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DERIVATIVES

3 Months Ended

Mar. 31, 2025

DERIVATIVES

10.DERIVATIVES

The Company’s derivative financial instruments are used 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 to manage the Company’s interest-rate risk. Additionally, the Company enters into interest rate derivatives to accommodate the business requirements of its customers. All derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of a derivative instrument depends upon whether it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.

Derivatives Designated as Hedging Instruments

Fair Value Hedge - The Company is exposed to changes in the fair value of fixed-rate assets due to changes in benchmark interest rates. In June 2023, to manage its exposure to changes in the fair value of a closed asset pool of fixed-rate residential mortgages, the Company entered into interest rate swaps with a total notional amount of $100.0 million, designated as fair value portfolio layer hedges. The Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts. The gain or loss on these derivatives, as well as the offsetting loss or gain on the hedged items attributable to the hedged risk, are recognized in interest income in the Company’s Consolidated Statements of Income.

As of March 31, 2025, the Company had two interest rate swap agreements with a notional amount of $100.0 million that were designated as a fair value hedge of fixed-rate residential mortgages. The hedges were determined to be effective during the three months ended March 31, 2025, and the Company expects the hedges to remain effective during the remaining terms of the swaps.

The following amounts were recorded on the Consolidated Balance Sheets related to cumulative basis adjustment for fair value hedges as of the dates indicated:


								Cumulative Amount of Fair Value
								Hedging Adjustment Included in the
Line Item in the Consolidated Balance Sheets		Carrying Amount of the Hedged						Carrying Amount of the Hedged
in Which the Hedged Item is Included		Assets						Assets
		March 31,			December 31,			March 31,			December 31,
		2025			2024			2025			2024

		(in thousands)

Loans held for investment (1)		$	100,567		$	100,080		$	567		$	80
Total		$	100,567		$	100,080		$	567		$	80

⁽¹⁾These amounts were included in the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At March 31, 2025, the amortized cost basis of the closed portfolios used in these hedging relationships was $1.12 billion; the cumulative basis adjustments associated with these hedging relationships was $567,000 and the amount of the designated hedged items were $100.0 million.

Cashflow Hedge - As part of its interest-rate risk-management strategy, the Company utilizes interest rate swap agreements to help manage its interest-rate risk positions. The notional amount of the interest rate swaps does not represent the amount exchanged by the parties. The exchange of cash flows is determined by reference to the notional amounts and the other terms of the interest rate swap agreements. The changes in fair value of derivatives designated as cashflow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized.

As of March 31, 2025, the Company had one interest rate swap agreement with a notional amount of $100.0 million that was designated as a cashflow hedge of brokered deposits. The interest rate swap agreement has an average maturity of 0.02 years, the current weighted average fixed rate paid is 0.67%, the weighted average three-month SOFR swap receive rate is 4.64%, and the fair value is $76,000. The Company expects approximately $76,000 related to the cashflow hedge to be reclassified to interest expense, from other comprehensive income, in the next twelve months.

Derivatives Not Designated as Hedging Instruments

Derivative Loan Commitments - Mortgage loan commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.

Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of a rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.

Forward Loan Sale Commitments -The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the number of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.

With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower).

The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.

Interest Rate Swaps -The Company enters into interest rate swap agreements that are transacted to meet the financing needs of its commercial customers. Offsetting interest rate swap agreements are simultaneously transacted with a third-party financial institution to effectively eliminate the Company’s interest-rate risk associated with the customer swaps. The primary risks associated with these transactions arise from exposure to the ability of the counterparties to meet the terms of the contract. The interest rate swap notional amount is the aggregate notional amount of the customer swap and the offsetting third-party swap. The Company also assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determines whether the credit valuation adjustments are significant to the overall valuation of its derivatives.

Interest Rate Futures -The Company uses interest rate futures to mitigate the impact of fluctuations in interest rates and interest rate volatility on the fair value of the MSRs. Changes in their fair value are reflected in current-period earnings in mortgage banking income.

