Derivative Instruments

6 Months Ended

Jun. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

At June 30, 2023 and December 31, 2022, the fair values of the Company’s derivative instruments were as follows:


	June 30, 2023				December 31, 2022
(in thousands)	Other Assets		Other Liabilities		Other Assets		Other Liabilities
Interest rate swaps designated as cash flow hedges	$	945	$	817	$	167	$	45
Interest rate swaps not designated as hedging instruments:
Customers	532		63,834		603		66,439
Third party broker	63,834		532		66,439		603
	64,366		64,366		67,042		67,042
Interest rate caps not designated as hedging instruments:
Customers	—		9,243		—		10,002
Third party broker	9,610		—		10,207		—
	9,610		9,243		10,207		10,002
Mortgage derivatives not designated as hedging instruments:
Interest rate lock commitments	721		—		727		—
Forward contracts	118		39		107		71
	839		39		834		71
	$	75,760	$	74,465	$	78,250	$	77,160

Derivatives Designated as Hedging Instruments

Interest Rate Swaps On Debt Instruments

The Company enters into interest rate swap contracts on debt instruments which the Company designates and qualifies 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 June 30, 2023 and December 31, 2022, the Company had five interest rate swap contracts on debt instruments with notional amounts totaling $64.2 million maturing in the third and fourth quarters of 2025. 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 June 30, 2023 and December 31, 2022 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. The Company recognized unrealized gains of $0.1 million and unrealized losses of $0.1 million in the three months ended June 30, 2023 and 2022, respectively, and unrealized gains of $0.2 million and unrealized losses of $0.4 million in the six months ended June 30, 2023 and 2022, respectively, related to these interest rate swap contracts. These unrealized losses were included as part of interest expense on junior subordinated debentures in the Company’s consolidated statement of operations and comprehensive (loss) income. As of June 30, 2023, the estimated net unrealized gains in accumulated other comprehensive income expected to be reclassified into expense in the next twelve months amounted to $1.0 million.

In 2019, the Company terminated 16 interest rate swaps on debt instruments 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 $0.3 million in each of the three months ended June 30, 2023 and 2022 and $0.7 million in each of the six months ended June 30, 2023 and 2022 as a reduction of interest expense on FHLB advances as a result of this amortization.

Interest Rate Swaps On Loans

In the second quarter of 2023, the Company entered into an interest rate swap contract with a notional amount of $50.0 million, and maturity in the second quarter of 2025. The Company designated this interest rate swap as a cash flow hedge to manage interest rate risk exposure on variable rate interest receipts on the first $50 million principal balance of a pool of loans. This interest rate swap contract involves the Company’s payment of variable-rate amounts in exchange for the Company receiving fixed-rate payments over the life of the contract without exchange of the underlying notional amount. In the three and six month periods ended June 30, 2023, the Company did not recognize significant unrealized gains and losses in earnings related to this interest rate swap contract. Any unrealized losses or gains recognized in earnings in connection with this contract are included as part of interest income on loans in the Company’s consolidated statement of operations and comprehensive (loss) income. As of June 30, 2023, the estimated net unrealized losses in accumulated other comprehensive (loss) income expected to be reclassified into interest income in the next twelve months amounted to $0.7 million.

Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps

At June 30, 2023 and December 31, 2022, the Company had 144 and 143 interest rate swap contracts with customers, respectively, with total notional amounts of $920.0 million and $925.4 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, as of June 30, 2023 and December 31, 2022, the Company had interest rate swap mirror contracts with third party brokers with similar terms.

The Company enters 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 June 30, 2023 and December 31, 2022, the Company had four swap participation agreements with total notional amounts of approximately $73.8 million and $74.0 million, respectively. The notional amount of these agreements is based on the Company’s pro-rata share of the related interest rate swap contracts. As of June 30, 2023 and December 31, 2022, the fair value of swap participation agreements was not significant.

Interest Rate Caps

At June 30, 2023 and December 31, 2022, the Company had 16 and 19 interest rate cap contracts with customers with total notional amounts of $384.5 million and $448.8 million, respectively. These instruments involve the Company making payments if an interest rate exceeds the agreed strike price. In addition, at June 30, 2023 and December 31, 2022, the Company had 14 and 16 interest rate cap mirror contracts, respectively, with a third party broker with total notional amounts of $332.4 million and $371.9 million, respectively.

In April 2022, the Company entered into 4 interest rate cap contracts with various third-party brokers with total notional amounts of $140.0 million. These interest rate caps initially served to partially offset changes in the estimated fair value of interest rate cap contracts with customers at December 31, 2022. At June 30, 2023 and December 31, 2022, there were 2 and 4 interest rate cap contracts, respectively, with total notional amounts of $70.0 million and $140.0 million, respectively, in connection with this transaction.

Mortgage Derivatives

The Company enters into interest rate lock commitments and forward sale contracts to manage the risk exposure in the mortgage banking area. At June 30, 2023 and December 31, 2022, the Company had interest rate lock commitments with notional amounts of $88.3 million and $77.0 million, respectively, and forward contracts with notional amounts of $41.0 million and $17.0 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. The change in the fair value of these instruments was an unrealized loss of $0.6 million and $0.1 million in the three months ended June 30, 2023 and 2022, respectively, and an unrealized gain of $36 thousand and $0.2 million in the six months ended June 30, 2023 and 2022, respectively. These amounts were recorded as part of other noninterest income in the consolidated statements of operations and comprehensive (loss) income.

Credit Risk-Related Contingent Features

As of June 30, 2023 and December 31, 2022, the aggregate fair value of interest rate swaps in a liability position was $65.2 million and $67.1 million, respectively.

Some agreements may require pledging of securities when the valuation of a interest rate swap falls below a certain amount. There were no securities pledged as collateral for interest rate swaps in a liability position at June 30, 2023. At December 31, 2022, there were $0.5 million in debt securities held for sale pledged as collateral to secure interest rate swaps designated as cash flow hedges, with a fair value of $45 thousand. In addition, as of June 30, 2023 and December 31, 2022, the Company had cash held as collateral of $33.6 million and $41.6 million, respectively, for derivatives margin calls. See Note 2 “Interest Earning Deposits with Banks” for additional information about cash held as collateral. As of June 30, 2023, there were no collateral requirements related to interest rate swaps with third-party brokers not designated as hedging instruments.