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Derivatives and Hedging Activities | 9 Months Ended
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Sep. 30, 2025
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives and Hedging Activities | Derivatives and Hedging Activities The Company enters into derivative financial instruments which involve, to varying degrees, interest rate and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures, seeking to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes derivative financial instruments to accommodate the business needs of its customers as well as to economically hedge the exposure that this creates for the Company. Additionally, the Company enters into certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The Company does not use derivative financial instruments for trading purposes. Customer Derivatives – Interest Rate Swaps and Cap Contracts Derivatives Not Designated as Hedging Instruments The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The Company also enters into interest rate cap contracts that enable commercial loan customers to lock in a cap on a variable-rate commercial loan agreement. This feature prevents the loan from repricing to a level that exceeds the cap contract’s specified interest rate, which serves to hedge the risk from rising interest rates. The Company then enters into an offsetting interest rate cap contract with a third party in order to economically hedge its exposure through the customer agreement. These interest rate swaps and cap contracts with both the customers and third parties are not designated as hedges under ASC Topic 815, Derivatives and Hedging, and therefore changes in fair value are reported in earnings. As the interest rate swaps and cap contracts are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by ASC Topic 820, Fair Value Measurements. The Company recognized losses of $3,000 and $28,000 in commercial loan swap income resulting from the fair value adjustments for the three and nine months ended September 30, 2025, respectively, as compared to losses of $25,000 and $14,000 for the corresponding prior year periods. Derivatives Designated as Hedging Instruments Cash Flow Hedge During 2022, the Company entered into a three-year interest rate swap intended to add stability to its net interest income and to manage its exposure to future interest rate movements associated with a pool of floating-rate commercial loans. The swap requires the Company to pay variable-rate amounts indexed to one-month term Secured Overnight Financing Rate (“SOFR”) to the counterparty in exchange for the receipt of fixed-rate amounts at 4.0% from the counterparty. The swap was designated and qualified as a cash flow hedge under ASC Topic 815, Derivatives and Hedging. The changes in the fair value of cash flow hedges are initially reported in other comprehensive income. Amounts are subsequently reclassified from accumulated other comprehensive income to earnings when the hedged transactions occur, specifically within the same line item as the hedged item (interest income). Therefore, a portion of the balance reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are made or received on the Company’s interest rate swaps. The table below presents the effect on the Company’s accumulated other comprehensive income/loss (“AOCI” or “AOCL”) attributable to the cash flow hedge derivative, net of tax, and the related gains/losses reclassified from AOCI into income (in thousands):
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2025 |  | 2024 |  | 2025 |  | 2024
AOCL balance at beginning of period, net of tax |  | $ | (52) |  |  | $ | (776) |  |  | $ | (87) |  |  | $ | (36) |
Unrealized (losses) gains recognized in OCI |  | (9) |  |  | 837 |  |  | (102) |  |  | (418) |
Losses reclassified from AOCI into interest income |  | 65 |  |  | 253 |  |  | 193 |  |  | 768 |
AOCI balance at end of period, net of tax |  | $ | 4 |  |  | $ | 314 |  |  | $ | 4 |  |  | $ | 314 |
