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Derivatives and Hedging Activities | 6 Months Ended
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Jun. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives and Hedging Activities | 14. Derivatives and Hedging Activities 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 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. These derivative financial instruments are reported at fair value in other assets or other liabilities and are not reported on a net basis. Derivatives Designated as Hedging Instruments 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 primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed rate payments or the receipt of fixed rate amounts from a counterparty in exchange for the Company making variable rate payments over the life of the agreements without exchange of the underlying notional amount. The Company entered into two $5 million notional interest rate swaps that were designated as cash flow hedges on 90-day advances from FHLB. The purpose of these cash flow hedges was to reduce potential interest rate risk by swapping a variable rate borrowing to a fixed rate. Management deemed it prudent to limit the variability of these interest payments by entering into these interest rate swap agreements. These agreements provided for the Company to receive payments at a variable rate determined by a specific index (three-month LIBOR) in exchange for making payments at a fixed rate. Publication of LIBOR is expected to cease in December of 2024. The swap agreements allowed for substitution of an alternative reference rate such as the secured overnight financing rate (“SOFR”) at that time. On January 17, 2023, the Company terminated both of its interest rate swap derivative instruments at a gain of $849,000. The Company recognized the change in fair value of these hedging instruments, previously accumulated in AOCI, as a gain on termination of interest rate swaps in its consolidated statement of (loss) income for the six months ended June 30, 2023 as it was determined that it was probable that the hedged forecasted transaction - the variability in cash flows related to 90-day advances from the FHLB - would not occur by the end of the original maturity dates of the hedging instruments. The use of derivatives for debt hedging as part of the Company's overall interest rate risk management strategy has been infrequent as the Company has utilized other interest rate risk management activities to achieve similar business purposes. Also, $536,000 of cash posted to the counterparty as collateral on these interest rate swaps contracts was returned to the Company. The changes in the fair value of interest rate swaps were reported in other comprehensive loss and were subsequently reclassified into interest expense or income in the period that the hedged transactions affected earnings. The change in fair value for these derivative instruments for the three months ended June 30, 2023 and 2022, was $-0- and $108,000, respectively, and $(112,000) and $545,000 for the six months ended June 30, 2023 and 2022, respectively. At December 31, 2022, the fair value of interest rate swap derivatives resulted in an asset of $961,000, and is recorded in other assets. The following table summarizes the Company's cash flow hedges associated with its interest rate risk management activities:
|  |  |  |  |  |  |  | December 31, 2022 |
(Dollars in thousands) |  | Start Date |  | Maturity Date |  | Rate |  | Notional |  |  | Assets |  |  | Liabilities |
Debt Hedging |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap 2020 |  | 4/13/2020 |  | 4/13/2025 |  | 0.68% |  | $ | 5,000 |  |  | $ | 431 |  |  | $ | — |
Interest Rate Swap 2021 |  | 4/13/2021 |  | 4/13/2026 |  | 0.74% |  |  | 5,000 |  |  |  | 530 |  |  |  | — |
Total Hedging Instruments |  |  |  |  |  |  |  | $ | 10,000 |  |  | $ | 961 |  |  | $ | — |
Hedged Items: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variability in cash flows related to 90-day FHLB advances |  |  |  |  |  |  |  | N/A |  |  | $ | — |  |  | $ | 10,000 |
The following tables summarize the effect of cash flow hedge accounting on the consolidated statements of (loss) income for the three and six months ended June 30, 2023 and 2022 :
| Location and Amount of Gain or Loss Recognized in Consolidated Statements of (Loss) Income |
| Three Months Ended June 30, |
(Dollars in thousands) | 2023 |  |  | 2022 |
| Interest Income (Expense) |  |  | Other Income (Expense) |  |  | Interest Income (Expense) |  |  | Other Income (Expense) |
The effect of cash flow hedge accounting: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount reclassified from AOCI into expense | $ | — |  |  | $ | — |  |  | $ | 6 |  |  | $ | — |
