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.

The Company uses interest rate swap agreements to assist in its interest rate risk management. The Company’s objective in using interest rate derivatives designated as cash flow hedges is to add stability to interest expense and to better manage its exposure to interest rate movements. To accomplish this objective, the Company utilizes interest rate swaps as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds. The notional amounts of the interest rate swaps designated as cash flow hedges do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties. The interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from one counterparty in exchange for the Company making fixed payments. The Company’s intent is to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments.

For derivatives designated as cash flow hedges, changes in the fair value of the derivative are initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction

affects 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.

Amounts reported in accumulated other comprehensive income related to designated cash flow hedge derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities.

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives 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 the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

The Company entered into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts in exchange for a fee. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities.

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The Company is exposed to credit risk in the event of nonperformance by the interest rate swap counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty.

The designated interest rate derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party's exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; and 3) if the Company fails to maintain its status as a well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of December 31 2022, the aggregate fair value of derivative contracts with credit risk contingent features (i.e. containing collateral posting or termination provisions based on our capital status) that was in a net asset position totaled $1.9 million. The aggregate fair value of all derivative contracts with credit risk contingent features that were a net liability position totaled $2.4 million as of December 31, 2021. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. As of December 31, 2022 the Company did not post any funds with its derivative counterparties against its obligations under these agreements because these agreements were in a net asset position. At December 31, 2021, the Company posted $2.9 million with its derivative counterparties against its obligations under these agreements because these agreements were in a net liability position. If the Company had breached any provisions under the agreements at December 31, 2022 or December 31, 2021, it could have been required to settle its obligations under the agreements at the termination value.


(dollars in thousands)	December 31, 2022						December 31, 2021
	Notional Amount		Fair Value			Balance Sheet Category		Notional Amount		Fair Value		Balance Sheet Category
Derivatives not designated as hedging instruments
Interest rate product	$	396,024	$	31,039		Other Assets		$	272,825	$	5,273	Other Assets
Mortgage banking derivatives	—		—			Other Assets		56,331		636		Other Assets
	$	396,024	$	31,039	31039000	Other Assets		$	329,156	$	5,909	Other Assets
Derivatives designated as hedging instruments
Interest rate product	—		$	—		Other Liabilities		$	—	$	—	Other Liabilities
Derivatives not designated as hedging instruments
Interest rate product	$	396,024	$	30,065		Other Liabilities		$	272,825	$	5,223	Other Liabilities
Other Contracts	25,902		2			Other Liabilities		26,417		47		Other Liabilities
Mortgage banking derivatives	—		—			Other Liabilities		—		—		Other Liabilities
	$	421,926	$	30,067		Other Liabilities		$	299,242	$	5,270	Other Liabilities
Net derivatives on the balance sheet			972							639
Cash and other collateral(1)			—							2,930
Net derivative Amounts			$	972						$	(2,291)

(1) Collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consist of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above.


The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
	Amount of Gain or (Loss) Recognized in OCI on Derivative Year Ended December 31,							Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Year Ended December 31,
Derivatives in ASC 815-20 Hedging Relationships (dollars in thousands)	2022		2021		2020			2022		2021		2020
Derivatives in cash flow hedging relationships
Interest rate products	$	—	$	—	$	(1,510)	Interest expense	$	—	$	(516)	$	(1,145)


The Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income
	Year Ended December 31,
	2022		2021		2020
	Interest Expense		Interest Expense		Interest Expense
Total amounts of income and expense line items presented in the Consolidated Statements of Income in which the effects of fair value or cash flow hedges are recorded	$	—	$	(516)	$	(1,145)


Gain or (loss) on cash flow hedging relationships in ASC 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	—	$	(516)	$	(1,145)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	—	$	—	$	—
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component	$	—	$	(516)	$	(1,145)


Effect of Derivatives Not Designated as Hedging Instruments on the Statements of Income
Derivatives Not Designated as Hedging Instruments under ASC 815-20	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
		Year Ended December 31,
		2022		2021		2020
Interest rate products	Other income / (expense)	$	3,057	$	2,797	$	153
Mortgage banking derivatives	Other income	671		636		5,213
Other contracts	Other income / (expense)	—		—		32
Total		$	3,728	$	3,433	$	5,398

Balance Sheet Offsetting: Our interest rate swap derivatives are eligible for offset in the Consolidated Balance Sheet and are subject to master netting arrangements. Our derivative transactions with 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. The Company generally offsets such financial instruments for financial reporting purposes.