Note 6: Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments, which consist of interest rate swaps, interest rate caps, and fair value swaps to assist in its interest rate risk management. The notional amount 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 agreements. Derivative financial instruments 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 and classification as either a cash flow hedge or fair value hedge for those derivatives which are designated as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

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Derivatives Designated as Hedging Instruments

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The Company uses derivative instruments to hedge its exposure to economic risks, including interest rate, liquidity and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP. On the date the Company enters into a derivative contract designated as a hedging instrument, the derivative is designated as either a fair value hedge or a cash flow hedge. When a derivative is designated as a fair value or cash flow hedge, the Company performs an assessment, at inception, and at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).

Fair value hedges: For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative 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 fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate available for sale securities. The hedging strategy converts the fixed interest rates to variable interest rates based on Secured Overnight Financing Rate (“SOFR”).

During the nine months ended September 30, 2026, the Company terminated certain fair value interest rate swaps with an aggregate notional amount of $195.9 million, resulting in a net gain of $10.4 million. The net gain was recognized in earnings and included in net gains on sales of available for sale securities.

The following table presents a summary of the Company’s interest rate swaps designated as fair value hedges as of September 30, 2026 and December 31, 2025:

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Cash flow hedges: For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities, with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered deposit and wholesale borrowing portfolios. During the next 12 months, the Company estimates that $6.9 million will be reclassified to interest expense, as a reduction of the expense.

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The following table presents a summary of the Company’s interest rate swaps designated as cash flow hedges as of September 30, 2026 and December 31, 2025:

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The Company purchases interest rate caps, designated as cash flow hedges, of certain funding liabilities. The interest rate caps require receipt of variable amounts from the counterparties when interest rates rise above the strike price specified in the contracts. For both the three and nine months ended September 30, 2026 and 2025, the Company recognized amortization expense on the interest rate caps of $200,000 and $593,000, respectively, which was recorded as a component of interest expense on brokered deposits and FHLB advances.

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The following table presents a summary of the Company’s interest rate caps designated as cash flow hedges as of September 30, 2026 and December 31, 2025:

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Derivatives Not Designated as Hedging Instruments

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Interest rate swaps: The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Company enters into offsetting positions with large U.S. financial institutions in order to minimize risk to the Company. These swaps are derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or client owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the client or counterparty and therefore, the Company has no associated credit risk.

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Risk participation agreements (“RPA”): The Company has entered into RPAs to share credit exposure with a counterparty in connection with interest rate swaps associated with loan participations. Under an RPA, the Company either assumes or sells a portion of the underlying credit exposure and, in exchange, pays or receives an upfront fee. When the Company assumes credit exposure, it is entitled to receive payment from the counterparty in the event of a borrower default. Conversely, when the Company sells credit exposure, it is obligated to make a payment to the counterparty if the underlying borrower defaults on its obligations. The notional amount of the RPA reflects the Company’s pro-rata share of the derivative instrument consistent with its share of the related participated loan.

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The following table presents the total notional amounts and gross fair values of the Company’s derivatives as of September 30, 2026 and December 31, 2025:

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The Company is party to collateral support agreements with certain derivative counterparties. These agreements require the Company to maintain collateral based on the fair values of derivative transactions. In the event of default by the Company, the counterparty would be entitled to the collateral. As of both September 30, 2026 and December 31, 2025, the Company had pledged no cash collateral for its derivative contracts. As of September 30, 2026 and December 31, 2025, the Company’s counterparties had pledged cash collateral to the Company of $45.5 million and $26.2 million, respectively.

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The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three and nine months ended September 30, 2026 and 2025:

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No amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the three and nine months ended September 30, 2026 and 2025, and no amounts are expected to be reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness over the next twelve months.

The effects of the Company’s hedging relationships on the income statement during the three and nine months ended September 30, 2026 and 2025 are presented in the table below:

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The following table presents amounts that were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at September 30, 2026 and December 31, 2025:

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The gain recognized on derivatives not designated as hedging relationships for the three and nine months ended September 30, 2026 and 2025 was as follows:

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The following table summarizes gross and net information about derivative instruments that were eligible for offset on the balance sheet at September 30, 2026 and December 31, 2025:

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