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

NOTE 9 — DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes interest rate swaps and options agreements as part of its asset-liability management strategy to help mitigate its interest rate risk. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. Derivative financial instruments are recorded in the Consolidated Balance Sheets as either an asset or a liability (in other assets or other liabilities, respectively) and measured at fair value.

The Company presents derivative position gross on the balance sheet. The following tables reflects the derivatives recorded on the balance sheet as of the dates indicated:

 

 

Included in Other Assets

 

 

Included in Other Liabilities

 

(In thousands of dollars)

 

Notional

 

 

Fair

 

 

Notional

 

 

Fair

 

June 30, 2026

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Derivatives designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

    Interest rate swaps related to
       cash flow hedges

 

$

25,000

 

 

$

3,044

 

 

$

-

 

 

$

-

 

    Interest rate collars related to
       cash flow hedges

 

 

150,000

 

 

 

357

 

 

 

-

 

 

 

-

 

    Interest rate swaps related to
       fair value hedges

 

 

25,535

 

 

 

2,160

 

 

 

-

 

 

 

-

 

    Total

 

 

 

 

$

5,561

 

 

 

 

 

$

-

 

 

 

 

Included in Other Assets

 

 

Included in Other Liabilities

 

(In thousands of dollars)

 

Notional

 

 

Fair

 

 

Notional

 

 

Fair

 

December 31, 2025

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Derivatives designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

    Interest rate swaps related to
       cash flow hedges

 

$

75,000

 

 

$

2,931

 

 

$

-

 

 

$

-

 

    Interest rate collars related to
       cash flow hedges

 

 

150,000

 

 

 

1,195

 

 

 

-

 

 

 

-

 

    Interest rate swaps related to
       fair value hedges

 

 

25,535

 

 

 

2,009

 

 

 

-

 

 

 

-

 

    Total

 

 

 

 

$

6,135

 

 

 

 

 

$

-

 

The Company did not have any derivatives that are not designated as hedges as of June 30, 2026 and December 31, 2025.

Fair Value Hedges

Fair value hedge interest rate swaps mature on various dates with a combined notional amount of $25.5 million at June 30, 2026 and December 31, 2025. The risk management objective with respect to the fair value hedges is to hedge the interest rate risk associated with longer duration municipal securities. These fair value hedges convert the fixed rates of the bonds to a floating leg of the overnight Secured Overnight Financing Rate ("Overnight SOFR") + 26.161 basis points. The hedges were determined to be effective during the periods presented. The Company expects these hedges to remain effective during the remaining term of the swap.

The following table presents the amounts recorded on the balance sheet related to cumulative basis adjustment for the fair value hedges as of June 30, 2026 and December 31, 2025:

 

 

 

 

 

 

 

 

Cumulative Amount of Fair

 

Line Item in the

 

 

 

 

 

 

 

Value Hedging Adjustment

 

Balance Sheet in

 

 

 

 

Included in the Carrying

 

Which the Hedged

 

Carrying Amount

 

 

Amount of the

 

Item is Included

 

of the Hedged Assets

 

 

Hedged Assets

 

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

(In thousands of dollars)

 

2026

 

 

2025

 

 

2026

 

 

2025

 

Securities available-for-sale

 

$

23,537

 

 

$

23,725

 

 

$

(2,262

)

 

$

(2,109

)

As of June 30, 2026 and December 31, 2025, the total notional amount of the pay-fixed/receive variable interest rate swap portfolio was $25.5 million. There were no hedging adjustments on the balances above for discontinued relationships.

