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Derivatives
 9 Months Ended
Sep. 30, 2025
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives

(14) Derivatives

Risk Management Objective Using Derivatives

 

The Company is exposed to certain risk 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 enters 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 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.

 

Interest Rate Swaps Designated as Cash Flow Hedge

 

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. In September 2025, the Company entered into a derivative instrument designated as a cash flow hedge. For a derivative instrument that is designated as a cash flow hedge, the aggregate fair value of the swaps is recorded in swap assets or swap liabilities with changes in fair value recorded in other comprehensive income (loss), net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.


An interest rate swap with a notional amount totaling $100.0 million as of September 30, 2025 was designated as a cash flow hedge to hedge the risk of variability in cash flows (future interest payments) attributable to changes in the contractually specified benchmark interest rate on the Company's short-term fixed rate FHLB advances. The gross aggregate fair value of the swap was $52 and is recorded in swap assets in the Consolidated Balance Sheets at September 30, 2025, with changes recorded in other comprehensive income (loss). Amounts reported in accumulated other comprehensive income related to this derivative will be reclassified to interest expense as interest payments are paid on the Company's short-term fixed rate FHLB advances. The hedge was executed to pay fixed and receive variable rate cash flows. The hedge was determined to be effective during the period and the Company expects the hedge to remain effective during the remaining term of the swap. A summary of the interest rate swap designated as a cash flow hedge is presented below (dollars in thousands):

 

 

 

 

 

September 30, 2025

 

Notational amount Cash Flow Hedge

 

 

$

100,000

 

Weighted average fixed pay rates

 

 

 

4.22

%

Weighted average variable SOFR receive rates

 

 

 

4.13

%

Weighted average remaining maturity (in years)

 

 

 

1.5

 

Fair Value

 

 

$

52

 

 

 

Non-designated Hedges

 

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. To accommodate customer need and to support the Company’s asset/liability positioning, on occasion the Company enters into interest rate swaps with a customer and a bank counterparty. The interest rate swaps are free-standing derivatives and are recorded at fair value. The Company enters into a floating rate loan and a fixed rate swap with our customer. Simultaneously, the Company enters into an offsetting fixed rate swap with a bank counterparty. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay a bank counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customer to effectively convert variable rate loans to fixed rate loans. Since the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations. These derivatives are not designated as hedging instruments and changes in fair value are recognized directly in earnings.

 

The Company presents non-designated derivative positions gross on the balance sheet for customers and net for financial institution counterparty positions subject to master netting arrangements. The fair value on the asset side was reduced by the margin call adjustment per the Company's netting arrangement in the amounts of $2,590 and $6,330 as of September 30, 2025 and December 31, 2024, respectively.

 

The following table reflects the derivative instruments not designated as hedging instruments recorded on the balance sheet as of September 30, 2025 and December 31, 2024:

 

 

 

September 30, 2025

 

 

December 31, 2024

 

 

 

Notional
Amount

 

 

Fair Value

 

 

Notional
Amount

 

 

Fair Value

 

Included in swap assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps with loan customers in an
   asset position

 

$

108,393

 

 

$

2,937

 

 

$

68,621

 

 

$

1,169

 

Counterparty positions with financial institutions
   in an asset position

 

 

242,672

 

 

 

3,285

 

 

 

247,727

 

 

 

10,469

 

Total before netting adjustments

 

 

 

 

 

6,222

 

 

 

 

 

 

11,638

 

Netting adjustments - cash collateral posted by counterparties*

 

 

 

 

 

(2,590

)

 

 

 

 

 

(6,330

)

Total Swap assets

 

 

 

 

$

3,632

 

 

 

 

 

$

5,308

 

Included in swap liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps with loan customers in a
   liability position

 

$

134,278

 

 

$

6,222

 

 

$

179,106

 

 

$

11,638

 

   Counterparty positions with financial institutions
   in a liability position

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total before netting adjustments

 

 

 

 

 

6,222

 

 

 

 

 

 

11,638

 

Netting adjustments - cash collateral posted to counterparties**

 

 

 

 

 

—

 

 

 

 

 

 

—

 

Total Swap liabilities

 

 

 

 

$

6,222

 

 

 

 

 

$

11,638

 

*Cash collateral posted by counterparties represents the obligation to return cash collateral received from counterparties.

 

 

 

 

 

 

 

 

 

 

 

 

**Cash collateral posted to counterparties represents the right to reclaim cash collateral that was paid to counterparties.

 

 

 

 

 

 

 

 

 

 

 

 

Gross notional positions with customers

 

$

242,672

 

 

 

 

 

$

247,727

 

 

 

 

Gross notional positions with financial institution
   counterparties

 

$

242,672

 

 

 

 

 

$

247,727

 

 

 

 

 

The Company monitors and controls these derivative products with a comprehensive Board of Director approved commercial loan swap policy. Transactions must be approved in advance by the Lenders Loan Committee or the Board of Directors. The Company classifies changes in fair value of derivative instruments not designated as hedging instruments in Other noninterest income in the Consolidated Statements of Operation. There was no gain or loss recognized on derivative instruments not designated as hedging instruments for the period ended September 30, 2025 or the period ended September 30, 2024.

At September 30, 2025 and December 31, 2024, the Company did not have any cash or securities pledged for collateral on its interest rate swaps with third party financial institutions. Cash pledged for collateral on interest rate swaps is classified as restricted cash on the Consolidated Balance Sheets.