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Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2023

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 10: Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments, which consist of interest rate swaps and interest rate caps, to assist in its interest rate risk management. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative financial instruments are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

Non-hedge Derivatives

The Company enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Company enters into offsetting positions with large U.S. financial institutions in order to minimize the risk to the Company. These swaps are derivatives, but are not designated as hedging instruments.

Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counter party or client owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the client or counterparty and therefore, the Company has no credit risk.

The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of December 31, 2023 and 2022:


		December 31, 2023						December 31, 2022
		Notional			Estimated			Notional			Estimated
(dollars in thousands)		Amount			Fair Value			Amount			Fair Value
Interest rate swap agreements:
Assets		$	63,814		$	6,981		$	65,315		$	8,240
Liabilities			63,814			(6,981)			65,315			(8,240)
Total		$	127,628		$	—		$	130,630		$	—

Cash Flow Hedging Derivatives

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered deposit and wholesale borrowing portfolios. During the next 12 months, the Company estimates that $7.5 million will be reclassified to interest expense, as a reduction of the expense.

The following table presents a summary of the Company’s interest rate swaps designated as cash flow hedges as of December 31, 2023 and 2022:


(dollars in thousands)		December 31, 2023			December 31, 2022
Notional Amount		$	183,000		$	163,000
Weighted Average Pay Rate			2.00	%		1.90	%
Weighted Average Receive Rate			5.48	%		3.47	%
Weighted Average Maturity (Years)			4.04			5.15
Net Unrealized Gain		$	5,271		$	9,175

The Company purchases interest rate caps, designated as cash flow hedges, of certain deposit liabilities. The interest rate caps require receipt of variable amounts from the counterparties when interest rates rise above the strike price in the contracts. For the years ended December 31, 2023 and 2022, the Company recognized amortization expense on the interest rate caps of $791,000 and $772,000, respectively, which was recorded as a component of interest expense on brokered deposits and FHLB advances.

The following table presents a summary of the Company’s interest rate caps designated as cash flow hedges as of December 31, 2023 and 2022:


(dollars in thousands)		December 31, 2023			December 31, 2022
Notional Amount		$	125,000		$	125,000
Unamortized Premium Paid			5,081			5,872
Weighted Average Strike Rate			0.96	%		0.96	%
Weighted Average Maturity (Years)			6.34			7.35

The following table presents a summary of the Company’s interest rate contracts as of December 31, 2023 and 2022:


		December 31, 2023						December 31, 2022
		Notional			Estimated			Notional			Estimated
(dollars in thousands)		Amount			Fair Value			Amount			Fair Value
Interest rate swap agreements:
Assets		$	135,000		$	6,891		$	125,000		$	10,477
Liabilities			48,000			(1,620)			38,000			(1,302)
Interest rate cap agreements:
Assets			125,000			18,717			125,000			19,406

The Company is party to collateral support agreements with certain derivative counterparties. These agreements require that the Company maintain collateral based on the fair values of derivative transactions. In the event of default by the Company, the counterparty would be entitled to the collateral. As of both December 31, 2023 and 2022, the Company had pledged cash collateral for the Company’s derivative contracts of $-0-. In addition, as of December 31, 2023 and 2022, the Company's derivative counterparties pledged cash collateral to the Company of $31.8 million and $36.4 million, respectively.

The following table summarizes gross and net information about derivative instruments that are eligible for offset in the balance sheet at December 31, 2023 and 2022:


		Gross Amounts			Gross Amounts			Assets (Liabilities)
		of Recognized			Offset in the			Presented in the			Financial			Cash Collateral			Net Assets
(dollars in thousands)		Assets (Liabilities)			Balance Sheet			Balance Sheet			Instruments			Received (Paid)			(Liabilities)
December 31, 2023
Assets		$	32,589		$	—		$	32,589		$	—		$	31,783		$	806
Liabilities			(8,601)			—			(8,601)			—			—			(8,601)

December 31, 2022
Assets		$	38,123		$	—		$	38,123		$	—		$	36,353		$	1,770
Liabilities			(9,542)			—			(9,542)			—			—			(9,542)

The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the years ended December 31, 2023, 2022 and 2021:


				Year Ended December 31,
(dollars in thousands)				2023			2022			2021
Derivatives in		Location of Gain (Loss)		Gain (Loss)
Cash Flow Hedging		Reclassified		Reclassified from
Relationships		from AOCI into Income		AOCI into Earnings
Interest rate swaps		Interest expense		$	5,783		$	679		$	(1,117)
Interest rate caps		Interest expense			319			(671)			(403)

No amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the years ended December 31, 2023, 2022 and 2021, and no amounts are expected to be reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness over the next twelve months.