The following table summarizes information about the interest rate swaps designated as fair value hedges at June 30, 2026:

(Dollars in thousands)

 

 

 

Notional amount of fair value hedges

 

$

25,535

 

Weighted average maturity in years

 

 

3.49

 

 

The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item for the periods indicated:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands of dollars)

 

2026

 

 

2025

 

 

2026

 

 

2025

 

Interest rate contracts: Gain or (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swaps hedging
   available-for-sale securities

 

$

122

 

 

$

(380

)

 

$

151

 

 

$

(891

)

Change in fair value of hedged available-for-sale securities

 

$

(123

)

 

$

388

 

 

$

(153

)

 

$

907

 

The following table presents the effect of fair value hedge accounting on the Consolidated Statements of Income and the location and amount of gain or (loss) recognized in income on fair value hedging relationships for the periods indicated:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2026

 

 

2025

 

 

2026

 

 

2025

 

 

 

Interest Income

 

 

Interest Income

 

 

Interest Income

 

 

Interest Income

 

(In thousands of dollars)

 

(Offset to AOCI)

 

 

(Offset to AOCI)

 

 

(Offset to AOCI)

 

 

(Offset to AOCI)

 

Gain or (loss) on fair value hedging relationships

 

 

 

 

 

 

 

 

 

 

 

 

Interest contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swaps hedging
   available-for-sale securities

 

$

122

 

 

$

(380

)

 

$

151

 

 

$

(891

)

Change in fair value of hedged available-for-sale securities

 

$

(123

)

 

$

388

 

 

$

(153

)

 

$

907

 

Cash Flow Hedges

A cash flow hedge interest rate collar that matures on November 30, 2028 had a notional amount of $75.0 million as of June 30, 2026. The risk management objective with respect to this cash flow hedge is to hedge forecasted interest receipts indexed to the next $75.0 million of USD-SOFR CME variable rate loans from November 30, 2025 to November 30, 2028. The Company designates the $75.0 million interest rate collar (the hedging instrument) as a cashflow hedge, hedging the risk of changes in its cashflows when the contractually specified interest rate, currently USD-SOFR CME, settles between 3.25% to 1.00% and between 5.25% to 6.55%. The Company's interest receipts are being hedged for changes in the USD-SOFR CME rate. The hedging instrument includes a sold 1.00% floor to offset the asset’s embedded 1.00% floor. The offsetting higher 6.55% strike cap was included to ensure alignment with ASC 815-20-25-89(d) wherein the notional amount of the written option is not greater than the notional amount of the purchased component This hedge was determined to be effective during the periods presented. The Company expects the hedge to remain effective during the remaining term of the option.

A cash flow hedge interest rate collar that matures on November 30, 2028 had a notional amount of $75.0 million as of June 30, 2026. The risk management objective with respect to this cash flow hedge is to hedge forecasted interest receipts indexed to the next $75.0 million of Prime rate assets from November 30, 2025 to November 30, 2028. The Company designates the $75.0 million interest rate collar (the hedging instrument) as a cash flow hedge, hedging the risk of changes in its cashflows if the contractually specified interest rate, currently Prime, settles between 6.50% to 4.25% and between 8.50% to 9.80%. The Company's interest receipts are being hedged for changes in the Prime rate. The SOFR hedging instrument includes a sold 1.00% SOFR floor to offset the Prime asset’s embedded 4.25% Prime floor. These strikes are arrived at by analysis showing a historically static spread of 325 basis points between SOFR and Prime indices and by which the interest rate derivatives market also uses in its construction of interest rate curves. The offsetting higher 6.55% SOFR strike cap (equivalent to a 9.80% Prime cap) was included to ensure alignment with 815-20-25-89(d) wherein the notional amount of the written option is not greater than the notional amount of the purchased component. This hedge was determined to be effective during the periods presented. The Company expects the hedge to remain effective during the remaining term of the option.

A cash flow hedge interest rate swap that matures on October 21, 2030 had a notional amount of $25.0 million as of June 30, 2026. The risk management objective with respect to the cash flow hedge is to hedge the risk of variability in the Company’s cash flows (future interest payments) attributable to changes in the 3-month LIBOR rate pertaining to fluctuations in market interest rates on $25.0 million of FHLBA, brokered certificates of deposit or other fixed rate advances for that period. The objective of the hedge is to offset the variability of cash flows due to the rollover of its fixed-rate 3-month FHLBA or another fixed rate advance every quarter from October 31, 2022 to October 21, 2030. After June 30, 2023, both LIBOR hedge and hedged item converted to Overnight SOFR as hedged item utilizes a benchmark rate component. The hedge was determined to be effective during the periods presented. The Company expects the hedge to remain effective during the remaining term of the swap.

