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DERIVATIVE FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS | DERIVATIVE FINANCIAL INSTRUMENTS The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used as risk management tools by the Company to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investment securities and borrowings and are not used for trading or speculative purposes. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed or variable amounts from a counterparty in exchange for the Company making variable-rate or fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company, however, discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period due to circumstances. Upon discontinuance, the associated gains and losses deferred in AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. The Company entered into one new interest rate swap designed as a hedging instrument with a notional value of $75.0 million during the nine months ended September 30, 2023. At September 30, 2023, the Company had two interest rate swaps designated as hedging instruments with a total notional value of $125.0 million for the purpose of hedging the variable cash flows of selected AFS securities or loans or hedging variable cash flows associated with the Company's borrowings compared to two interest rate swaps designated as hedging instruments with a total notional value of $100.0 million at December 31, 2022 for the purpose of hedging the variable cash flows of selected AFS securities. During the three months ended September 30, 2023, the Company had one interest rate swap designated as a hedging instrument mature with a total notional value of $50.0 million. The Company enters into interest rate swap agreements that allow its 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. In addition, the Company may enter into interest rate caps that allow its commercial loan customers to gain protection against significant interest rate increases and provide a upper limit, or cap, on the variable interest rate. The Company then enters into a corresponding swap or cap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps and interest rate caps with both the customers and third parties are not designated as hedges and are marked through earnings. At September 30, 2023, the Company had 31 customer and 31 corresponding third-party broker interest rate derivatives not designated as a hedging instrument with an aggregate notional amount of $319.5 million, compared to $268.8 million in notional amount of such derivative instruments at December 31, 2022. The Company entered into four new interest rate swaps with its commercial loan customers and recognized swap fee income of $255 thousand during the three months ended September 30, 2023 and six new interest rate swaps that resulted in swap fee income $451 thousand during the nine months ended September 30, 2023. This is compared to four new interest rate swaps that resulted in swap fee income of $197 thousand during the three months ended September 30, 2022 and nine new interest rate swaps that resulted in swap fee income of $1.9 million during the nine months ended September 30, 2022. Swap fee income is included in noninterest income in the unaudited condensed consolidated statements of income. At September 30, 2023 and December 31, 2022, the Company had cash collateral of $9.7 million and $5.4 million with the third parties for certain of these derivatives, respectively. At September 30, 2023 and December 31, 2022, the Company received cash collateral of $16.1 million and $8.5 million from a counterparty for these derivatives, respectively. The Company also may enter into risk participation agreements with a financial institution counterparty for an interest rate derivative contract related to a loan in which the Company may be a participant or the agent bank. The risk participation agreement provides credit protection to the agent bank should the borrower fail to perform on its interest rate derivative contracts with the agent bank. The Company manages its credit risk on the risk participation agreement by monitoring the creditworthiness of the borrower, which is based on the same credit review process as though the Company had entered into the derivative instruments directly with the borrower. The notional amount of such risk participation agreement reflects the Company’s pro-rata share of the derivative instrument, consistent with its share of the related participated loan. At September 30, 2023 and December 31, 2022, the Company had four risk participation agreements with sold protection with a notional value of $32.6 million and $29.0 million, respectively. In addition, the Company had a risk participation with purchased protection with a notional value of $4.9 million at both September 30, 2023 and December 31, 2022. The Company did not enter into any risk participation agreements during the three and nine months ended September 30, 2023 compared to one new risk