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 predominant derivative and hedging activities involve interest rate swaps related to certain borrowings, brokered deposits, investment securities and forward sales contracts associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.

The Company regularly enters into commitments to originate and sell loans held for sale. The Company has exposure to movements in interest rates associated with written interest rate lock commitments with potential borrowers to originate one-to four-family loans that are intended to be sold and for closed one-to-four-family mortgage loans held for sale for which fair value accounting has been elected, that are awaiting sale and delivery into the secondary market. The Company economically hedges the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one-to-four-family mortgage loans or into contracts to sell forward To-Be-Announced (“TBA”) mortgage-backed securities. These commitments and contracts are considered derivatives but have not been designated as hedging instruments for reporting purposes under U.S. GAAP. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in noninterest income or noninterest expense. The Bank recognizes all derivative instruments as either other assets or other liabilities on the Consolidated Balance Sheets and measures those instruments at fair value.

The Bank has entered into interest rate swaps to reduce the exposure to variability in interest-related cash outflows attributable to changes in forecasted London Interbank Offered Rate (“LIBOR”)-based borrowings and brokered deposits. These derivative instruments are designated as cash flow hedges. The hedged item is the LIBOR portion of the series of future adjustable-rate borrowings and deposits over the term of the interest rate swap. Accordingly, changes to the amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk are excluded from management’s assessment of hedge effectiveness. The Bank tests for hedging effectiveness on a quarterly basis. The accumulated other comprehensive income is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Bank has not recorded any hedge ineffectiveness since inception.

The Bank expects that approximately $2.1 million will be reclassified from accumulated OCI as a decrease to interest expense over the next twelve months related to these cash flow hedges.

The Company is exposed to changes in the fair value of certain of its pools of prepayable 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 Secured Overnight Financing Rate (“SOFR”). Interest rate swaps designated as fair value hedges involve 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 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.

As of June 30, 2022, the following amounts were recorded on the balance sheet related to cumulative-basis adjustment for fair value hedges. The Company had no fair value hedges at December 31, 2021.

These amounts include the amortized cost basis of closed portfolios used in designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At June 30, 2022, the amortized cost basis of the closed portfolios used in these hedging relationships was $244.7 million; the cumulative basis adjustments associated with these hedging relationships was $933,000; and the amounts of the designated hedged items was $60.0 million.

The following tables summarize the Bank’s derivative instruments at the dates indicated. The Bank has master netting agreements with derivative dealers with which it does business, but reflects gross assets and liabilities as other assets and other liabilities, respectively, on the Consolidated Balance Sheets, as follows:


	June 30, 2022
			Fair Value
Cash flow hedges:	Notional		Asset		Liability
Interest rate swaps - brokered deposits and borrowings	$	90,000	$	4,670	$	—
Fair value hedges:
Interest rate swaps - securities	$	60,000	$	931	$	—
Non-hedging derivatives:
Fallout adjusted interest rate lock commitments with customers		43,792		184		—
Mandatory and best effort forward commitments with investors		18,320		518		—
Forward TBA mortgage-backed securities		52,565		203		—


	December 31, 2021
			Fair Value
Cash flow hedges:	Notional		Asset		Liability
Interest rate swaps - brokered deposits and borrowings	$	90,000	$	1,168	$	155
Non-hedging derivatives:
Fallout adjusted interest rate lock commitments with customers		71,890		757		—
Mandatory and best effort forward commitments with investors		74,375		808		—
Forward TBA mortgage-backed securities		111,000		53		—

The following tables summarize the effect of fair value and cash flow hedge accounting on the income statement for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended				Three Months Ended
	June 30, 2022				June 30, 2021
	Interest Expense Deposits		Interest Income Securities		Interest Expense Deposits		Interest Income Securities
Total amounts presented in the Consolidated Statements of Income	$	1,557	$	1,670	$	1,870	$	1,313
Net gains (losses) on fair value hedging relationships
Interest rate swaps - securities
Recognized on hedged items	$	—	$	(933)	$	—	$	—
Recognized on derivatives designated as hedging instruments		—		831		—		—
Net income (expense) recognized on fair value hedges	$	—	$	(102)	$	—	$	—
Net gain (loss) on cash flow hedging relationships
Interest rate swaps - brokered deposits and borrowings
Realized gains (losses) (pre-tax) reclassified from AOCI into net income	$	55	$	—	$	(124)	$	—
Net income (expense) recognized on cash flow hedges	$	55	$	—	$	(124)	$	—


	Six Months Ended				Six Months Ended
	June 30, 2022				June 30, 2021
	Interest Expense Deposits		Interest Income Securities		Interest Expense Deposits		Interest Income Securities
Total amounts presented in the Consolidated Statements of Income	$	2,842	$	3,249	$	3,852	$	2,563
Net gains (losses) on fair value hedging relationships
Interest rate swaps - securities
Recognized on hedged items	$	—	$	(933)	$	—	$	—
Recognized on derivatives designated as hedging instruments		—		831		—		—
Net income (expense) recognized on fair value hedges	$	—	$	(102)	$	—	$	—
Net gain (loss) on cash flow hedging relationships
Interest rate swaps - brokered deposits and borrowings
Realized gains (losses) (pre-tax) reclassified from AOCI into net income	$	(46)	$	—	$	(238)	$	—
Net income (expense) recognized on cash flow hedges	$	(46)	$	—	$	(238)	$	—

Changes in the fair value of the nonhedging derivatives recognized in noninterest income on the Consolidated Statements of Income and included in gain on sale of loans resulted in net losses of $1.5 million and $3.0 million for the three months ended June 30, 2022 and 2021, respectively, and net losses of $1.7 million and $3.9 million for the six months ended June 30, 2022 and 2021, respectively.

The following tables present additional information related to the Company’s derivative contracts by type of financial instrument, as of June 30, 2022 and December 31, 2021:


			Gross Amounts		Net Amounts of Assets		Gross Amounts Not Offset
	Gross Amounts		Offset in the		Presented in the		in the Statement of Financial Position
Offsetting of Derivative Assets	of Recognized		Statement of		Statement of		Financial		Cash Collateral
as of June 30, 2022	Assets		Financial Position		Financial Position		Instruments		Received		Net Amount
Interest rate swaps	$	5,601	$	—	$	5,601	$	—	$	—	$	5,601

as of December 31, 2021
Interest rate swaps	$	1,168	$	—	$	1,168	$	—	$	—	$	1,168


			Gross Amounts		Net Amounts of		Gross Amounts Not Offset
	Gross Amounts		Offset in the		Liabilities		in the Statement of Financial Position
Offsetting of Derivative Liabilities	of Recognized		Statement of		Presented in the Statement		Financial		Cash Collateral
as of June 30, 2022	Liabilities		Financial Position		of Financial Position		Instruments		Posted		Net Amount
Interest rate swaps	$	—	$	—	$	—	$	—	$	—	$	—

as of December 31, 2021
Interest rate swaps	$	155	$	—	$	155	$	—	$	155	$	—

Credit-risk-related Contingent Features

The Company has interest rate swap agreements with certain of its derivative counterparties that contain a provision where if the Company either defaults or fails to maintain its status as a well / adequately capitalized institution, then the Company could be required to terminate the contracts or post additional collateral. As of June 30, 2022, the Company had no derivatives in a net liability position related to these agreements. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of securities with a carrying value of $2.7 million to secure interest rate swap agreements as of June 30, 2022. The Bank had posted no collateral, and had no posting requirement for TBA trades with counterparties at that date. In certain cases, the Company will have posted excess collateral, compared to total exposure due to initial margin requirements or day-to-day rate volatility.