The Company maintains an interest rate protection program for commercial loan customers. Under this program, the Company provides a variable rate loan while creating a fixed rate loan for the customer by the customer entering into an interest rate swap with terms that match the loan. The Company offsets its risk exposure by entering into an offsetting interest rate swap with an unaffiliated institution. The Company had interest rate swaps associated with commercial loans with a notional value of $66.3 million and fair value of $6.2 million in other assets and $6.2 million in other liabilities at September 30, 2023. At December 31, 2022, the Company had interest rate swaps associated with commercial loans with and a notional value of $71.9 million and fair value of $5.5 million in other assets and $5.5 million in other liabilities. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are not marked to market through earnings. As the interest rate swaps 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 FASB ASC 820.

There were no net gains or losses for interest rate swaps for the three and nine month period ended September 30, 2023 and 2022, respectively.

The Company has one interest rate swap with a notional amount of $100.0 million as of September 30, 2023 which was designated as a fair value hedge to mitigate the risk of further interest rate increases and the subsequent impact on the valuation of the company’s state and political subdivision municipal bond portfolio. The gross aggregate fair value of the swap of $920 thousand is recorded in other assets in the unaudited Consolidated Balance Sheets at September 30, 2023. The Company expects the hedge to remain in effect for the remaining term of the swap, which matures August 2026. A summary of the interest rate swap designated as a fair value hedge is presented below:


	September 30, 2023

Notional amount fair value hedge	$	100,000
Fixed pay rates		4.35	%
Variable SOFR receive rates		5.31	%
Remaining maturity (in years)		2.9
Fair value	$	920

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third-party investors are considered derivatives. The Company had $5.0 million of interest rate lock commitments at September 30, 2023 and $4.9 million of interest rate lock commitments at December 31, 2022. Effective May 2022, the Company began the practice of entering into commitments to sell mortgage backed securities when the interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated as hedge instruments. There were $4.8 million of forward sales of mortgage backed securities at September 30, 2023 and $4.3 million of forward sales of mortgage backed securities at December 31, 2022. There were not any forward commitments for the future delivery of residential mortgages at either September 30, 2023 or December 31, 2022.

The net gains and losses on derivative instruments not designated as hedging instruments are included in mortgage banking income. For the quarters ended September 30, 2023 and September 30, 2022, losses of $76 thousand and gains of $283 thousand, respectively, were included in mortgage banking income for the interest rate lock commitments. For the nine month periods ended September 30, 2023 and September 30, 2022, losses of $19 thousand and gains of $535 thousand, respectively, were included in mortgage banking income for the interest rate lock commitments. Gains of $22 thousand and gains of $6 thousand were included in mortgage banking income for the three and nine month periods ended September 30, 2023 for the forward sales of mortgage backed securities. Losses of $198 thousand and losses of $203 thousand were included in mortgage banking income for the three and nine month periods ended September 30, 2022 for the forward sales of mortgage backed securities.