Derivative Instruments

6 Months Ended

Jun. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

From time to time, the Company enters into interest rate swap agreements with certain borrowers to assist them in mitigating their interest rate risk exposure associated with the loans they have with the Company. At the same time, the Company enters into identical offsetting interest rate swap agreements with another financial institution to mitigate the Company’s interest rate risk exposure associated with the swap agreements it enters into with its borrowers. At June 30, 2021, the Company had over-the-counter derivative instruments and centrally-cleared derivative instruments with matched terms with an aggregate notional amount of $137.2 million and a fair value of $6.7 million compared with an aggregate notional amount of $145.2 million and a fair value of $12.1 million at December 31, 2020. The fair value of these agreements are determined through a third party valuation model used by the Company’s counterparty bank, which uses observable market data such as cash LIBOR rates, prices of Eurodollar futures contracts, and market swap rates. The fair values of these swaps are recorded as components of other assets and other liabilities in the Company’s consolidated statements of financial condition. Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Company’s consolidated statements of income as a component of noninterest income.

Over-the-counter contracts are tailored to meet the needs of the counterparties involved and, therefore, generally contain a greater degree of credit risk and liquidity risk than centrally-cleared contracts, which have standardized terms. Although changes in the fair value of swap agreements between the Company and borrowers and the Company and other financial institutions offset each other, changes in the credit risk of these counterparties may result in a difference in the fair value of these swap agreements. Offsetting over-the-counter swap agreements the Company has with other financial institutions are collateralized with cash and investment securities, and swap agreements with borrowers are secured by the collateral arrangements for the underlying loans these borrowers have with the Company. During the six months ended June 30, 2021 and 2020, there were no losses recorded on swap agreements attributable to the change in credit risk associated with a counterparty. All interest rate swap agreements entered into by the Company as of June 30, 2021 and December 31, 2020 are free-standing derivatives and are not designated as hedging instruments.

The Company’s credit derivatives result from entering into credit risk participation agreements (“RPAs”) with a counterparty bank (Opus) during the first quarter of 2020 to accept a portion of the credit risk on interest rate swaps related to loans. RPAs provide credit protection to the financial institution should the borrower fail to perform on its interest rate swap derivative contract with the financial institution. The credit risk related to these credit derivatives is managed through the Company’s loan underwriting process. RPAs are derivative financial instruments not designated as hedging and are recorded at fair value. Changes in fair value are recognized as a component of noninterest income with a corresponding offset within other assets or other liabilities. As the result of the acquisition of Opus, the RPAs were terminated in the second quarter 2020.

The Company acquired two individual equity warrant assets as a result of acquisition of the Opus. Opus received equity warrant assets through its lending activities, which were accounted for as loan origination fees. The warrants provide the Bank the right to purchase a specific number of equity shares of the underlying company’s equity at a certain price before expiration and contain net settlement terms qualifying as derivatives under ASC Topic 815. The Company no longer has loans associated with these borrowers. Changes in fair value are recognized as a component of noninterest income with a corresponding offset within other assets. The total fair value of the warrants held in private companies was $1.9 million in other assets as of June 30, 2021 and December 31, 2020. The two warrants expire on March 12, 2023 and July 28, 2025, respectively.

The following tables summarize the Company's derivative instruments included in other assets and other liabilities in the consolidated statements of financial condition:


	June 30, 2021
	Derivative Assets				Derivative Liabilities
(Dollars in thousands)	Notional		Fair Value		Notional		Fair Value
Derivative instruments not designated as hedging instruments:
Interest rate swaps contracts	$	137,154	$	6,712	$	137,154	$	6,716
Equity warrants	—		1,903		—		—
Total derivative instruments	$	137,154	$	8,615	$	137,154	$	6,716


	December 31, 2020
	Derivative Assets				Derivative Liabilities
(Dollars in thousands)	Notional		Fair Value		Notional		Fair Value
Derivative instruments not designated as hedging instruments:
Interest rate swaps contracts	$	145,181	$	12,053	$	145,181	$	12,066
Equity warrants	—		1,914		—		—
Total derivative instruments	$	145,181	$	13,967	$	145,181	$	12,066

The following table summarizes the effect of the derivative financial instruments in the consolidated statements of income.



(Dollars in thousands)		Three Months Ended				Six Months Ended
Derivative Not Designated as Hedging Instruments:	Location of Gain (Loss) Recognized in Income on Derivative Instruments	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Interest rate products	Other income	$	1	$	—	$	8	$	—
Other contracts	Other income	—		(1)		—		197
Equity warrants	Other income	(8)		(4)		(11)		(4)
Total		$	(7)	$	(5)	$	(3)	$	193