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DERIVATIVE FINANCIAL INSTRUMENTS | 12 Months Ended
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Dec. 31, 2022
DERIVATIVE FINANCIAL INSTRUMENTS [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS | 17. DERIVATIVE FINANCIAL INSTRUMENTS The Company is exposed to certain risks 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 through 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 principally related to certain variable rate borrowings. Cash Flow Hedges of Interest Rate Risk 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 has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed interest payments. As of December 31, 2022 and 2021, the Company had six interest rate swaps with a notional of $50.5 million associated with the Company’s cash outflows associated with various floating-rate amounts. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company did not recognize any hedge ineffectiveness in earnings during the periods ended December 31, 2022 and 2021. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the twelve months ending December 31, 2023, the Company estimates that no amount will be reclassified as an increase in interest expense. Customer Swaps The Company also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of customers desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. In order to economically hedge the interest rate risk associated with offering this product, the Company simultaneously enters into derivative contracts with third parties to offset the customer contracts, such that the Company minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts decrease over time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to customers. The Company utilizes a loan hedging program to accommodate clients preferring a fixed rate loan. The loan documents include an addendum with a zero premium collar. The zero premium collar is a cap and floor at the same interest rate, resulting in a fixed rate to the borrower. To hedge this embedded option, the Company enters into a dealer facing trade exactly mirroring the terms of the loan addendum. At December 31, 2022, the Company had interest rate swaps related to this program with an aggregate notional amount of $71.8 million. Counterparty Credit Risk As a result of its derivative contracts, the Company is exposed to credit risk. Specifically, approved counterparties and exposure limits are defined. On at least an annual basis, the customer derivative contracts and related counterparties are evaluated for credit risk with an adjustment made to the contracts fair value. In accordance with the interest rate agreements with derivative dealers, the Company may be required to post margin to these counterparties. At December 31, 2022, the Company has required collateral with certain of its derivative counterparties in the amount of $13.9 million and was not holding collateral of any derivative counterparties. The following table reflects the estimated fair value positions of derivative contracts as of December 31, 2022 and 2021: Derivatives designated as hedging instruments under ASC 815 (in thousands):
|  |  |  |  |  |  |  | Fair Value December 31, |
Third party interest rate swaps | Balance Sheet Location |  | Notional Amount |  | Interest rate Paid | Interest rate Received |  | 2022 |  |  | 2021 |
Maturing in 2025 | other assets/(other liabilities) |  | $ | 15,000 |  | Fixed - 0.57% | 3-Month Libor |  | $ | 1,269 |  |  | $ | 291 |
Maturing in 2027 | other assets/(other liabilities) |  |  | 10,000 |  | Fixed - 0.65% | 3-Month Libor |  |  | 1,324 |  |  |  | 361 |
Maturing in 2027 | other assets/(other liabilities) |  |  | 7,500 |  | Fixed - 3.57% | 3-Month Libor + 280 |  |  | 995 |  |  |  | 239 |
Maturing in 2027 | other assets/(other liabilities) |  |  | 6,000 |  | Fixed - 0.61% | 3-Month Libor |  |  | 822 |  |  |  | 244 |
Maturing in 2029 | other assets/(other liabilities) |  |  | 6,000 |  | Fixed - 0.72% | 3-Month Libor |  |  | 1,065 |  |  |  | 329 |
Maturing in 2032 | other assets/(other liabilities) |  |  | 6,000 |  | Fixed - 0.82% | 3-Month Libor |  |  | 1,398 |  |  |  | 446 |
|  |  | $ | 50,500 |  |  |  |  | $ | 6,873 |  |  | $ | 1,910 |
Derivatives not designated as hedging instruments under ASC 815 (in thousands):
|  |  | December 31, 2022 |  |  | December 31, 2021 |
Interest Rate Products | Balance Sheet Location |  | Notional Amount |  |  | Fair Value |  |  | Notional Amount |  |  | Fair Value |
Zero Premium Collar | other assets/(other liabilities) |  | $ | 71,776 |  |  | $ | (9,726 | ) |  | $ | 67,375 |  |  | $ | (1,817 | )
Zero Premium Collar | other assets/(other liabilities) |  | $ | - |  |  | $ | - |  |  | $ | 19,938 |  |  | $ | 284 |
Dealer Offset to Zero Premium Collar | other assets/(other liabilities) |  | $ | 71,776 |  |  | $ | 9,726 |  |  | $ | 67,375 |  |  | $ | 1,817 |
Dealer Offset to Zero Premium Collar | other assets/(other liabilities) |  | $ | - |  |  | $ | - |  |  | $ | 19,938 |  |  | $ | (284 | )
The following table presents the effect of the Company’s cash flow hedge accounting on Accumulated Other Comprehensive Income for the years ended December 31, 2022 and 2021 (in thousands):
The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income |
|  | Amount of (Loss) Gain Recognized in OCI on Derivatives |  | Location of Gain Reclassified from Accumulated OCI into Income |  | Amount of (loss) gain reclassified from Accumulated OCI into income |
|  | Year Ended December 31, |  |  | Year Ended December 31, |
Derivatives in Hedging relationships |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Interest rate Products |  | $ | 4,963 |  |  | $ | 1,920 |  | Interest Expense |  | $ | 145 |  |  | $ | (147 | )

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI https://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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