The tables below present the gains and (losses) recognized in accumulated other comprehensive income ("AOCI") and the location in the Consolidated Statements of Income of the gains and (losses) reclassified from other comprehensive income ("OCI") into earnings for derivatives designated as cash flow hedges for the periods indicated:

Three Months Ended June 30, 2026

 

(In thousands of dollars)

 

Derivatives in Cash Flow Hedging Relationships

 

Amount of Gain (Loss) Recognized in OCI on Derivative

 

 

Location of Gain (Loss) Reclassified from OCI into Income

 

Amount of Gain (Loss) Reclassified from OCI into Income (pre-tax)

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

Interest income (expense)

 

 

 

Effective portion

 

$

(196

)

 

Effective portion

 

$

179

 

Deferred tax

 

$

(84

)

 

Amount excluded from the assessment
of effectiveness and amortized into earnings

 

$

(108

)

 

Three Months Ended June 30, 2025

 

(In thousands of dollars)

 

Derivatives in Cash Flow Hedging Relationships

 

Amount of Gain (Loss) Recognized in OCI on Derivative

 

 

Location of Gain (Loss) Reclassified from OCI into Income

 

Amount of Gain (Loss) Reclassified from OCI into Income (pre-tax)

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

Interest income (expense)

 

 

 

Effective portion

 

$

92

 

 

Effective portion

 

$

312

 

Deferred tax

 

$

28

 

 

Amount excluded from the assessment
of effectiveness and amortized into earnings

 

$

(308

)

 

Six Months Ended June 30, 2026

 

(In thousands of dollars)

 

Derivatives in Cash Flow Hedging Relationships

 

Amount of Gain (Loss) Recognized in OCI on Derivative

 

 

Location of Gain (Loss) Reclassified from OCI into Income

 

Amount of Gain (Loss) Reclassified from OCI into Income (pre-tax)

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

Interest income (expense)

 

 

 

Effective portion

 

$

(239

)

 

Effective portion

 

$

364

 

Deferred tax

 

$

(122

)

 

Amount excluded from the assessment
of effectiveness and amortized into earnings

 

$

(215

)

 

Six Months Ended June 30, 2025

 

(In thousands of dollars)

 

Derivatives in Cash Flow Hedging Relationships

 

Amount of Gain (Loss) Recognized in OCI on Derivative

 

 

Location of Gain (Loss) Reclassified from OCI into Income

 

Amount of Gain (Loss) Reclassified from OCI into Income (pre-tax)

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

Interest income (expense)

 

 

 

Effective portion

 

$

(190

)

 

Effective portion

 

$

622

 

Deferred tax

 

$

(104

)

 

Amount excluded from the assessment
of effectiveness and amortized into earnings

 

$

(482

)

Gains and losses on interest rate swaps related to funding liabilities are recorded in interest income/expense. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of OCI in the Consolidated Statements of Changes in Shareholders’ Equity. These

changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in other income or expense.

The following tables summarizes information about the interest rate swaps and option collar designated as a cash flow hedge at June 30, 2026:

(Dollars in thousands)

 

 

 

Notional Amount - Pay Fixed Swap

 

$

25,000

 

Weighted average fixed pay rate

 

 

1.06

%

Weighted average 3-month receive rate

 

 

3.90

%

Weighted average maturity in years

 

 

4.31

 

During the next twelve months, the Company estimates that will be
   reclassified from OCI as a decrease to interest expense

 

$

591

 

During the next twelve months, the Company estimates that will be
   reclassified from Deferred Tax as a decrease to interest expense

 

$

187

 

 

(Dollars in thousands)

 

 

 

Notional Amount Collar

 

$

150,000

 

Weighted average bought floor strike

 

 

3.25

%

Weighted average sold floor strike

 

 

1.00

%

Weighted average bought cap strike

 

 

6.55

%

Weighted average sold cap strike

 

 

5.25

%

Weighted average maturity in years

 

2.42

 

During the next twelve months, the Company estimates that will be
   reclassified from OCI as a decrease to interest income

 

$

330

 

During the next twelve months, the Company estimates that will be
   reclassified from Deferred Tax as a decrease to interest income

 

$

104