Derivative Financial Instruments

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The notional amounts and estimated fair values of derivative positions outstanding are presented in the following table:



	June 30, 2020						December 31, 2019
			Estimated Fair Value						Estimated Fair Value
(in thousands)	Notional Amount		Asset Derivative		Liability Derivative		Notional Amount		Asset Derivative			Liability Derivative
Non-hedging derivatives:
Financial institution counterparties:
Commercial loan/lease interest rate swaps	$	1,947,806	$	—	$	118,663	$	1,548,234	$	182		$	46,518
Commercial loan/lease interest rate caps	657,109		42		—		639,163		32			—
Foreign currency forward contracts	2,228		—		238		2,219		169			—
Customer counterparties:
Commercial loan/lease interest rate swaps	1,947,806		118,663		—		1,548,234		46,518			182
Commercial loan/lease interest rate caps	657,109		—		42		639,163		—			32
Foreign currency forward contracts	2,228		238		—		2,219		—			169
Economic hedging derivatives to hedge:
Residential MSRs:
Interest rate swap futures	255,000		2,460		3		—		—			—
Forward sale commitments	153,000		1,067		—		—		—			—
Loans held for sale:
Loan purchase commitments	1,215,599		20,580		3		214,012		1,965			4
Forward sale commitments	1,311,974		—		7,593		2,654,653		—			4,587
Gross derivatives			143,050		126,542				48,866			51,492
Offsetting derivative assets/liabilities			—		—				(182		)	(182		)
Net derivatives included in the consolidated balance sheets			$	143,050	$	126,542			$	48,684		$	51,310

During the second quarter of 2020, we initiated a strategy to mitigate exposure to potential impairment losses from adverse changes in the fair value of our residential MSR portfolio using interest rate derivative contracts, primarily interest rate swap futures and forward sale commitments of mortgage-backed securities. These derivative instruments are considered highly liquid and can be settled daily, which allows us to dynamically manage our exposure. The derivative instruments are used to

economically hedge the fair value of the residential MSR portfolio impacted by changes in anticipated prepayments resulting from mortgage interest rate movements and are classified as other assets and other liabilities on the consolidated balance sheets. Any unrealized or realized gains/(losses) related to derivatives economically hedging the residential MSR portfolio are recognized in servicing-related expenses along with changes to the MSR valuation allowance.

The weighted-average received and paid interest rates for interest rate swaps outstanding were as follows:



	June 30, 2020 Weighted-Average Interest Rate				December 31, 2019 Weighted-Average Interest Rate
	Received		Paid		Received		Paid
Non-hedging interest rate swaps	3.23	%	1.44	%	3.94	%	3.26	%

The weighted-average strike rate for outstanding interest rate caps was 3.38% at June 30, 2020 and 3.29% at December 31, 2019.

Our credit exposure on derivative instruments is limited to the net favorable value and interest payments by each counterparty. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. Our credit exposure associated with these instruments, net of any collateral pledged, was approximately $143.1 million at June 30, 2020 and approximately $48.7 million at December 31, 2019. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap and cap values, as well as for changes in the value of forward sale commitments. At June 30, 2020, we had $134.5 million in cash collateral pledged for these derivatives, of which $128.9 million was included in interest-bearing deposits in other banks and $5.6 million was included in accrued interest receivable and other assets. At December 31, 2019, we had $56.6 million in cash collateral pledged for these derivatives, of which $54.3 million was included in interest-bearing deposits in other banks and $2.3 million was included in accrued interest receivable and other assets.

We also enter into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are either a participant or a lead bank. The risk participation agreements entered into by us as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. We are party to 8 risk participation agreements where we are a participant bank with a notional amount of $110.7 million at June 30, 2020, compared to 12 risk participation agreements having a notional amount of $146.7 million at December 31, 2019. The maximum estimated exposure to these agreements, assuming 100% default by all obligors, was approximately $7.0 million at June 30, 2020 and $3.6 million at December 31, 2019. The fair value of these exposures was insignificant to the consolidated financial statements at both June 30, 2020 and December 31, 2019. Risk participation agreements entered into by us as the lead bank provide credit protection to us should the borrower fail to perform on its interest rate derivative contract with us. We are party to 16 risk participation agreements where we are the lead bank having a notional amount of $166.9 million at June 30, 2020, compared to 12 agreements having a notional amount of $145.9 million at December 31, 2019.