Derivative Financial Instruments

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not enter into derivative financial instruments for trading purposes.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2019, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. These cash flow hedges swap variable 90 day LIBOR to a fixed rate of 2.62% on average for an average term of six years.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are paid on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $0.4 million will be reclassified as a decrease to interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not considered speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings as a component of other noninterest income.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2019 and December 31, 2018.



	Derivative Assets										Derivative Liabilities
	June 30, 2019					December 31, 2018					June 30, 2019			December 31, 2018
(in thousands)	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Interest rate swap	$	61,962	Other Assets	$	—	$	—	Other Assets	$	—	Other Liabilities	$	2,939	Other Liabilities	$	—
Total				$	—				$	—		$	2,939		$	—

Derivatives not Designated as Hedging Instruments
Interest rate swap	$	609,454	Other Assets	$	10,511	$	494,567	Other Assets	$	2,217	Other Liabilities	$	11,386	Other Liabilities	$	2,217
Foreign exchange forward contracts	613		Other Assets	613		806		Other Assets	806		Other Liabilities	613		Other Liabilities	806
Total				$	11,124				$	3,023		$	11,999		$	3,023

The tables below present the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income for the three and six months ended June 30, 2019. The Company did not have cash flow hedging instruments in 2018.



	Amount of Gain or (Loss) Recognized in OCI on Derivative			Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
(in thousands)	Three months ended June 30, 2019				Three months ended June 30, 2019
Derivatives in Cash Flow Hedging Relationships
Interest rate swap	$	(1,675	)	Interest Expense	$	(6	)
Total	$	(1,675	)		$	(6	)



	Amount of Gain or (Loss) Recognized in OCI on Derivative			Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
(in thousands)	Six months ended June 30, 2019				Six months ended June 30, 2019
Derivatives in Cash Flow Hedging Relationships
Interest rate swap	$	(2,939	)	Interest Expense	$	(6	)
Total	$	(2,939	)		$	(6	)

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments that are subject to offsetting as of June 30, 2019 and December 31, 2018. The gross amounts of assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that financial assets and liabilities are presented on the Balance Sheet.



As of June 30, 2019
							Gross Amounts Not Offset in the Statement of Financial Position
(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Posted		Net Amount
Assets:
Interest rate swap	$	10,511	$	—	$	10,511	$	97	$	—	$	10,413

Liabilities:
Interest rate swap	$	14,325	$	—	$	14,325	$	97	$	13,982	$	246
Securities sold under agreements to repurchase	160,961		—		160,961		—		160,961		—

As of December 31, 2018
							Gross Amounts Not Offset in the Statement of Financial Position
(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Posted		Net Amount
Assets:
Interest rate swap	$	2,217	$	—	$	2,217	$	—	$	—	$	2,217

Liabilities:
Interest rate swap	$	2,217	$	—	$	2,217	$	—	$	—	$	2,217
Securities sold under agreements to repurchase	221,450		—		221,450		—		221,450		—

As of June 30, 2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $14.3 million. Further, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $14.2 million.