| Location and Amount of Gain or Loss Recognized in Consolidated Statements of (Loss) Income |
| Six Months Ended June 30, |
(Dollars in thousands) | 2023 |  |  | 2022 |
| Interest Income (Expense) |  |  | Other Income (Expense) |  |  | Interest Income (Expense) |  |  | Other Income (Expense) |
The effect of cash flow hedge accounting: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount reclassified from AOCI into expense | $ | — |  |  | $ | — |  |  | $ | (6) |  |  | $ | — |
The credit risk associated with these interest rate swaps was the risk of default by the counterparty. To minimize this risk, the Company only enters into interest rate swap agreements with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements did not represent amounts exchanged by the parties and, therefore, was not a measure of the potential loss exposure. Risk management results for the three and six months ended June 30, 2023 and 2022, related to the balance sheet hedging of $10.0 million of 90 day FHLB advances, included in borrowings, indicated that the hedge was 100% effective and there was no component of the derivative instruments’ unrealized gain or loss which was excluded from the assessment of hedge effectiveness. As of June 30, 2023 and December 31, 2022, the Company posted $-0- and $535,000, respectively, of cash to the counterparty as collateral on these interest rate swap contracts, which was presented within cash and due from banks on the consolidated balance sheets. Fair Value Hedges of Interest Rate Risk On June 5, 2023, the Company entered into an interest rate contract that was designated as a fair value hedge utilizing a pay fixed interest rate swap to hedge a portion of the residential mortgage loan portfolio's change in fair value attributable to the movement in the one-month SOFR. The Company is exposed to changes in the fair value of certain pools of fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. The Company's interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreement without the exchange of the underlying notional amount. The hedging strategy effectively converts these mortgage loans to SOFR floating rate loans for the term of the swap starting on the effective date. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income. As of June 30, 2023, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:
Location in Consolidated Balance Sheets |  | Carrying Amount of Hedged Assets/(Liabilities) |  |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities) |
(Dollars in thousands) |  | June 30, 2023 |  |  | December 31, 2022 |  |  | June 30, 2023 |  |  | December 31, 2022 |
Total loans |  | $ | 24,722 |  |  | $ | — |  |  | $ | (278 | ) |  | $ | — |
Total |  | $ | 24,722 |  |  | $ | — |  |  | $ | (278 | ) |  | $ | — |
These amounts include the amortized cost basis of closed portfolios of fixed-rate residential loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At June 30, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $63.7 million; the cumulative basis adjustments associated with these hedging relationships was $(278,000); and the notional amount of the designated hedged items were $25.0 million. Under the "portfolio layer" approach, the Company designated a $25.0 million notional amount of portfolio assets that are not expected to be affected by prepayments, defaults and other factors affecting the timing and amount of cash flows of the designated hedged layer. The Company had no fair value hedges at December 31, 2022. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of potential loss exposure. At June 30, 2023, the Company’s fair value hedges had a remaining maturity of 2.92 years, an average pay fixed rate of 3.99% and an average received rate of 5.06%. Derivatives not Designated as Hedging Instruments Customer Loan Swaps Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain commercial banking customers. On May 19, 2023, the Company entered into an interest rate swap with a commercial loan borrower. The Company executes interest rate swaps with customers to facilitate their respective risk management strategies. The interest rate swap contract with the commercial loan borrower allows them to convert floating-rate loan payments based on SOFR to fixed-rate loan payments. This interest rate swap is simultaneously hedged by an offsetting derivative that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivative and the offsetting derivative are recognized directly in earnings. The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheet:
| Derivative Assets |  |  | Derivative Liabilities |
| Notional Amount |  |  | Location |  | Fair Value |  |  | Notional Amount |  |  | Location |  | Fair Value |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