participation agreement with purchased protection with a notional value of $4.9 million during the three and nine months ended September 30, 2022. There was no upfront fee on the new risk participation during the three and nine months ended September 30, 2022. As a part of its normal residential mortgage operations, the Company will enter into an interest rate lock commitment with a potential borrower. The Company may enter into a corresponding commitment with an investor to sell that loan at a specific price shortly after origination. In accordance with FASB ASC 820, adjustments are recorded through earnings to account for the net change in fair value of these transactions for the held for sale loans. The fair value of held for sale loans can vary based on the interest rate locked with the customer and the current market interest rate at the balance sheet date. The following table summarizes the fair value of the Company's derivative instruments at September 30, 2023 and December 31, 2022:
| September 30, 2023 |  | December 31, 2022
| Notional Amount |  | Balance Sheet Location |  | Fair Value |  | Notional Amount |  | Balance Sheet Location |  | Fair Value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - balance sheet hedge | $ | 75,000 |  |  | Other assets |  | $ | 2,616 |  |  | n/a |  | n/a |  | n/a
Interest rate swaps - balance sheet hedge | $ | 50,000 |  |  | Other liabilities |  | $ | (758) |  |  | $ | 100,000 |  |  | Other liabilities |  | $ | (973) |
Total derivatives designated as hedging instruments |  |  |  |  | $ | 1,858 |  |  |  |  |  |  | $ | (973) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 153,828 |  |  | Other assets |  | $ | 13,911 |  |  | $ | 128,385 |  |  | Other assets |  | $ | 10,437 |
Interest rate swaps | 153,828 |  |  | Other liabilities |  | (13,517) |  |  | 128,385 |  |  | Other liabilities |  | (10,262) |
Purchased options – rate cap | 5,932 |  |  | Other assets |  | 21 |  |  | 6,000 |  |  | Other assets |  | 29 |
Written options – rate cap | 5,932 |  |  | Other liabilities |  | (21) |  |  | 6,000 |  |  | Other liabilities |  | (29) |
Risk participations - sold credit protection | 32,588 |  |  | Other liabilities |  | (32) |  |  | 29,019 |  |  | Other liabilities |  | (69) |
Risk participations - purchased credit protection | 4,864 |  |  | Other assets |  | 5 |  |  | 4,941 |  |  | Other assets |  | 16 |
Interest rate lock commitments with customers | 593 |  |  | Other assets |  | 15 |  |  | 1,356 |  |  | Other assets |  | 35 |
Forward sale commitments | 150 |  |  | Other assets |  | 2 |  |  | 3,483 |  |  | Other assets |  | 140 |
Total derivatives not designated as hedging instruments |  |  |  |  | $ | 384 |  |  |  |  |  |  | $ | 297 |
The following tables summarize the effect of the Company's derivative financial instruments on OCI and net income for the three and nine months ended September 30, 2023 and 2022:
| Amount of Gain (Loss) Recognized in OCI on Derivative |  | Amount of Gain (Loss) Recognized in OCI on Derivative
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Derivatives in cash flow hedging relationships: |  |  |  |  |  |
Interest rate products | $ | 1,439 |  |  | $ | (562) |  |  | $ | 2,831 |  |  | $ | (562) |
Total | $ | 1,439 |  |  | $ | (562) |  |  | $ | 2,831 |  |  | $ | (562) |
| Amount of Loss Reclassified from AOCI into Income |  | Amount of Loss Reclassified from AOCI into Income |  | Location of Loss Recognized from AOCI into Income
| Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
| 2023 |  | 2022 |  | 2023 |  | 2022 |  |
Derivatives in cash flow hedging relationships: |  |  |  |  |  |
Interest rate products | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | Interest income
Total | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |
| Amount of Gain (Loss) Recognized in Income |  | Amount of Gain (Loss) Recognized in Income |  | Location of Gain (Loss) Recognized in Income
| Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
| 2023 |  | 2022 |  | 2023 |  | 2022 |  |
Derivatives not designated as hedging instruments: |  |  |  |  |  |
Interest rate products | $ | 307 |  |  | $ | 179 |  |  | $ | 188 |  |  | $ | 309 |  |  | Other operating expenses
Risk participation agreements | 31 |  |  | (11) |  |  | 58 |  |  | 19 |  |  | Other operating expenses
Interest rate lock commitments with customers | (52) |  |  | (98) |  |  | (20) |  |  | (265) |  |  | Mortgage banking activities
Forward sale commitments | — |  |  | (610) |  |  | (139) |  |  | 21 |  |  | Mortgage banking activities
Total | $ | 286 |  |  | $ | (540) |  |  | $ | 87 |  |  | $ | 84 |  |  |
The following table is a summary of components for interest rate swaps designated as hedging instruments at September 30, 2023 and December 31, 2022:
| September 30, 2023 |  | December 31, 2022
Weighted average pay rate | 4.22 | % |  | 3.81 | %
Weighted average receive rate | 4.68 | % |  | 3.81 | %
Weighted average maturity in years | 3.1 |  | 1.2

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