For the year ending 2025, the Company estimates that an additional $5,000 will be reclassified as an addition t o interest income. Fair Value Hedge During the third quarter of 2025, the Company entered into interest rate swap derivatives to hedge the changes in fair value of AFS debt securities due to changes in interest rates. The swaps hedge the interest rate risk component of the change in fair value of the hedged items (i.e., hedged layers of AFS debt securities), and were designated and qualified as portfolio layer method fair value hedges under ASC Topic 815, Derivatives and Hedging. The last of the fair value hedges is scheduled to expire in October 2042. For AFS securities that are included in a fair value hedge relationship, changes in fair value related to changes to the benchmark interest rate on AFS securities are immediately recognized into interest income in the Consolidated Statements of Income, and are offset by the change in the fair value of the interest rate swap derivatives. Changes in fair value of the AFS securities that are unrelated to interest rate risk are recorded in OCI as net unrealized gains (losses) on AFS securities. Throughout the life of the hedges, basis adjustments are maintained at the portfolio level and are allocated to individual assets only under certain circumstances. These circumstances include instances where the portfolio amount falls below the hedged layer amounts, or in cases of voluntary de-designation. The cumulative fair value hedge basis adjustments included in the carrying amount of hedged assets are reversed through the Consolidated Statements of Income in future periods as an adjustment to yield. All swaps involved in fair value hedges have been determined to be effective. The following table presents the amortized cost and cumulative basis adjustment for closed portfolios of securities used to designate fair value hedging relationships (in thousands):
|  | As of September 30, 2025 |  |
AFS securities: |  |  |  |
Amortized cost (excluding fair value hedge basis adjustment) |  | $ | 651,231 |  |  |
Fair value hedge basis adjustment |  | (341) |  |  |
The table below presents the effects of fair value hedges on net interest income, as well as their location on the Consolidated Statements of Income (in thousands):
|  | Location of Gain/(Loss) Recognized in Income |  | Three Months Ended September 30, 2025 |  | Nine Months Ended September 30, 2025
AFS securities: |  |  |  |  |  |
Gain recognized on derivatives |  | Interest income - debt securities |  | $ | 288 |  |  | $ | 288 |
Loss recognized on hedged items |  | Interest income - debt securities |  | (341) |  |  | (341) |
Net loss recognized on fair value hedges |  | Interest income - debt securities |  | $ | (53) |  |  | $ | (53) |
Derivatives Not Designated as Hedging Instruments and Designated as Hedging Instruments The table below presents the notional amount and fair value of derivatives designated and not designated as hedging instruments, as well as their location on the Consolidated Statements of Financial Condition (in thousands):
|  | Notional |  | Fair Value |  |  |  |
|  |  | Other assets |  | Other liabilities |  |
As of September 30, 2025 |  |  |  |  |  |  |  |  |  |
Derivatives Not Designated as Hedging Instruments |  |  |  |  |  |  |  |  |  |
Interest rate swaps and cap contracts |  | $ | 1,456,192 |  |  | $ | 55,454 |  |  | $ | 55,499 |  |  |  |  |
Derivatives Designated as Hedging Instruments |  |  |  |  |  |  |  |  |  |
Interest rate swap contract - cash flow hedge |  | 100,000 |  |  | 5 |  |  | — |  |  |  |  |
Interest rate swap contracts - fair value hedge |  | 650,926 |  |  | 1,237 |  |  | 950 |  |  |  |  |
Total Derivatives |  | $ | 2,207,118 |  |  | $ | 56,696 |  |  | $ | 56,449 |  |  |  |  |
As of December 31, 2024 |  |  |  |  |  |  |  |  |  |
Derivatives Not Designated as Hedging Instruments |  |  |  |  |  |  |  |  |  |
Interest rate swaps and cap contracts |  | $ | 1,468,022 |  |  | $ | 91,352 |  |  | $ | 91,368 |  |  |  |  |
Derivatives Designated as Cash Flow Hedge |  |  |  |  |  |  |  |  |  |
Interest rate swap contract |  | 100,000 |  |  | — |  |  | 115 |  |  |  |  |
Total Derivatives |  | $ | 1,568,022 |  |  | $ | 91,352 |  |  | $ | 91,483 |  |  |  |  |
Credit Risk-Related Contingent Features The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by being a party to International Swaps and Derivatives Association agreements with third-party broker-dealers that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. There was no collateral posted by the Company with third parties at both September 30, 2025 and December 31, 2024. The amount of collateral received from third parties was $47.2 million and $93.3 million at September 30, 2025 and December 31, 2024, respectively. The amount of collateral posted with third parties and received from third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $56.4 million and $91.5 million at September 30, 2025 and December 31, 2024, respectively. The interest rate derivatives which the Company executes with the commercial borrowers are collateralized by the borrowers’ commercial real estate financed by the Company.

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