Balance Sheet Offsetting

12 Months Ended

Dec. 31, 2022

DERIVATIVES AND HEDGING

The Company is exposed to certain risk 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. The Company’s credit derivatives result from loan participation arrangements, and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities.

Derivatives Designated as Hedging Instruments - Cash Flow Hedges of Interest Rate Risk

Interest Rate Contracts. 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. For the years ended December 31, 2022 and 2021, such derivatives were used to hedge the variable cash flows associated with existing variable-rate assets or liabilities or forecasted issuances of debt.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense or interest income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense or interest income as interest payments are made or received on the Company’s variable-rate liabilities or assets. The Company estimates that an additional $3.0 million will be reclassified as a decrease to interest expense and an additional $3.1 million will be reclassified as a decrease to interest income over the next 12 months.

Derivatives not Designated as Hedges

Customer Loan Swaps. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate 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.

Fixed Rate Mortgage Interest Rate Lock Commitments. As part of the origination process of a residential loan, the Company may enter into rate lock agreements with its borrower, which is considered an interest rate lock commitment. If the Company intends to sell the loan upon origination, it will account for the interest rate lock commitment as a derivative.

Forward Delivery Commitments. The Company typically enters into a forward delivery commitment with a secondary market investor, which has been approved by the Company within its normal governance process, at the onset of the loan origination process. The Company may enter into these arrangements with the secondary market investors on a “best effort“ or “mandatory delivery” basis. The Company's normal practice is typically to enter into these arrangements on a "best effort” basis. The Company enters into these arrangements with the secondary market investors to manage its interest rate exposure. The Company accounts for the forward delivery commitment as a derivative upon origination of a loan identified as held for sale.

Risk Participation Agreements. The Company’s existing credit derivatives result from participations in or out of interest rate swaps provided by or to external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans.

The following table presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated statements of condition as of the dates indicated:


	Derivative Assets					Derivative Liabilities
(In thousands)	Notional Amount		Location	Fair Value		Notional Amount		Location	Fair Value
December 31, 2022
Derivatives designated as hedging instruments:
Interest rate contracts(1)	$	110,000	Other assets	$	13,051	$	133,000	Accrued interest and other liabilities	$	5,515
Total derivatives designated as hedging instruments				$	13,051				$	5,515
Derivatives not designated as hedging instruments:
Customer loan swaps(1)	$	260,130	Other assets	$	14,802	$	260,130	Accrued interest and other liabilities	$	14,850
Risk participation agreements	21,818		Other assets	—		44,438		Accrued interest and other liabilities	—
Fixed Rate mortgage interest rate lock commitments	4,493		Other assets	31		9,597		Accrued interest and other liabilities	87
Forward delivery commitments	5,259		Other assets	114		—		Accrued interest and other liabilities	—
Total derivatives not designated as hedging instruments				$	14,947				$	14,937
December 31, 2021
Derivatives designated as hedging instruments:
Interest rate contracts(1)	$	160,000	Other assets	$	5,589	$	83,000	Accrued interest and other liabilities	$	7,872
Total derivatives designated as hedging instruments				$	5,589				$	7,872
Derivatives not designated as hedging instruments:
Customer loan swaps(1)	$	345,545	Other assets	$	19,297	$	345,545	Accrued interest and other liabilities	$	19,485
Risk participation agreements	25,347		Other assets	—		53,704		Accrued interest and other liabilities	—
Fixed rate mortgage interest rate lock commitments	20,437		Other assets	371		8,587		Accrued interest and other liabilities	91
Forward delivery commitments	3,882		Other assets	86		1,903		Accrued interest and other liabilities	6
Total derivatives not designated as hedging instruments				$	19,754				$	19,582

(1) Reported fair values include accrued interest receivable and payable.

The table below presents the effect of cash flow hedge accounting, before tax, on AOCI for the periods indicated:


(Dollars in thousands)	Amount of Gain (Loss) Recognized in OCI on Derivative		Amount of Gain (Loss) Recognized in OCI Included Component		Amount of Gain (Loss) Recognized in OCI Excluded Component		Location of Gain (Loss) Recognized from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income		Amount of Gain (Loss) Reclassified from AOCI into Income Included Component		Amount of Gain (Loss) Reclassified from AOCI into Income Excluded Component
For the Year Ended December 31, 2022
Interest rate contracts	$	(6,147)	$	(6,147)	$	—	Interest and fees on loans	$	5	$	5	$	—
Interest rate contracts	5,892		5,892		—		Interest on deposits	441		441		—
Interest rate contracts	2,455		2,455		—		Interest on borrowings	551		551		—
Interest rate contracts	7,838		7,838		—		Interest on subordinated debentures	(729)		(729)		—
Total	$	10,038	$	10,038	$	—		$	268	$	268	$	—

For the Year Ended December 31, 2021
Interest rate contracts	$	(1,697)	$	(1,697)	$	—	Interest and fees on loans	$	1,614	$	1,614	$	—
Interest rate contracts	2,447		2,447		—		Interest on deposits	(661)		(661)		—

Interest rate contracts	2,237		2,237		—		Interest on subordinated debentures	(1,593)		(1,593)		—
Total	$	2,987	$	2,987	$	—		$	(640)	$	(640)	$	—

For the Year Ended December 31, 2020
Interest rate contracts	$	5,693	$	5,693	$	—	Interest and fees on loans	$	1,006	$	1,006	$	—
Interest rate contracts	(810)		(810)		—		Interest on deposits	(130)		(130)		—
Interest rate contracts	(135)		(135)		—		Interest on borrowings	(102)		(102)		—
Interest rate contracts	(3,534)		(3,534)		—		Interest on subordinated debentures	(1,371)		(1,371)		—
Total	$	1,214	$	1,214	$	—		$	(597)	$	(597)	$	—

