Derivatives

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 11 – Derivatives

We use certain derivative instruments to meet the needs of customers, as well as to manage the interest rate risk associated with certain transactions. All derivative financial instruments are recognized as either assets or liabilities and measured at fair value.

Fair Value Hedges of Interest Rate Risk

We are exposed to changes in the fair value of fixed rate mortgages included in a closed portfolio due to changes in benchmark interest rates. In 2023, we entered into three fixed portfolio layer method fair value swaps, designated as hedging instruments, to manage exposure to changes in fair value on these instruments attributable to the designated interest rate. The interest rate swaps involve the payment of fixed-rate amounts to a counterparty in exchange for us receiving variable-rate payments over the life of the agreements, without the exchange of the underlying notional amount.

We designated the fair value swaps under the portfolio layer method (“PLM”). The total notional amount of the three swaps was $145.7 million as of September 30, 2023, one of which is amortizing and included a $4.29 million amortization adjustment to the notional amount at September 30, 2023. Under this method, the hedged items are designated as a hedged layer of closed portfolios of financial loans that are anticipated to remain outstanding for the designated hedged periods. Adjustments will be made to record the swaps at fair value on the consolidated balance sheets, with changes in fair value recognized in interest income. These instruments are included in loans receivable on the consolidated balance sheet. The carrying values of the fair value swaps on the consolidated balance sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk.

The following table represents the carrying value of the portfolio layer method hedged assets and the cumulative fair value hedging adjustments included in the carrying value of the hedged assets as of September 30, 2023 and December 31, 2022:


	September 30, 2023						December 31, 2022
(Dollars in thousands)	Amortized Cost Basis		Hedged Asset		Basis Adjustment		Amortized Cost Basis		Hedged Asset		Basis Adjustment
Fixed Rate Assets	$	486,167	$	145,709	$	(2,809)	$	—	$	—	$	—

Derivatives Not Designated as Hedging Instruments

Matched Interest Rate Swaps. We enter into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating-rate loan payments to fixed rate loan payments. When we enter into an interest rate swap contract with a commercial loan borrower, we simultaneously enter into a "mirror" swap contract with a third-party. The third-party exchanges the borrower's fixed-rate loan payments for floating-rate loan payments. These derivatives are not designated as hedges and changes in fair value are recognized in earnings. Because these derivatives have mirror-image contractual terms, the changes in fair value substantially offset each other through earnings. Fees earned in connection with the execution of derivatives related to this program are recognized in earnings through loan-related derivative income.

Pay Fixed Interest Rate Swaps. During the three months ended September 30, 2023, we entered into a pay fixed swap with a notional amount of $250.0 million. The interest rate swap involves the payment of fixed-rate amounts to a counterparty in exchange for us receiving variable-rate payments over the life of the agreement, without the exchange of the underlying notional amount. This swap was not designated as a hedging instrument and changes in fair value are recognized in earnings.

The following tables summarize outstanding financial derivative instruments as of September 30, 2023 and December 31, 2022:


		September 30, 2023
(Dollars in thousands)	Balance Sheet Location	Notional Amount		Fair Value of Asset (Liability)		Gain (Loss)
Fair value hedge of interest rate risk:
Pay fixed rate swaps with counterparty	Accrued interest receivable and other assets	$	145,709	$	2,814	$	2,814

Not designated hedges of interest rate risk:
Matched interest rate swaps with borrowers	Accrued interest receivable and other assets	265,286		10,160		—
Matched interest rate swaps with counterparty	Accrued interest payable and other liabilities	132,643		(10,160)		—
Pay fixed rate swaps with counterparty	Accrued interest payable and other liabilities	250,000		(449)		(449)

Total derivatives		$	793,638	$	2,365	$	2,365


		December 31, 2022
(Dollars in thousands)	Balance Sheet Location	Notional Amount		Fair Value of Asset (Liability)		Gain (Loss)
Fair value hedge of interest rate risk:
Pay fixed rate swaps with counterparty	Accrued interest receivable and other assets	$	—	$	—	$	—

Not designated hedges of interest rate risk:
Matched interest rate swaps with borrowers	Accrued interest receivable and other assets	275,478		8,427		—
Matched interest rate swaps with counterparty	Accrued interest payable and other liabilities	137,739		(8,427)		—
Pay fixed rate swaps with counterparty	Accrued interest payable and other liabilities	—		—		—

Total derivatives		$	413,217	$	—	$	—

Embedded Derivative

In December 2022, we entered into an agreement to sell a portion of our shares of Interchecks Technologies, Inc., a former equity method investment that was subsequently reclassified to equity securities due to the decrease in the remaining ownership percentage. Based on the terms of the sale, we recognized the cash received at closing, as well as a receivable for the remaining installment payment, which is based on a future economic event and is accounted for and separately recorded as a derivative. The derivative instrument is included in accrued interest receivable and other assets on the consolidated balance sheet, while the gains and losses are included in noninterest income on the consolidated statement of income. The fair value of the embedded derivative was $0.6 million and $0.8 million at September 30, 2023 and December 31, 2022, respectively, with a loss of $0.1 million as of September 30, 2023.