The Company utilizes interest rate swaps and floors to mitigate exposure to interest rate risk and to facilitate the needs of its clients. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts principally related to the Company’s assets.

The Company uses interest rate floors to manage its exposure to interest rate movements. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up-front premium.

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 AOCL and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded components is presented in interest income. Amounts reported in AOCI and AOCL related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets.

During the next twelve months, the Company estimates that $395,000 will be reclassified out of AOCI and AOCL into earnings, as a decrease to interest income.

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 agreements without the exchange of the underlying notional amount.

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.

The Company recorded the following amounts on the balance sheet related to cumulative basis adjustment for fair value hedges:

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 September 30, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $689.1 million, the cumulative basis adjustments associated with these hedging relationships was $6.4 million, and the notional amount of the designated hedged items were $500.0 million. 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 the potential loss exposure. At September 30, 2023, the Company’s fair value hedges had a weighted average remaining maturity of 1.53 years, and a weighted average fixed rate of 4.16%.

Derivatives not designated as hedges result from a service the Company provides to certain clients. For the Company’s clients, these are interest rate swaps and risk participation agreements.

Interest Rate Swaps. The Company enters into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating-rate loan payments to fixed rate loan payments. When the Company enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party. The third party exchanges the borrower’s fixed-rate loan payments for floating-rate loan payments. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Because these derivatives have mirror-image contractual terms, the changes in fair value substantially offset each other through earnings. Fees earned in connection with the execution of derivatives related to this program are recognized in earnings through loan-related derivative income.

The credit risk associated with swap transactions is the risk of default by the counterparty. To minimize this risk, the Company enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure.

Risk Participation Agreements. The Company enters into risk participation agreements (“RPAs”) with other banks participating in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. RPAs are derivative financial instruments and are recorded at fair value. These derivatives are not designated as hedges and, therefore, changes in fair value are recognized in earnings.

Under a risk participation-out agreement, a derivative asset, the Company participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Company assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank.

The following tables present the notional amount, the location, and fair values of derivative instruments in the Company’s consolidated balance sheets:


	September 30, 2023
	Derivative Assets					Derivative Liabilities
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
	(dollars in thousands)					(dollars in thousands)
Derivatives designated as hedging instruments
Interest rate contracts-cash flow hedging relationships	$	250,000	Other Assets	$	799	$	—	Other Liabilities	$	—
Interest rate contracts-fair value hedging relationships		500,000	Other Assets		6,329		—	Other Liabilities		—
Total derivatives designated as hedging instruments				$	7,128				$	—
Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate contracts	$	492,412	Other Assets	$	59,287	$	492,412	Other Liabilities	$	59,287
Risk participation agreements-out to counterparties		51,681	Other Assets		6		—	Other Liabilities		—
Risk participation agreements-in with counterparties		—	Other Assets		—		83,832	Other Liabilities		18
Total derivatives not designated as hedging instruments				$	59,293				$	59,305


	December 31, 2022
	Derivative Assets					Derivative Liabilities
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
	(dollars in thousands)					(dollars in thousands)
Derivatives designated as hedging instruments
Interest rate contracts-cash flow hedging relationships	$	250,000	Other Assets	$	1,966	$	—	Other Liabilities	$	—
Total derivatives designated as hedging instruments				$	1,966				$	—
Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate contracts	$	499,619	Other Assets	$	50,784	$	499,619	Other Liabilities	$	50,784
Risk participation agreements-out to counterparties		46,604	Other Assets		23		—	Other Liabilities		—
Risk participation agreements-in with counterparties		—	Other Assets		—		71,046	Other Liabilities		43
Total derivatives not designated as hedging instruments				$	50,807				$	50,827

The following tables present the changes to AOCI and AOCL as a result of cash flow hedge accounting as of the periods presented:


	Three Months Ended September 30, 2023
	Amount of Gain or (Loss) Recognized in OCI			Amount of Gain or (Loss) Recognized in OCI - Included Component		Amount of Gain or (Loss) Recognized in OCI - Excluded Component			Location of Gain or (Loss)	Amount of Gain or (Loss) Reclassified from AOCL into Income			Amount of Gain or (Loss) Reclassified from AOCL into Income Included Component		Amount of Gain or (Loss) Reclassified from AOCL into Income Excluded Component
	(dollars in thousands)									(dollars in thousands)
Interest rate contracts	$	(536	)	$	—	$	(536	)	Interest Income	$	(148	)	$	—	$	(148	)


	Nine Months Ended September 30, 2023
	Amount of Gain or (Loss) Recognized in OCI			Amount of Gain or (Loss) Recognized in OCI Included Component		Amount of Gain or (Loss) Recognized in OCI Excluded Component			Location of Gain or (Loss)	Amount of Gain or (Loss) Reclassified from AOCL into Income			Amount of Gain or (Loss) Reclassified from AOCL into Income Included Component			Amount of Gain or (Loss) Reclassified from AOCL into Income Excluded Component
	(dollars in thousands)									(dollars in thousands)
Interest rate contracts	$	(1,169	)	$	—	$	(1,169	)	Interest Income	$	(437	)	$	(96	)	$	(341	)


	Three Months Ended September 30, 2022
	Amount of Gain or (Loss) Recognized in OCI			Amount of Gain or (Loss) Recognized in OCI Included Component		Amount of Gain or (Loss) Recognized in OCI Excluded Component			Location of Gain or (Loss)	Amount of Gain or (Loss) Reclassified from AOCI into Income			Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component		Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
	(dollars in thousands)									(dollars in thousands)
Interest rate contracts	$	(209	)	$	59	$	(150	)	Interest Income	$	(20	)	$	29	$	(49	)


	Nine Months Ended September 30, 2022
	Amount of Gain or (Loss) Recognized in OCI			Amount of Gain or (Loss) Recognized in OCI - Included Component		Amount of Gain or (Loss) Recognized in OCI - Excluded Component			Location of Gain or (Loss)	Amount of Gain or (Loss) Reclassified from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component		Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
	(dollars in thousands)									(dollars in thousands)
Interest rate contracts	$	(2,267	)	$	634	$	(1,633	)	Interest Income	$	985	$	1,129	$	(144	)

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, monitoring procedures, and obtaining collateral, where appropriate. 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.

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 would be required to settle its obligations under the agreements.

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 financial instruments that are eligible for offset in the consolidated balance sheets at September 30, 2023 and December 31, 2022:


								Gross Amounts Not Offset
		Gross Amounts Recognized		Gross Amounts Offset		Net Amounts Recognized		Financial Instruments		Collateral Pledged (Received)			Net Amount
		September 30, 2023
	(dollars in thousands)
Offsetting of Derivative Assets
Derivative Assets		$	66,421	$	—	$	66,421	$	4	$	(66,407	)	$	10

Offsetting of Derivative Liabilities
Derivative Liabilities		$	59,305	$	—	$	59,305	$	4	$	—		$	59,301

								Gross Amounts Not Offset
		Gross Amounts Recognized		Gross Amounts Offset		Net Amounts Recognized		Financial Instruments		Collateral Pledged (Received)			Net Amount
		December 31, 2022
	(dollars in thousands)
Offsetting of Derivative Assets
Derivative Assets		$	52,773	$	—	$	52,773	$	48	$	(52,130	)	$	595

Offsetting of Derivative Liabilities
Derivative Liabilities		$	50,827	$	—	$	50,827	$	48	$	—		$	50,875

At September 30, 2023 and December 31, 2022, respectively, there were no derivatives in a net liability position related to these agreements.