The table below presents the effect of cash flow hedge accounting on the consolidated statements of income for the periods indicated:


	Location and Amount of Gain (Loss) Recognized in Income
	For the Year Ended December 31,
	2022								2021				2020
(Dollars in thousands)	Interest and Fees on Loans		Interest on Deposits		Interest on borrowings		Interest on Subordinated Debentures		Interest and Fees on Loans		Interest on Deposits		Interest on Subordinated Debentures		Interest and Fees on Loans		Interest on Deposits		Interest on Borrowings		Interest on Subordinated Debentures
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded	$	144,709	$	20,305	$	2,649	$	2,140	$	125,437	$	7,920	$	2,523	$	134,000	$	15,544	$	1,837	$	3,512
Gain (loss) on cash flow hedging relationships
Interest rate contracts:
Amount of gain (loss) reclassified from AOCI into income	$	5	$	441	$	551	$	(729)	$	1,614	$	(661)	$	(1,593)	$	1,006	$	(130)	$	(102)	$	(1,371)
Amount of gain (loss) reclassified from AOCI into income - included component	$	5	$	441	$	551	$	(729)	$	1,614	$	(661)	$	(1,593)	$	1,006	$	(130)	$	(102)	$	(1,371)
Amount of gain (loss) reclassified from AOCI into income - excluded component	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

The table below presents the effect of the Company's derivative financial instruments that are not designated as hedging instruments on the consolidated statements of income for the periods indicated:


		Amount of Gain (Loss) Recognized in Income
	Location of Gain (Loss) Recognized in Income	For the Year Ended December 31,
(Dollars in thousands)		2022		2021		2020
Customer loan swaps	Other expense	$	(336)	$	(189)	$	—
Fixed rate mortgage interest rate lock commitments	Mortgage banking income, net	34		(80)		(102)
Forward delivery commitments	Mortgage banking income, net	140		(35)		(182)
Total		$	(162)	$	(304)	$	(284)

Credit Risk-Related Contingent Features

By using derivatives, 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, monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote.

The Company has agreements with its derivative counterparties that contain a provision where 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. In addition, the Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well-

capitalized institution, then the counterparty could terminate the derivative position(s) and the Company could be required to settle its obligations under the agreements.

As of December 31, 2022 and 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk, related to these agreements was $14.8 million and $26.1 million, respectively. As of December 31, 2022 and 2021, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $0 and $30.7 million, respectively. If the Company had breached any of these provisions at December 31, 2022 or 2021, it could have been required to settle its obligations under the agreements at their termination value of $14.8 million and $26.1 million, respectively.

Subsequent to December 31, 2022, the Company executed four fixed-for-floating interest rate swaps for a total of $300.0 million of notional on a designated pool of fixed rate residential real estate loans. The derivative transaction was designated as a “fair value hedge” under ASC 815. Refer to the recent accounting pronouncements section within Note 1 Business and Summary of Significant Accounting Policies.

BALANCE SHEET OFFSETTINGThe Company does not offset the carrying value for derivative instruments or repurchase agreements on the consolidated statements of condition. The Company does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be pledged or received is monitored and adjusted as necessary. Refer to Note 10 for further discussion of repurchase agreements and Note 12 for further discussion of derivative instruments.

The following table presents the Company's derivative positions and repurchase agreements, and the potential effect of netting arrangements on its consolidated statements of condition, as of the dates indicated:


							Gross Amount Not Offset in the Consolidated Statements of Condition
(In thousands)	Gross Amount Recognized in the Consolidated Statements of Condition		Gross Amount Offset in the Consolidated Statements of Condition		Net Amount Presented in the Consolidated Statements of Condition		Financial Instruments Pledged (Received)(1)		Cash Collateral Pledged (Received)(1)		Net Amount
December 31, 2022
Derivative assets:
Customer loan swaps - dealer bank(2)	$	14,802	$	—	$	14,802	$	—	$	—	$	14,802
Interest rate contracts(3)	13,051		—		13,051		—		(10,915)		2,136
Total	$	27,853	$	—	$	27,853	$	—	$	(10,915)	$	16,938
Derivative liabilities:
Customer loan swaps - commercial customer(3)	$	14,850	$	—	14,850		$	—	$	—	$	14,850
Interest rate contracts(3)	5,515		—		5,515		—		5,515		—
Total	$	20,365	$	—	$	20,365	$	—	$	5,515	$	14,850
Customer repurchase agreements	$	196,451	$	—	$	196,451	$	196,451	$	—	$	—
December 31, 2021
Derivative assets:
Customer loan swaps - commercial customer(3)	$	19,297	$	—	$	19,297	$	—	$	—	$	19,297
Interest rate contracts(3)	5,589		—		5,589		—		(5,529)		60
Total	$	24,886	$	—	$	24,886	$	—	$	(5,529)	$	19,357
Derivative liabilities:
Customer loan swaps - dealer bank(2)	$	19,485	$	—	19,485		$	—	$	19,485	$	—
Interest rate contracts(3)	7,872		—		7,872		—		6,603		1,269
Total	$	27,357	$	—	$	27,357	$	—	$	26,088	$	1,269
Customer repurchase agreements	$	211,608	$	—	$	211,608	$	211,608	$	—	$	—

(1) The amount presented was the lesser of the amount pledged (received) or the net amount presented in the consolidated statements of condition.

(2) Interest rate swap contracts were completed with the same dealer bank. The company maintains a master netting arrangement and settles collateral requested or pledged on a net basis for all contracts.

(3) The Company manages its net exposure with its commercial customers 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.