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Derivative Instruments
 9 Months Ended
Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments Derivative Instruments
The Company uses derivative instruments to manage its exposure to market risks, including interest rate risk, and to assist customers with their risk management objectives. The Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, while other derivatives serve as economic hedges that do not qualify for hedge accounting.

Derivatives Designated as Hedging Instruments

Fair Value Hedges – The Company is exposed to changes in the fair value of fixed-rate assets due to changes in benchmark interest rates. During the third quarter of 2021, the Company entered into pay-fixed and receive-floating interest rate swaps of certain fixed rate loans, primarily commercial real estate loans, to manage its exposure to changes in fair value on these instruments attributable to changes in the designated USD-SOFR-COMPOUND benchmark interest rate. These interest rate swaps are designated as fair value hedges using the last-of-layer method. As a result, the Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts. The fair value of fair value hedges are recorded as components of other assets and other liabilities in the Company’s consolidated statements of financial condition. The gain or loss on these derivatives, as well as the offsetting loss or gain on the hedged items attributable to the hedged risk are recognized in interest income in the Company’s consolidated statements of income. At September 30, 2021, interest rate swaps with a notional amount totaling $300.0 million and a fair value totaling $932,000 were designated as fair value hedges.

The following amounts were recorded on the consolidated statement of financial condition related to cumulative basis adjustment for fair value hedges as of the dates indicated:

Line Item in the Statement of Financial Position in Which the Hedged Item is IncludedCarrying Amount of the Hedged AssetsCumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
(Dollars in thousands)September 30, 2021December 31, 2020September 30, 2021December 31, 2020
Loans held for investment(1)
$298,973 $— $(1,027)$— 
Total$298,973 $— $(1,027)$— 
______________________________
(1) These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At September 30, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $815.2 million; the cumulative basis adjustments associated with these hedging relationships was $1.0 million; and the amounts of the designated hedged items were $300.0 million.
Derivatives Not Designated as Hedging Instruments

Interest Rate Swap Contracts – 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 September 30, 2021, the Company had over-the-counter derivative instruments and centrally-cleared derivative instruments with matched terms with an aggregate notional amount of $135.6 million and a fair value of $5.8 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 interest 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 nine months ended September 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 September 30, 2021 and December 31, 2020 are free-standing derivatives and are not designated as hedging instruments.

Other Contracts – 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 instruments 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.

Equity Warrant Assets – The Company acquired two individual equity warrant assets as a result of the acquisition of 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 September 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:
September 30, 2021
Derivative AssetsDerivative Liabilities
(Dollars in thousands)NotionalFair ValueNotionalFair Value
Derivative instruments designated as hedging instruments:
Fair value hedge - interest rate swap contracts$300,000 $932 $— $— 
Total derivative designated as hedging instruments300,000 932 — — 
Derivative instruments not designated as hedging instruments:
Interest rate swaps contracts135,580 5,815 135,580 5,819 
Equity warrants— 1,895 — — 
Total derivative not designated as hedging instruments$135,580 $7,710 $135,580 $5,819 
Total derivatives435,580 8,642 135,580 5,819 

December 31, 2020
Derivative AssetsDerivative Liabilities
(Dollars in thousands)NotionalFair ValueNotionalFair 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 presents the effect of fair value hedge accounting on the consolidated statements of income:
Three Months Ended
(Dollars in thousands)Location of Gain (Loss) Recognized in Income on Derivative InstrumentsSeptember 30, 2021
Gain (loss) on fair value hedging relationships:
Hedged itemsInterest Income$(1,027)
Derivatives designated as hedging instruments Interest Income932 

The following table summarizes the effect of the derivatives not designated as hedging instruments in the consolidated statements of income.
(Dollars in thousands)Three Months Ended September 30,Nine Months Ended September 30,
Derivatives Not Designated as Hedging Instruments:Location of Gain (Loss) Recognized in Income on Derivative Instruments2021202020212020
Interest rate productsOther income$1 $— $9 $— 
Other contractsOther income— 218 — 415 
Equity warrantsOther income(8)(31)(19)(35)
Total$(7)$187 $(10)$380