Derivatives

12 Months Ended

Dec. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 19 – 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 and certain fixed rate available for sale securities included in a closed portfolio due to changes in benchmark interest rates.

In 2023, we entered into five fixed portfolio layer method fair value swaps, designated as hedging instruments under the portfolio layer method, to manage exposure to changes in fair value on fixed rate mortgages and certain fixed rate available for sale securities attributable to the designated interest rate. Four of the interest rate swaps were designated to hedge a closed portfolio of fixed rate mortgages, and one of the interest rate swaps was designated to hedge a closed portfolio of fixed rate municipal bonds. 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.

In October 2024, we discontinued a portfolio layer method fair value swap designated as a hedging instrument to hedge a closed portfolio of fixed rate mortgages. The hedge, which had a notional amount of $250.0 million, was fully dedesignated, and we paid the counterparty $2.1 million to terminate the swap. We recorded a $0.5 million loss in 2023 and $1.7 million remained on the balance sheet as a basis adjustment to the loans that were part of the hedged portfolio. The $1.7 million basis adjustment will be amortized over the life of the underlying hedged items. As of December 31, 2024, the basis adjustment remaining on the hedged portfolio was $1.6 million.

The total notional amount of the four remaining active swaps was $176.0 million at December 31, 2024, one of which is amortizing and included a $24.0 million amortization adjustment to the notional amount at December 31, 2024. Under the portfolio layer method, the hedged items are designated as a hedged layer of closed portfolios of financial loans and municipal bonds that are anticipated to remain outstanding for the designated hedged periods. Adjustments are made to record the swaps at fair value on the consolidated balance sheets, with changes in fair value recognized in interest income. The carrying values of the fair value swaps on the consolidated balance sheets are also adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk.

The following table, which includes active fair value hedged items and discontinued fair value hedged items on which a basis adjustment still remains, 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 December 31, 2024 and December 31, 2023:


		December 31, 2024						December 31, 2023
(Dollars in thousands)	Balance Sheet Location	Amortized Cost Basis		Hedged Asset		Basis Adjustment		Amortized Cost Basis		Hedged Asset		Basis Adjustment
Fixed rate mortgages	Loans receivable	$	443,830	$	125,993	$	1,088	$	491,018	$	390,297	$	4,055
Fixed rate bonds	Investment securities available-for-sale	58,318		50,000		618		59,270		50,000		1,570
Total hedged assets		$	502,148	$	175,993	$	1,706	$	550,288	$	440,297	$	5,625

In January 2025, we discontinued two portfolio layer method fair value swaps designated as hedging instruments. One of the swaps, which was designated to hedge a closed portfolio of fixed rate mortgages, was in a liability position with an immaterial fair value and had a notional amount of $30.0 million as of December 31, 2024. The other swap, which was designated to hedge a closed portfolio of fixed rate municipal bonds, was in a liability position with a fair value of $0.6 million and had a notional amount of $50.0 million as of December 31, 2024. As part of the discontinuance, we incurred $0.5 million in fees that will be amortized over the life of the related loans and securities.

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.

The following tables summarize outstanding financial derivative instruments as of December 31, 2024 and December 31, 2023:


		December 31, 2024
(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	$	175,993	$	(112)	$	5,998

Not designated hedges of interest rate risk:
Matched interest rate swaps with borrowers	Accrued interest receivable and other assets	133,942		5,913		5,913
Matched interest rate swaps with counterparty	Accrued interest payable and other liabilities	133,942		(5,913)		(5,913)

Total derivatives		$	443,877	$	(112)	$	5,998


		December 31, 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	$	440,297	$	(6,111)	$	(6,111)

Not designated hedges of interest rate risk:
Matched interest rate swaps with borrowers	Accrued interest receivable and other assets	126,494		6,249		6,249
Matched interest rate swaps with counterparty	Accrued interest payable and other liabilities	126,494		(6,249)		(6,249)

Total derivatives		$	693,285	$	(6,111)	$	(6,111)

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 at December 31, 2024 and December 31, 2023, with no gain or loss for the twelve months ended December 31, 2024 and a loss of $0.1 million for the twelve months ended December 31, 2023.