June 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives designated as |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts - fair value hedge | $ | 25,000 |  |  | Other assets |  | $ | 278 |  |  | $ | — |  |  | Other liabilities |  | $ | — |
Total derivatives designated as |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
hedging instruments |  |  |  |  |  | $ | 278 |  |  |  |  |  |  |  | $ | — |
Derivatives not designated as |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Customer loan swaps | $ | 4,378 |  |  | Other assets |  | $ | 48 |  |  | $ | 4,378 |  |  | Other liabilities |  | $ | 48 |
Total derivatives not designated as |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
hedging instruments |  |  |  |  |  | $ | 48 |  |  |  |  |  |  |  | $ | 48 |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives designated as |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts - cash flow hedge | $ | 10,000 |  |  | Other assets |  | $ | 961 |  |  | $ | — |  |  | Other liabilities |  | $ | — |
Total derivatives designated as |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
hedging instruments |  |  |  |  |  | $ | 961 |  |  |  |  |  |  |  | $ | — |
The following table presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the consolidated statements of (loss) income for the periods presented:
|  |  |  | Amount of Gain Recognized in Income |
|  |  |  | Three Months Ended |  |  | Six Months Ended |
|  |  |  | June 30, 2023 |  |  | June 30, 2022 |  |  | June 30, 2023 |  |  | June 30, 2022 |
(Dollars in thousands) |  | Location of Gain |  |  |  |  |  |  |  |  |  |  |  |
Customer loan swaps |  | Interest and fees on loans |  | $ | 95 |  |  | $ | — |  |  | $ | 95 |  |  | $ | — |
Credit-risk-related Contingent Features By entering into derivative transactions, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, and other monitoring procedures. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s board of directors. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote. As of June 30, 2023 and December 31, 2022, the Company posted $778,000 and $535,000, respectively, of cash to the counterparties as collateral on its interest rate swap contracts and customer loan swaps, which was presented within cash and due from banks on the consolidated balance sheets. Balance Sheet Offsetting Certain financial instruments may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. The Company’s derivative transactions with institutional counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Generally, the Company does not offset such financial instruments for financial reporting purposes. The following tables present the information about derivative positions that are eligible for offset in the consolidated balance sheets as of June 30, 2023 and December 31, 2022:
|  |  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset |  |  |  |
(Dollars in thousands) |  | Gross Amounts Recognized |  |  | Gross Amounts Offset |  |  | Net Amounts Recognized |  |  | Financial Instruments Pledged (Received) |  |  | Cash Collateral Pledged (Received)(1) |  |  | Net Amount |
June 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts (2) |  | $ | 278 |  |  | $ | — |  |  | $ | 278 |  |  | $ | — |  |  | $ | 278 |  |  | $ | — |
Customer loan swaps - commercial customer (3) |  |  | 48 |  |  |  | — |  |  |  | 48 |  |  |  | — |  |  |  | — |  |  |  | 48 |
Total |  | $ | 326 |  |  | $ | — |  |  | $ | 326 |  |  | $ | — |  |  | $ | 278 |  |  | $ | 48 |
Derivative Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Customer loan swaps - dealer bank (3) |  | $ | 48 |  |  | $ | — |  |  | $ | 48 |  |  | $ | — |  |  | $ | 48 |  |  | $ | — |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts (2) |  | $ | 961 |  |  | $ | — |  |  | $ | 961 |  |  | $ | — |  |  | $ | 535 |  |  | $ | 426 |
(1) The amount presented was the lesser of the amount pledged (received) or the net amount presented in the consolidated balance sheets. (2) Interest rate swap contracts were completed with the same dealer bank. The Company maintains a master netting arrangement with the counterparty and settles collateral on a net basis for all contracts. (3) The Company manages its net exposure on its commercial customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting practices. The Company does not post collateral to its commercial customers as part of its contract. At June 30, 2023 and December 31, 2022, there were no derivatives in a net liability position related to these agreements.

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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://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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