Derivative Instruments

6 Months Ended

Jun. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

As of June 30, 2023 and December 31, 2022, the Company primarily utilizes non-hedging derivative financial instruments with commercial banking customers to facilitate their interest rate management strategies. For these instruments, the Company acts as an intermediary for its customers and has offsetting contracts with financial institution counterparties. Changes in the fair value of these underlying derivative contracts generally offset each other and do not significantly impact the Company's results of operations.

The following table summarizes the notional and fair value of these derivative instruments (in thousands):


	June 30, 2023				December 31, 2022
	Notional Amount		Fair Value		Notional Amount		Fair Value

Non-hedging interest rate derivatives:
Customer counterparties:
Loan interest rate swap - assets	$	27,463	$	1,458	$	28,238	$	1,298
Loan interest rate swap - liabilities	586,928		57,812		619,150		63,758

Non-hedging interest rate derivatives:
Financial institution counterparties:
Loan interest rate swap - assets	604,928		59,204		637,150		65,217
Loan interest rate swap - liabilities	27,463		1,458		28,238		1,298

The following table summarizes the change in fair value of these derivative instruments (in thousands):


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Change in Fair Value Non-Hedging Interest Rate Derivatives:
Other income (expense) - derivative assets	$	10,653	$	15,448	$	(5,477)	$	18,524
Other (expense) income - derivative liabilities	(10,653)		(15,448)		5,477		(18,524)
Other income (expense) - derivative liabilities	131		311		(67)		888

Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements. The Company's derivative transactions with financial institution counterparties are generally executed under International Swaps and Derivative Association ("ISDA") master agreements which include "right of setoff" 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. Nonetheless, the Company does not generally offset financial instruments for financial reporting purposes.

Pursuant to the Company's agreements with certain of its derivative financial institution counterparties, the Company may receive collateral or post collateral, which may be in the form of cash or securities, based upon mark-to-mark positions. The Company has received collateral with a value of $75.7 million and $83.0 million as of June 30, 2023 and December 31, 2022, respectively.

Loans associated with a customer counterparty loan interest rate swap agreement may be subject to a make whole penalty upon termination of the agreement. The dollar amount of the make whole penalty varies based on the remaining term of the agreement and market rates at that time. The make whole penalty is secured by equity in the specific collateral securing the loan. The Company estimates the make whole penalty when determining if there is sufficient collateral to pay off both the potential make whole penalty and the outstanding loan balance at the origination of the loan. In the event of a customer default, the make whole penalty is capitalized into the existing loan balance; however, no guarantees can be made that the collateral will be sufficient to cover both the make whole provision and the outstanding loan balance at the time of foreclosure.

Fair Value Hedges

During the year ended December 31, 2020, the Company entered into a series of fair value hedge agreements to reduce the interest rate risk associated with the change in fair value of certain securities. The total notional amount of these agreements was $150 million and the amortized cost of the hedged assets was $313.7 million and $330.0 million as of June 30, 2023 and

December 31, 2022, respectively. During the six months ended June 30, 2023 and 2022, the fair value hedge agreements were effective. The gains or losses on these hedges are recognized in current earnings as fair value changes.

The following table summarizes the financial statement impact of these derivative instruments (in thousands):


	June 30, 2023		December 31, 2022
Investment securities available for sale, at fair value	$	(14,429)	$	(15,394)
Other assets	14,384		15,262
Cumulative adjustment to Interest and dividends on investment securities	45		132

During the six months ended June 30, 2023, the Company entered into a fair value hedge agreement to reduce the interest rate risk associated with the change in fair value of certain loans. The total notional amount of these agreements was $100 million. During the six months ended June 30, 2023, the fair value hedge agreements were effective. The gains or losses on these hedges are recognized in current earnings as fair value changes.

The following table summarizes the financial statement impact of these derivative instruments (in thousands):


	June 30, 2023
Gross loans	$	(2,066)
Other assets	2,050
Cumulative adjustment to Interest and fees on loans	16