RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS

RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS

The Company uses derivative instruments and other risk management techniques to reduce its exposure to adverse fluctuations in interest rates and foreign currency exchange rates in accordance with its risk management policies. The Company utilizes forward contracts and investor commitments to economically hedge mortgage banking products and may from time to time use interest rate swaps as hedges against certain liabilities.

Derivative Instruments Related to Mortgage Banking Activities: In connection with mortgage banking activities, if interest rates increase, the value of the Company’s loan commitments to borrowers and mortgage loans held-for-sale are adversely impacted. The Company attempts to economically hedge the risk of the overall change in the fair value of loan commitments to borrowers and mortgage loans held-for-sale with forward loan sale contracts and TBA mortgage-backed securities trades . Forward contracts on loan sale commitments, TBA mortgage-based securities trades, and loan commitments to borrowers are non-designated derivative instruments and the gains and losses resulting from these derivative instruments are included in Net Revenue on Mortgage Banking Activities in the Consolidated Statements of Operations. The fair value of resulting derivative assets and liabilities are included in Other Assets and Accrued Expenses and Other Liabilities, respectively, in the Consolidated Statements of Financial Condition.

The net losses relating to these derivative instruments used for mortgage banking activities, which were included in Net Revenue on Mortgage Banking Activities in the Consolidated Statements of Operations, were $4.7 million and $2.7 million, respectively, for the three months ended September 30, 2016 and 2015, and $16.0 million and $5.4 million, respectively, for the nine months endedSeptember 30, 2016 and 2015.

Interest Rate Swaps on Deposits and Other Borrowings: On September 30, 2013 and January 30, 2015, the Company entered into pay-fixed, receive-variable interest-rate swap contracts for the notional amounts of $50.0 million and $25.0 million, respectively, with maturity dates of September 27, 2018 and January 30, 2022, respectively. These swap contracts were entered into with institutional counterparties to hedge against variability in cash flows attributable to interest rate risk caused by changes in the LIBOR benchmark interest rate on the Company’s ongoing LIBOR based variable rate deposits and borrowings. During the nine months endedSeptember 30, 2016, the Company terminated the interest rate swaps of $50.0 million that were entered into on September 30, 2013.

During the year ended December 31, 2015, the Company exited the underlying hedged items related to interest rate swaps designated as cash flow hedges. As a result, the Company discontinued hedge accounting related to these interest rate swaps, and reclassified the fair value of the derivatives from AOCI into earnings. At September 30, 2015, the fair value of these derivative instruments discontinued from hedge accounting was $918 thousand, which was reclassified into earnings. During the nine months endedSeptember 30, 2016, the Company recognized a total loss of $576 thousand related to these derivatives in Other Income in the Consolidated Statements of Operations.

Interest Rate Swaps and Caps on Loans:The Company offers interest rate swap and cap products to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. These swaps and caps are not designated as hedging instruments and are recorded at fair value in Other Assets and Accrued Expenses and Other Liabilities in the Consolidated Statement of Financial Condition. The changes in fair value are recorded in Other Income in the Consolidated Statements of Operations. For the three and nine months endedSeptember 30, 2016, changes in fair value recorded through Other Income in the Consolidated Statements of Operations were insignificant.

Foreign Exchange Contracts: The Company offers short-term foreign exchange contracts to its customers to purchase and/or sell foreign currencies at set rates in the future. These products allow customers to hedge the foreign exchange rate risk of their deposits and loans denominated in foreign currencies. In conjunction with these products the Company also enters into offsetting contracts with institutional counterparties to hedge the Company’s foreign exchange rate risk. These back-to-back contracts allow the Company to offer its customers foreign exchange products while minimizing its exposure to foreign exchange rate fluctuations. These foreign exchange contracts are not designated as hedging instruments and are recorded at fair value in Other Assets and Accrued Expenses and Other Liabilities in the Consolidated Statement of Financial Condition. For the three and nine months endedSeptember 30, 2016, changes in fair value recorded in Other Income in the Consolidated Statements of Operations were $65 thousand.

The following table presents the notional amount and fair value of derivative instruments included in the Consolidated Statements of Financial Condition as of the dates indicated. Note 3 contains further disclosures pertaining to the fair value of mortgage banking derivatives.

	September 30, 2016				December 31, 2015
	Notional Amount		Fair Value		Notional Amount		Fair Value
	(In thousands)
Included in assets:
Interest rate lock commitments	$	521,547	$	15,200	$	262,135	$	7,343
Mandatory forward commitments	138,400		140		468,740		1,130
Interest rate swaps on deposits and other borrowings	—		—		25,000		331
Interest rate swaps and cap on loans with customers	27,140		285		27,467		238
Foreign exchange contracts	10,430		121		—		—
Total included in assets	$	697,517	$	15,746	$	783,342	$	9,042
Included in liabilities:
Interest rate lock commitments	$	21,775	$	109	$	16,790	$	88
Mandatory forward commitments	999,041		3,624		215,272		300
Interest rate swaps on deposits and other borrowings	25,000		576		50,000		441
Interest rate swaps and caps on loans with correspondent bank	27,140		285		27,467		238
Foreign exchange contracts	10,366		56		—		—
Total included in liabilities	$	1,083,322	$	4,650	$	309,529	$	1,067

The Company has entered into agreements with counterparty financial institutions, which include master netting agreements that provide for the net settlement of all contracts with a single counterparty in the event of default. However, the Company elected to account for all derivatives with counterparty institutions on a gross basis. There was no cash collateral received against derivative assets at September 30, 2016 and December 31, 2015. Cash collateral pledged against derivative liabilities recorded in Other Assets in Consolidated Statements of Financial Condition were $660 thousand and $590 thousand at September 30, 2016 and December 31, 2015, respectively.