DERIVATIVES AND HEDGING

6 Months Ended

Jun. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 - Hedges of Interest Rate Risk

Interest Rate Contracts - Cash Flow Hedges. 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 three and six months ended June 30, 2023 and 2022, 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 is 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 $3.2 million will be reclassified as a decrease to interest expense and an additional $3.4 million will be reclassified as a decrease to interest income over the next 12 months.

Interest Rate Contracts - Fair Value Hedges. Derivatives designated as fair value hedges are utilized to mitigate the risk of changes in the fair values of recognized assets and liabilities. The Company uses interest rate contracts in this manner to manage its exposure to changes in the fair value of hedged items caused by changes in interest rates.

Changes in the fair value of the derivatives and changes in the fair value of the hedged item due to changes in the hedged risk are recognized in earnings in the same line item. If a hedge is terminated, but the hedged item was not derecognized, all remaining adjustments to the carrying amount of the hedged item are amortized over a period that is consistent with the amortization of other discounts or premiums associated with the hedged item.

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
(Dollars in thousands)	Notional Amount		Location	Fair Value		Notional Amount		Location	Fair Value
June 30, 2023
Derivatives designated as hedging instruments:
Interest rate contracts(1)	$	435,000	Other Assets	$	18,433	$	133,000	Accrued interest and other liabilities	$	4,398
Total derivatives designated as hedging instruments				$	18,433				$	4,398
Derivatives not designated as hedging instruments:
Customer loan swaps(1)	$	285,002	Other assets	$	15,329	$	285,002	Accrued interest and other liabilities	$	15,366
Risk participation agreements	28,324		Other assets	—		43,801		Accrued interest and other liabilities	—
Fixed rate mortgage interest rate lock commitments	11,358		Other assets	110		18,472		Accrued interest and other liabilities	162
Forward delivery commitments	8,591		Other assets	143		2,076		Accrued interest and other liabilities	9
Total derivatives not designated as hedging instruments				$	15,582				$	15,537
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	$	345,545	Accrued interest and other liabilities	$	14,850
Risk participation agreements	21,818		Other assets	—		53,704		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

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

The following table shows the carrying amount and associated cumulative basis adjustments related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships:


Location in Consolidated Statements of Condition	Carrying Amount of Hedged Assets/(Liabilities)				Cumulative Fair Value Hedging Adjustment in the Carrying Amount of the Hedged Assets/(Liabilities)
(Dollars in thousands)	June 30, 2023		December 31, 2022		June 30, 2023		December 31, 2022
Loans(1)	$	368,930	$	—	$	6,070	$	—
Total	$	368,930	$	—	$	6,070	$	—

(1) These amounts include the amortized cost basis of residential real estate loans that were 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 residential real estate loans used in these hedging relationships was $839.1 million and the amount of the designated hedged residential loans was $375.0 million.

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 Three Months Ended June 30, 2023
Interest rate contracts	$	(864)	$	(864)	$	—	Interest and fees on loans	$	(862)	$	(862)	$	—

Interest rate contracts	1,517		1,517		—		Interest on borrowings	537		537		—
Interest rate contracts	1,406		1,406		—		Interest on junior subordinated debentures	182		182		—
Total	$	2,059	$	2,059	$	—		$	(143)	$	(143)	$	—

For the Six Months Ended June 30, 2023
Interest rate contracts	$	(682)	$	(682)	$	—	Interest and fees on loans	$	(1,579)	$	(1,579)	$	—
Interest rate contracts	(1)		(1)		—		Interest on deposits	306		306		—
Interest rate contracts	722		722		—		Interest on borrowings	1,024		1,024		—
Interest rate contracts	472		472		—		Interest on junior subordinated debentures	315		315		—
Total	$	511	$	511	$	—		$	66	$	66	$	—

For the Three Months Ended June 30, 2022
Interest rate contracts	$	(904)	$	(904)	$	—	Interest and fees on loans	$	237	$	237	$	—
Interest rate contracts	2,233		2,233		—		Interest on deposits	32		32		—

Interest rate contracts	2,259		2,259				Interest on junior subordinated debentures	(271)		(271)
Total	$	3,588	$	3,588	$	—		$	(2)	$	(2)	$	—

For the Six Months Ended June 30, 2022
Interest rate contracts	$	(3,915)	$	(3,915)	$	—	Interest and fees on loans	$	619	$	619	$	—
Interest rate contracts	5,721		5,721		—		Interest on deposits	(117)		(117)		—

Interest rate contracts	5,417		5,417		—		Interest on junior subordinated debentures	(622)		(622)		—
Total	$	7,223	$	7,223	$	—		$	(120)	$	(120)	$	—

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


	Location and Amount of Gain (Loss) Recognized in Income
	Three Months Ended June 30,
	2023								2022
(Dollars in thousands)	Interest and fees on loans		Interest on deposits		Interest on borrowings		Interest on junior subordinated debentures		Interest and fees on loans		Interest on deposits		Interest on junior subordinated debentures
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded	$	48,645	$	19,245	$	3,587	$	533	$	33,121	$	2,510	$	532
Gain (loss) on fair value hedging relationships
Interest rate contracts:
Hedged items	$	(7,655)	$	—	$	—	$	—	$	—	$	—	$	—
Derivatives designated as hedging instruments	$	8,859	$	—	$	—	$	—	$	—	$	—	$	—
Gain (loss) on cash flow hedging relationships
Interest rate contracts:
Amount of gain (loss) reclassified from AOCI into income	$	(862)	$	—	$	537	$	182	$	237	$	32	$	(271)
Amount of gain (loss) reclassified from AOCI into income - included component	$	(862)	$	—	$	537	$	182	$	237	$	32	$	(271)
Amount of gain (loss) reclassified from AOCI into income - excluded component	$	—	$	—	$	—	$	—	$	—	$	—	$	—


	Location and Amount of Gain (Loss) Recognized in Income
	Six Months Ended June 30,
	2023								2022
(Dollars in thousands)	Interest and fees on loans		Interest on deposits		Interest on borrowings		Interest on junior subordinated debentures		Interest and fees on loans		Interest on deposits		Interest on junior subordinated debentures
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded	$	93,977	$	35,077	$	5,672	$	1,061	$	65,156	$	4,343	$	1,061
Gain (loss) on fair value hedging relationships
Interest rate contracts:
Hedged items	$	(6,103)	$	—	$	—	$	—	$	—	$	—	$	—
Derivatives designated as hedging instruments	$	7,786	$	—	$	—	$	—	$	—	$	—	$	—
Gain (loss) on cash flow hedging relationships
Interest rate contracts:
Amount of gain (loss) reclassified from AOCI into income	$	(1,579)	$	306	$	1,024	$	315	$	619	$	(117)	$	(622)
Amount of gain (loss) reclassified from AOCI into income - included component	$	(1,579)	$	306	$	1,024	$	315	$	619	$	(117)	$	(622)
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:


	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income
		Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)		2023		2022		2023		2022
Customer loan swaps	Other expense	$	38	$	44	$	11	$	138
Fixed rate mortgage interest rate lock commitments	Mortgage banking income, net	(80)		268		4		(191)
Forward delivery commitments	Mortgage banking income, net	116		(155)		20		11
Total		$	74	$	157	$	35	$	(42)

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 June 30, 2023 and December 31, 2022, 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 $15.4 million and $14.8 million, respectively. As of June 30, 2023 and December 31, 2022, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $0 and $0, respectively. If the Company had breached any of these provisions at June 30, 2023 or December 31, 2022, it could have been required to settle its obligations under the agreements at their termination value of $15.4 million and $14.8 million, respectively.