The Company uses derivative instruments to minimize fluctuations in earnings and cash flows caused by interest rate volatility. The Company’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so the changes in interest rates do not have a significant effect on net interest income. Thus, all of the Company's derivative contracts are considered to be interest rate contracts.

The Company recognizes its derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss.

The Company offers derivative products in the form of interest rate swaps, to commercial loan customers to facilitate their risk management strategies. These instruments are executed through Master Netting Arrangements (MNA) with financial institution counterparties or Risk Participation Agreements (RPA) with commercial bank counterparties, for which the Company assumes a pro rata share of the credit exposure associated with a borrower's performance related to the derivative contract with the counterparty.

The following tables present information about derivative assets and liabilities at September 30, 2021 and December 31, 2020:

(1)	Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statements.

As of September 30, 2021 and December 31, 2020, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:


				Cumulative Amount of Fair
	Location of Hedged Item on	Carrying Amount of Hedged		Value Hedging Adjustment in
	Balance Sheet	Assets		Carrying Amount
September 30, 2021
Interest rate swap on securities	Securities Available for Sale	$	39,200	$	2,010

December 31, 2020
Interest rate swap on securities	Securities Available for Sale	$	40,209	$	3,019

Information about derivative assets and liabilities for the three and nine months ended September 30, 2021 and December 31, 2020, follows:


	Three Months Ended September 30, 2021
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	167	Interest expense	$	—	Interest expense	$	(205)
Interest rate swap on variable rate loans		(101)	Interest income		—	Interest income		92
Total cash flow hedges		66			—			(113)

Fair value hedges:
Interest rate swap on securities		(221)	Interest income		—	Interest income		(144)
Total fair value hedges		(221)			—			(144)

Economic hedges:
Forward commitments		—	Other income		—	Other income		(96)
Total economic hedges		—			—			(96)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other income		22
Total non-hedging derivatives		—			—			22

Total	$	(155)		$	—		$	(331)


	Nine Months Ended September 30, 2021
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	1,148	Interest expense	$	—	Interest expense	$	(589)
Interest rate swap on variable rate loans		(93)	Interest income		—	Interest income		189
Total cash flow hedges		1,055			—			(400)

Fair value hedges:
Interest rate swap on securities		720	Interest income		—	Interest income		(421)
Total fair value hedges		720			—			(421)

Economic hedges:
Forward commitments		—	Other income		—	Other income		(45)
Total economic hedges		—			—			(45)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other income		26
Total non-hedging derivatives		—			—			26

Total	$	1,775		$	—		$	(840)

The Company expects approximately $1.0 million of losses (pre-tax) related to the Company’s cash flow hedges to be reclassified to earnings from AOCI over the next 12 months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of September 30, 2021.


	Three Months Ended September 30, 2020
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income⁽¹⁾		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	362	Interest expense	$	—	Interest expense	$	(427)
Total cash flow hedges		362			—			(427)

Fair value hedges:
Interest rate swap on securities		635	Interest income		—	Interest income		(204)
Total economic hedges		635			—			(204)

Economic hedges:
Forward commitments		—	Other income		—	Other income		40
Total economic hedges		—			—			40

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other Income		(39)
Total non-hedging derivatives		—			—			(39)

Total	$	997		$	—		$	(630)

(1)	Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statement.


	Nine Months Ended September 30, 2020
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income⁽¹⁾		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	(4,247)	Interest expense	$	—	Interest expense	$	(642)
Total cash flow hedges		(4,247)			—			(642)

Fair value hedges:
Interest rate swap on securities		(1,545)	Interest income		—	Interest income		(145)
Total economic hedges		(1,545)			—			(145)

Economic hedges:
Forward commitments		—	Other income		—	Other income		(3)
Total economic hedges		—			—			(3)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other Income		(35)
Total non-hedging derivatives		—			—			(35)

Total	$	(5,792)		$	—		$	(825)

(1)	Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statement.

