The Company uses derivative financial instruments to manage its interest rate risk resulting from the differences in the amount, timing, and duration of known or expected cash receipts and known or expected cash payments. Additionally, the Company enters into interest rate derivatives and foreign exchange contracts to accommodate the business requirements of its customers (“customer-related positions”) and risk participation agreements entered into as financial guarantees of performance on customer-related interest rate swap derivatives. The Company also enters into residential mortgage loan commitments to fund mortgage loans at specified rates and times in the future and enters into forward sale commitments to sell such residential mortgage loans at specified prices and times in the future, both of which are considered derivative instruments. Derivative instruments are carried at fair value in the Company’s financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not the instrument qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.

By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty plus any initial margin collateral posted. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with those counterparties is remote. The Company’s discounting methodology and interest calculation of cash margin uses the Secured Overnight Financing Rate, or SOFR, for U.S. dollar cleared interest rate swaps.

An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. The Company has entered into interest rate swaps in which it pays floating and receives fixed interest in order to manage its interest rate risk exposure to the variability in interest cash flows on certain floating-rate commercial loans. Such interest rate swaps include those which effectively convert the floating rate one-month LIBOR, SOFR or overnight indexed swap rate interest payments received on the commercial loans to a fixed rate and consequently reduce the Company’s exposure to variability in short-term interest rates. For interest rate swaps that are accounted for as cash flow hedges, changes in fair value are included in other comprehensive income and reclassified into net income in the same period or periods during which the hedged forecasted transaction affects net income. The following table reflects the Company’s derivative positions as of June 30, 2022 for interest rate swaps which qualify as cash flow hedges for accounting purposes:

(1)The fair value included a net accrued interest receivable balance of $0.4 million as of June 30, 2022. In addition, the fair value includes netting adjustments which represent the amounts recorded to convert derivative assets and liabilities cleared through the CME from a gross basis to a net basis in accordance with applicable accounting guidance. As of June 30, 2022, the fair value was reduced to a net liability as a result of the inclusion of variation margin payments.

The Company expects approximately $1.5 million will be reclassified into interest income, as a reduction of such income, from other comprehensive income related to the Company’s active cash flow hedges in the next 12 months as of June 30, 2022. The reclassification is due to anticipated payments that will be received on the swaps based upon the forward curve as of June 30, 2022.

The Company discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in accumulated other comprehensive income (“AOCI”) are reclassified immediately into earnings and any subsequent changes in the fair value of such derivatives are recognized directly in earnings.


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Unrealized gains on terminated hedges included in AOCI – beginning of respective period	$	4,941	$	33,199	$	10,239	$	41,473
Unrealized gains on terminated hedges arising during the period	—		—		—		—
Reclassification adjustments for amortization of unrealized gains into net income	(3,091)		(8,219)		(8,389)		(16,493)
Unrealized gains on terminated hedges included in AOCI – end of respective period	$	1,850	$	24,980	$	1,850	$	24,980

The balance of terminated cash flow hedges in AOCI will be amortized into earnings through January 2023. The Company expects the remaining $1.9 million to be reclassified into interest income from other comprehensive income related to the Company’s terminated cash flow hedges in the next 12 months as of June 30, 2022.

Interest rate swaps offered to commercial customers do not qualify as hedges for accounting purposes. These swaps allow the Company to retain variable rate commercial loans while allowing the commercial customer to synthetically fix the loan rate by entering into a variable-to-fixed rate interest rate swap. The Company believes that its exposure to commercial customer derivatives is limited to nonperformance by either the customer or the dealer because these contracts are simultaneously matched at inception with an offsetting transaction.

Risk participation agreements are entered into as financial guarantees of performance on interest rate swap derivatives. The purchased (asset) or sold (liability) guarantee allow the Company to participate-out (fee paid) or participate-in (fee received) the risk associated with certain derivative positions executed with the borrower by the lead bank in a customer-related interest rate swap derivative.

