Derivative Instruments

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

From time to time, the Company enters into derivative financial instruments as part of its interest rate management activities and to facilitate customer transactions. Those instruments may or may not be designated and qualify as part of a hedging relationship. The customer derivatives we use for the Company’s account are generally matched against derivatives from third parties, but are not designated as hedging instruments.

At December 31, 2021 and 2020 the fair value of the Company’s derivative instruments was as follows:


	December 31, 2021				December 31, 2020
(in thousands)	Other Assets		Other Liabilities		Other Assets		Other Liabilities
Interest rate swaps designated as cash flow hedges	$	—	$	615	$	—	$	1,658
Interest rate swaps not designated as hedging instruments:
Customers	18,858		1,923		39,715		—
Third party broker	1,923		18,858		—		39,715
	20,781		20,781		39,715		39,715
Interest rate caps not designated as hedging instruments:
Customers	—		764		—		58
Third party broker	477		—		6		—
	477		764		6		58
Mortgage derivatives not designated as hedging instruments:
Interest rate lock commitments	581		—		—		—
Forward contracts	31		38		—		—
	612		38		—		—
	$	21,870	$	22,198	$	39,721	$	41,431

Derivatives Designated as Hedging Instruments

The Company enters into interest rate swap contracts which the Company designates and qualify as cash flow hedges. These interest rate swaps are designed as cash flow hedges to manage the exposure that arises from differences in the amount of the Company’s known or expected cash receipts and the known or expected cash payments on designated debt instruments. These interest rate swap contracts involve the Company’s payment of fixed-rate amounts in exchange for the Company receiving variable-rate payments over the life of the contracts without exchange of the underlying notional amount.

At December 31, 2021 and 2020, the Company had five interest rate swap contracts with notional amounts totaling $64.2 million, maturing in the third and fourth quarters of 2022. These contracts were designated as cash flow hedges to manage the exposure of variable rate interest payments on all of the Company’s outstanding variable-rate junior subordinated debentures with principal amounts at December 31, 2021 and 2020 totaling $64.2 million. The Company expects these interest rate swaps to be highly effective in offsetting the effects of changes in interest rates on cash flows associated with the Company’s variable-rate junior subordinated debentures. In 2021 and 2020, the Company recognized unrealized losses of $0.9 million and $0.3 million, respectively, in connection with these interest rate swap contracts, which were included as part of interest expense on junior subordinated debentures in the Company’s consolidated statement of operations and comprehensive income. As of December 31, 2021, the estimated net unrealized losses in accumulated other comprehensive expected to be reclassified into expense in the next twelve months amounted to $0.9 million.

In 2019, the Company terminated 16 interest rate swaps that had been designated as cash flow hedges of variable rate interest payments on the outstanding and expected rollover of variable-rate advances from the FHLB. The Company is recognizing the contracts’ cumulative net unrealized gains of $8.9 million in earnings over the remaining original life of the terminated interest rate swaps ranging between one month and seven years. The Company recognized approximately $1.4 million as a reduction of interest expense on FHLB advances in each 2021 and 2020 as a result of this amortization.

Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps

At December 31, 2021 and 2020, the Company had 109 and 76 interest rate swap contracts with customers, respectively, with a total notional amount of $595.4 million and $475.6 million, respectively. These instruments involve the Company’s payment of variable-rate amounts to customers in exchange for the Company receiving fixed-rate payments from customers over the life of the contracts without exchange of the underlying notional amount. In addition, at December 31, 2021 and 2020, the Company had interest rate swap mirror contracts with third party brokers with similar terms. These instruments have maturities ranging from 2 to 13 years in 2021 (3 to 14 years in 2020).

In 2019, the Company entered into swap participation agreements with other financial institutions to manage the credit risk exposure on certain interest rate swaps with customers. Under these agreements, the Company, as the beneficiary or guarantor, will receive or make payments from/to the counterparty if the borrower defaults on the related interest rate swap contract. As of December 31, 2021 and 2020, we had two swap participation agreements with an aggregate notional amount of approximately $32.0 million. The notional amount of these agreements is based on the Company’s pro-rata share of the related interest rate swap contracts. As of December 31, 2021 and 2020, the fair value of swap participation agreements was not significant.

Interest Rate Caps

At December 31, 2021 and 2020, the Company had 19 and 23 interest rate cap contracts with customers with a total notional amount of $432.0 million and $486.5 million, respectively. These instruments involve the Company making payments if an interest rate exceeds the agreed strike price. In addition, at December 31, 2021 and 2020, the Company had 9 and 8 interest rate cap mirror contracts with a third party broker with total notional amounts of $190.7 million and $152.2 million, respectively. These instruments have maturities ranging from less than 1 to 5 years in 2021 (less than 1 to 3 years in 2020).

Mortgage Derivatives

In 2021, the Company entered into interest rate lock commitments and forward sale contracts to manage the risk exposure in the mortgage banking area. At December 31, 2021, the Company had interest rate lock commitments and forward contracts with notional amounts of $17.9 million and $16.5 million, respectively. Interest rate lock commitments guarantee the funding of residential mortgage loans originated for sale, at specified interest rates and times in the future. Forward sale contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. In 2021, the change in the fair value of these instruments was $0.6 million. These amounts were recorded as part of other noninterest income in the consolidated statements of operations and comprehensive income.

Credit Risk-Related Contingent Features

Some agreements may require the posting of pledged securities when the valuation of the interest rate swap falls below a certain amount.

At December 31, 2021 and 2020 the derivative contracts subject to credit-risk related contingent features was as follows:


(in thousands)	December 31, 2021		December 31, 2020
Fair value of derivative contracts	$	21,396	$	41,373

Securities Pledged	25,380		52,857
Liquidity exposure	$	(3,984)	$	(11,484)