Derivative Financial Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging Activities

The Bank is exposed to certain risks from both its business operations and changes in economic conditions. As part of our asset/liability and interest rate risk management strategy, we may enter into interest rate derivative contracts to modify repricing characteristics of certain of our interest-earning assets and interest-bearing liabilities. The Bank generally designates interest rate hedging agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges.

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.

On July 7, 2023, the Bank entered into various interest rate swap agreements with notional values totaling $101.8 million split evenly between terms of 2.5 and 3.0 years to hedge balance sheet interest rate sensitivity and protect certain of our fixed rate available-for-sale securities against changes in fair value related to changes in the benchmark interest rate. The interest rate swaps involve the receipt of floating rate interest from a counterparty in exchange for us making fixed-rate interest payments over the lives of the agreements, without the exchange of the underlying notional values. The transactions were designated as partial term fair value hedges and structured such that the changes in the fair value of the interest rate swaps are expected to be perfectly effective in offsetting the changes in the fair value of the hedged items attributable to changes in the SOFR OIS swap rate, the designated benchmark interest rate. Because the hedges met the criteria for using the shortcut method, there is no need to periodically reassess effectiveness during the term of the hedges. For fair value designated hedges, the gains or losses on the hedging instruments as well as the offsetting loss or gain on the hedged items, are recognized in current earnings as their fair values change.

In addition, we had three interest rate swap agreements on certain loans with our customers, which are scheduled to mature at various dates ranging from June 2031 to July 2032. In December 2023, one interest rate swap, scheduled to mature in October 2037, was terminated as the hedged loan was paid off. The loan interest rate swaps were designated as fair value hedges and allowed 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 SOFR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans.

Information on our derivatives follows:


	Asset derivatives				Liability derivatives
(in thousands)	March 31, 2024		December 31, 2023		March 31, 2024		December 31, 2023
Available-for-sale securities:
Interest rate swaps - notional amount	$	—	$	—	$	101,770	$	101,770
Interest rate swaps - fair value1	$	—	$	—	$	142	$	1,359
Loans receivable:
Interest rate contracts - notional amount	$	8,366	$	6,441	$	—	$	2,157
Interest rate contracts - fair value1	$	400	$	287	$	—	$	2

1 Refer to 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, 2024 and December 31, 2023.


	Carrying Amounts of Hedged Assets				Cumulative Amounts of Fair Value Hedging Adjustments Included in the Carrying Amounts of the Hedged Assets
(in thousands)	March 31, 2024		December 31, 2023		March 31, 2024		December 31, 2023
Available-for-sale securities 1	$	108,125	$	107,181	$	(142)	$	(1,359)
Loans receivable 2	$	7,841	$	8,183	$	(478)	$	(367)
1 Carrying value equals the amortized cost basis of the securities underlying the hedge relationship, which is the book value net of the fair value hedge adjustment. Amortized cost excludes accrued interest totaling $233 thousand and $222 thousand as of March 31, 2024 and December 31, 2023, respectively.
2 Carrying value equals the amortized cost basis of the loans underlying the hedge relationship, which is the loan balance net of deferred loan origination fees and cost and the fair value hedge adjustment. Amortized cost excludes accrued interest, which was not material.

The following table presents the pretax net gains (losses) recognized in interest income related to our fair value hedges for the years presented.


	Three months ended
(in thousands)	March 31, 2024		March 31, 2023
Interest on investment securities 1
Increase in fair value of interest rate swaps hedging available-for-sale securities	$	1,217	$	—
Hedged interest earned	206		—
Decrease in carrying value included in the hedged available-for-sale securities	(1,217)		—
Net gain (loss) recognized in interest income on investment securities	$	206	$	—
Interest and fees on loans 1
Increase (decrease) in fair value of interest rate swaps hedging loans receivable	$	115	$	(221)
Hedged interest earned	54		51
(Decrease) increase in carrying value included in the hedged loans	(110)		221
Decrease in value of yield maintenance agreement	(2)		(2)
Net gain recognized in interest income on loans	$	57	$	49
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 the counterparty are under an International Swaps and Derivative Association (“ISDA”) master agreement that includes “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)	Assets1		Condition		of Condition1		Instruments		Received		Net Amount
March 31, 2024

Counterparty	$	400	$	—	$	400	$	—	$	—	$	400
Total	$	400	$	—	$	400	$	—	$	—	$	400
December 31, 2023

Counterparty	$	287	$	—	$	287	$	—	$	—	$	287
Total	$	287	$	—	$	287	$	—	$	—	$	287



Offsetting of Financial Liabilities and Derivative Liabilities
			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)	Assets1		Condition		of Condition1		Instruments		Received		Net Amount
March 31, 2024

Counterparty	142		—		142		(142)		—		—
Total	$	142	$	—	$	142	$	(142)	$	—	$	—
December 31, 2023
Counterparty	$	1,361	$	—	$	1,361	$	(287)	$	(330)	$	744

Total	$	1,361	$	—	$	1,361	$	(287)	$	(330)	$	744

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 2023 Form 10-K filed with the SEC on March 14, 2024.