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three months ended September 30, 2021 and 2020:


	Three Months Ended September 30, 2021
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and exepense line items presented in the consolidated statements of income	$	25,094	$	3,821	$	1,555	$	1,778	$	11,350

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		(205)		—
Interest rate swap on variable rate loans		92		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(144)		—		—		—

	Three Months Ended September 30, 2020
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and exepense line items presented in the consolidated statements of income	$	25,918	$	4,557	$	3,869	$	1,941	$	10,102

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		(365)		(62)		—
Interest rate swap on variable rate loans		—		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(204)		—		—		—

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the nine months ended September 30, 2021 and 2020:


	Nine Months Ended September 30, 2021
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and exepense line items presented in the consolidated statements of income	$	72,490		11,792	$	7,109		5,415	$	31,103

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		(589)		—
Interest rate swap on variable rate loans		189		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(421)		—		—		—

	Nine Months Ended September 30, 2020
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and exepense line items presented in the consolidated statements of income	$	80,398		15,006	$	14,437		7,149	$	28,233

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		(580)		(62)		—
Interest rate swap on variable rate loans		—		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(145)		—		—		—

Cash flow hedges

Interest rate swaps on wholesale funding

As of September 30, 2021 the Company has two interest rate swaps on wholesale borrowings (the "SWAPS") to limit its exposure to rising interest rates over a five year term on 3-month FHLB borrowings or brokered certificates, or a combination thereof at each maturity date. The first of the two agreements were entered in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 1.53%. A second agreement was entered on April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays the Company interest on the three-month LIBOR rate. The Company designated the swaps as a cash flow hedge.

Interest rate swap on variable rate loans

In March 2021, the Company entered into a contract with a counterparty to manage interest rate risk associated with its variable rate loans. The instrument is specifically designed to hedge the risk of changes in its cash flows from interest receipts attributable to changes in a contractually specified interest rate, on an amount of the Company’s variable rate loan assets equal to $50 million. The interest rate swap will effectively fix the Company’s interest rate on $50 million of 1 month USD-LIBOR-BBA (or LIBOR less two days) based loan assets at 0.806% plus the credit spread on the loans that reprices on weighted average basis. The Company designated the swap as a cash flow hedge.

Fair value hedges

Interest rate swap on securities

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. During 2019, the Company entered into eight swap transactions with a notional amount of $37.2 million designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the fair values of fixed rate securities. The fixed rates on the transactions have a weighted average of 1.696%.

Economic hedges

Forward sale commitments

The Company utilizes forward sale commitments on residential mortgage loans to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives. The Company typically uses a combination of best efforts and mandatory delivery contracts. The contracts are loan sale agreements where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into contracts just prior to the loan closing with a customer.

Customer loan derivatives

The Company enters into customer loan derivatives to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting loan swap agreements with highly rated third-party financial institutions. The loan swap agreements are free standing derivatives and are recorded at fair value in the Company's consolidated balance sheet. The Company is party to master netting arrangements with its financial institutional counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.

The master netting arrangements provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. Currently, the Company has posted cash of $17.0 million with counterparties.


	Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount
As of September 30, 2021
Customer Loan Derivatives:
MNA counterparty	$	(10,258)	$	10,258	$	17,000	$	17,000
RPA counterparty		(5,892)		5,892		—		—
Total	$	(16,150)	$	16,150	$	17,000	$	17,000


	Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount
As of December 31, 2020
Customer Loan Derivatives:
MNA counterparty	$	(15,938)	$	15,938	$	23,450	$	23,450
RPA counterparty		(9,957)		9,957		—		—
Total	$	(25,895)	$	25,895	$	23,450	$	23,450

Non-hedging derivatives

Interest rate lock commitments

The Company enters into interest rate lock commitments (IRLCs) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs relate to the origination of residential mortgage loans that are held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free standing derivatives which are carried at fair value with changes recorded in non-interest income in the Company’s Consolidated Statements of Income. Changes in the fair value of IRLCs subsequent to inception are based on; (i) changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and (ii) changes in the probability when the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.