Derivative Financial Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging Activities

We entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates.

Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.

As of March 31, 2023, we had four interest rate swap agreements, which are scheduled to mature at various dates ranging from June 2031 to October 2037. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest receivable on the swaps totaled $6 thousand at March 31, 2023 and $5 thousand at December 31, 2022. Information on our derivatives follows:


	Asset Derivatives				Liability Derivatives
(in thousands)	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022
Fair value hedges:
Interest rate contracts notional amount	$	9,450	$	12,046	$	2,340	$	—
Interest rate contracts fair value1	$	404	$	602	$	23	$	—

1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology.

The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of March 31, 2023 and December 31, 2022.


	Carrying Amounts of Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands)	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022
Loans	$	11,284	$	11,319	$	(506)	$	(726)

The following table presents the net losses recognized in interest income on loans on the consolidated statements of comprehensive income related to our derivatives designated as fair value hedges.


	Three months ended
(in thousands)	March 31, 2023		March 31, 2022
Interest and fees on loans 1	$	24,258	$	23,677
(Decrease) increase in fair value of designated interest rate swaps due to LIBOR interest rate movements	$	(221)	$	757
Receivable (payment) on interest rate swaps	51		(85)
Increase (decrease) in fair value hedging adjustment of hedged loans	221		(752)
Decrease in value of yield maintenance agreement	(2)		(3)
Net gain (losses) on fair value hedging relationships recognized in interest income	$	49	$	(83)

1 Represents the income line item in the statement of comprehensive income in which the effects of fair value hedges are recorded.

Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes. Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:



Offsetting of Financial Assets and Derivative Assets
			Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
	Gross Amounts		Offset in the		Assets Presented		the Statements of Condition
	of Recognized		Statements of		in the Statements		Financial		Cash Collateral
(in thousands)	Assets		Condition		of Condition		Instruments		Received		Net Amount
March 31, 2023

Counterparty	$	404	$	—	$	404	$	(23)	$	—	$	381


December 31, 2022

Counterparty	$	602	$	—	$	602	$	—	$	—	$	602


Offsetting of Financial Liabilities and Derivative Liabilities
			Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
	Gross Amounts		Offset in the		Liabilities Presented		the Statements of Condition
	of Recognized		Statements of		in the Statements		Financial		Cash Collateral
(in thousands)	Liabilities1		Condition		of Condition1		Instruments		Pledged		Net Amount
March 31, 2023

Counterparty	$	23	$	—	$	23	$	(23)	$	—	$	—


December 31, 2022

Counterparty	$	—	$	—	$	—	$	—	$	—	$	—

1 Amounts exclude accrued interest on swaps.

For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 2022 Form 10-K filed with the SEC on March 16, 2023.