Derivatives

9 Months Ended

Sep. 30, 2024

DERIVATIVES

To a limited extent, the Company utilizes interest rate swaps contracts with clients and counterparty banks for the purpose of offsetting or hedging exposures arising out of lending and borrowing transactions. The Company offers borrowers interest rate swaps under a "back-to-back" loan hedging program and offsets these "pay floating/receive fixed" contracts with borrowers with "receive floating/pay fixed" swaps with counterparty banks. The total notional balance of these offsetting hedging contracts was $198.2 million at September 30, 2024. The Company has also hedged the interest rate risk and foreign currency risk on €25.8 million of subordinated debt utilizing a combined cross currency swap/interest rate swap, which has had the effect of hedging the foreign currency risk and fixing the Euribor-based floating rate instrument at a fixed rate of 2.76% through July 2025. The outputs from the Company's NII simulation analysis and EVE modeling reflect the impact of these interest rate/currency swaps, however, the impact is not material. Our derivatives are carried at fair value and recorded in "Other assets" or "Accrued interest payable and other liabilities," as appropriate, in the condensed consolidated balance sheets. For derivatives not designated as hedging instruments, the changes in fair value of our derivatives and the related fees are recognized in "Noninterest income - other" in the condensed consolidated statements of earnings (loss). For the three and nine months ended September 30, 2024, changes in fair value and fees recorded in noninterest income in the condensed consolidated statements of earnings (loss) were immaterial.

Cash flow hedges in the table below included pay-fixed, receive-floating interest rate swap contracts with notional amounts aggregating $300.0 million, five year terms, and varying maturity dates throughout 2028. These swap contracts were entered into with institutional counterparties to hedge against variability in cash flow attributable to interest rate risk on a portion of the Company's borrowings. Also included in cash flow hedges in the table below are pay-fixed, receive-floating interest rate swap contracts with notional amounts aggregating $100.0 million, with forward-starting dates in 2024 and varying maturity dates throughout 2025. These swap contracts were entered into with institutional counterparties to hedge against variability in cash flow attributable to interest rate risk on future issuance of brokered deposits. The cash flow hedges were deemed highly effective at inception and thereafter. For derivatives designated as cash flow hedges, the portion of changes in fair value considered to be highly effective are reported as a component of AOCI on the condensed consolidated balance sheets until the related cash flows from the hedged items are recognized in earnings. As of September 30, 2024, the fair value of the cash flow hedges represented a net liability of $6.9 million, related to which a loss of $6.6 million (net of tax) was included in AOCI. The estimated amount to be reclassified in the next 12 months out of AOCI into earnings is $1.9 million.

The following table presents the U.S. dollar notional amounts and fair values of our derivative instruments included in the condensed consolidated balance sheets as of the dates indicated:


	September 30, 2024						December 31, 2023
	Notional		Fair Value				Notional		Fair Value
	Amount		Asset		Liability		Amount		Asset		Liability
	(In thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges	$	400,000	$	1,368	$	8,281	$	300,000	$	—	$	4,090
Derivatives Not Designated as Hedging Instruments:
Interest rate contracts	198,205		5,027		4,973		168,850		6,426		6,331
Foreign exchange contracts	36,535		1,170		73		45,742		1,883		128
Equity warrant assets	16,333		3,297		—		17,008		3,689		—
Total contracts	$	651,073	$	10,862	$	13,327	$	531,600	$	11,998	$	10,549

During the third quarter of 2024, we closed out a portion of our pay-fixed, receive-floating interest rate swap contracts classified as cash flow hedges with notional amounts of $255.0 million. At September 30, 2024, we had a net loss of $0.7 million (net of tax) deferred in AOCI related to closed out cash flow hedges. Amounts deferred in AOCI from closed out cash flow hedges will be amortized into interest expense on a straight-line basis through the original maturity dates of the hedges as long as the hedged forecasted transactions continue to be expected to occur. During the three and nine months ended September 30, 2024, interest expense from the amortization of closed out cash flow hedges totaled $90,000.

For further information regarding our derivatives, see Note 1. Nature of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of the Form 10-K.