Foreign exchange contracts consist of those offered to commercial customers and those entered into to hedge the Company’s foreign currency risk associated with a foreign-currency loan. Neither qualifies as a hedge for accounting purposes. These commercial customer derivatives are offset with matching derivatives with correspondent-bank counterparties in order to minimize foreign exchange rate risk to the Company. Exposure with respect to these derivatives is largely limited to nonperformance by either the customer or the other counterparty. Neither the Company nor the correspondent-bank counterparty are required to post collateral but each has established foreign-currency transaction limits to manage the exposure risk. The Company requires its customers to post collateral to minimize risk exposure.

The table below presents the fair value of the Company’s derivative financial instruments, as well as their classification on the consolidated balance sheets for the periods indicated. There were no derivatives designated as hedging instruments at December 31, 2021.


	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	Fair Value at June 30, 2022		Fair Value at December 31, 2021		Balance Sheet Location	Fair Value at June 30, 2022		Fair Value at December 31, 2021
	(In thousands)
Derivatives designated as hedging instruments
Interest rate swaps	Other assets	$	—	$	—	Other liabilities	$	2,006	$	—
Derivatives not designated as hedging instruments
Customer-related positions:
Interest rate swaps	Other assets	$	17,276	$	64,338	Other liabilities	$	41,531	$	17,880
Risk participation agreements	Other assets	122		315		Other liabilities	239		580
Foreign currency exchange contracts - matched customer book	Other assets	269		61		Other liabilities	254		46
Foreign currency exchange contracts - foreign currency loan	Other assets	58		—		Other liabilities	—		87
		$	17,725	$	64,714		$	42,024	$	18,593
Total		$	17,725	$	64,714		$	44,030	$	18,593

The table below presents the net effect of the Company’s derivative financial instruments on the consolidated income statements as well as the effect of the Company’s derivative financial instruments included in other comprehensive income (“OCI”) as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Derivatives designated as hedges:
Gain in OCI on derivatives	$	1,485	$	—	$	1,485	$	—
Gain reclassified from OCI into interest income (effective portion)	$	3,744	$	8,219	$	9,042	$	16,493
Gain recognized in income on derivatives (ineffective portion and amount excluded from effectiveness test)
Interest income	—		—		—		—
Other income	—		—		—		—
Total	$	—	$	—	$	—	$	—
Derivatives not designated as hedges:
Customer-related positions:
Gain (loss) recognized in interest rate swap income	$	1,427	$	(1,087)	$	3,725	$	3,764
Gain (loss) recognized in interest rate swap income for risk participation agreements	88		(105)		148		264
Gain (loss) recognized in other income for foreign currency exchange contracts:
Matched commercial customer book	2		(14)		—		(8)
Foreign currency loan	67		36		145		109
Total gain (loss) for derivatives not designated as hedges	$	1,584	$	(1,170)	$	4,018	$	4,129

The Company has agreements with its customer-related interest rate swap derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company also has agreements with certain of its customer-related interest rate swap derivative correspondent-bank counterparties that contain a provision whereby if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

Cleared derivative transactions are with the Chicago Mercantile Exchange, or CME, and exposure is settled to market daily, with additional credit exposure related to initial-margin collateral pledged to CME at trade execution. At June 30, 2022 and December 31, 2021, the Company had exposure to CME for settled variation margin in excess of the customer-related and non-customer-related interest rate swap termination values of $1.3 million and $0.4 million, respectively. In addition, at June 30, 2022 and December 31, 2021, the Company had posted initial-margin collateral in the form of U.S. Treasury notes amounting to $66.3 million and $48.9 million, respectively, to CME for these derivatives. The U.S. Treasury notes were considered restricted assets and were included in available for sale securities within the Company’s consolidated balance sheets.

At June 30, 2022, there were no customer-related interest rate swap derivatives with credit-risk contingent features in a net liability position. At December 31, 2021 the fair value of all customer-related interest rate swap derivatives with credit-risk related contingent features that were in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, totaled $13.7 million. The Company has minimum collateral posting thresholds with its customer-related interest rate swap derivative correspondent-bank counterparties to the extent that the Company has a liability position with the correspondent-bank counterparties. At June 30, 2022 and December 31, 2021, the Company had posted collateral in the form of cash amounting to $3.3 million and $21.3 million, respectively, which was considered to be a restricted asset and was included in other short-term investments within the Company's consolidated balance sheets. If the Company had breached any of these provisions at June 30, 2022 or December 31, 2021, it would have been required to settle its obligations under the