2026 and December 31, 2025, the amortized cost basis of the closed portfolios used in these hedging relationships was $1.6 billion and $1.7 billion, respectively. The cumulative basis adjustments associated with these hedging relationships were ($2.0) million and $10.9 million, respectively, of which $1.5 million and $1.5 million, respectively, related to discontinued hedging relationships. At June 30, 2026 and December 31, 2025, the notional amount of the designated hedged items was $700.0 million.

 

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

 

The following table summarizes the effect of derivatives not designated as hedging 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,

 

 

 

 

 

2026

 

 

2025

 

 

2026

 

 

2025

 

 

 

 

 

(Dollars in thousands)

 

Derivatives Not Designated
  as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Interest rate swaps

 

Other income

 

$

41

 

 

$

—

 

 

$

41

 

 

$

—

 

Total

 

 

 

$

41

 

 

$

—

 

 

$

41

 

 

$

—

 

 

The following table summarizes the effect of fair value and cash flow hedge on the condensed consolidated statements of earnings for the periods presented.

 

 

 

Location of Gain Recognized in
Income on Derivative Instruments

 

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

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

2026

 

 

2025

 

 

2026

 

 

2025

 

 

 

 

 

(Dollars in thousands)

 

Derivatives Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Fair value hedges:
     interest rate swaps

 

Interest income

 

$

(149

)

 

$

1,257

 

 

$

(245

)

 

$

2,309

 

   Cash flow hedges:
     interest rate swaps

 

Interest expense

 

 

(368

)

 

 

162

 

 

 

(700

)

 

 

330

 

Total

 

 

 

$

(517

)

 

$

1,419

 

 

$

(945

)

 

$

2,639