Risk Participation Agreements -The Company has entered into risk participation agreements with correspondent institutions and shares in any interest rate swap losses incurred as a result of the commercial loan customers’ termination of a loan-level interest rate swap agreement prior to maturity. The Company records these risk participation agreements at fair value. The Company’s maximum credit exposure is based on its proportionate share of the settlement amount of the referenced interest rate swap. Settlement amounts are generally calculated based on the fair value of the swap plus outstanding accrued interest receivables from the customer.

The following table presents the outstanding notional balances and fair values of outstanding derivative instruments:


					Assets			Liabilities
		Notional			Fair			Fair
		Amount			Value			Value

		(in thousands)
March 31, 2025:
Derivatives designated as hedging instruments
Fair value hedge - interest rate swaps		$	100,000		$	—		$	455
Cashflow hedge - interest rate swaps			100,000			76			—
Total derivatives designated as hedging instruments					$	76		$	455
Derivatives not designated as hedging instruments
Derivative loan commitments		$	41,938		$	540		$	54
Forward loan sale commitments			28,500			9			63
Interest rate swaps			980,343			18,850			18,850
Risk participation agreements			215,355			—			—
Interest Rate Futures			31,600			595			—
Total derivatives not designated as hedging instruments					$	19,994		$	18,967
Total derivatives					$	20,070		$	19,422

December 31, 2024:
Derivatives designated as hedging instruments
Fair value hedge - interest rate swaps		$	100,000		$	112		$	84
Cashflow hedge - interest rate swaps		$	100,000		$	1,040		$	—
Total derivatives designated as hedging instruments					$	1,152		$	84
Derivatives not designated as hedging instruments
Derivative loan commitments		$	38,929		$	374		$	61
Forward loan sale commitments			50,500			382			4
Interest rate swaps			1,015,448			23,021			23,021
Risk participation agreements			216,245			—			—
Interest Rate Futures			35,400			—			376
Total derivatives not designated as hedging instruments					$	23,777		$	23,462
Total derivatives					$	24,929		$	23,546

The following table presents the recorded net gains and losses pertaining to the Company’s derivative instruments:


		Location of gain (loss)
		recognized in		Three Months Ended March 31,
		Income		2025			2024

				(in thousands)
Derivatives designated as fair value hedge
Hedged items - loans		Interest income		$	488		$	(1,429)
Interest rate swap contracts		Interest income			(483)			1,420
Total				$	5		$	(9)
Derivatives not designated as hedging instruments
Derivative loan commitments		Mortgage banking income		$	174		$	57
Forward loan sale commitments		Mortgage banking income			(431)			310
Interest rate futures		Mortgage banking income			561			(221)
Interest rate swaps		Other income			—			—
Total				$	304		$	146

The effect of cashflow hedge accounting on accumulated other comprehensive income is as follows:


				Three Months Ended March 31,
				2025			2024

				(in thousands)
Derivatives designated as hedging instruments
Loss in OCI on derivatives (effective portion), net of tax				$	(708)		$	(369)
Gain reclassified from OCI into interest income (effective portion)				$	987		$	1,235

Master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds.

The following table presents the offsetting of derivatives and amounts subject to an enforceable master netting arrangement, not offset in the Consolidated Balance Sheets at March 31, 2025:


											Gross Amounts Not Offset in the Consolidated Balance Sheets
								Net Amounts
		Gross Amounts			Gross Amounts			Assets (Liabilities)						Cash
		of Recognized			Offset in the			presented in the						Collateral
		Assets			Consolidated			Consolidated			Financial			(Received)			Net
		(Liabilities)			Balance Sheets			Balance Sheets			Instruments			Posted			Amount

		(in thousands)
Derivatives designated as hedging instruments
Interest rate swap on deposits		$	76		$	—		$	76		$	—		$	(76)		$	—
Interest rate swap on residential real estate loans		$	(455)		$	—		$	(455)		$	—		$	510		$	55
Derivatives not designated as hedging instruments
Customer interest rate swaps		$	15,842		$	—		$	15,842		$	—		$	(14,524)		$	1,318