Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company is exposed to certain risks 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 the 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.

Non-designated Hedges. Derivatives not designated in qualifying hedging relationships are not speculative and result from a service the Company provides to certain qualified commercial borrowers in loan related transactions which, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company may execute interest rate swaps with qualified commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. The interest rate swap agreement which the Company executes with the commercial borrower is collateralized by the borrower's commercial real estate financed by the Company. As the Company has not elected to apply hedge accounting and these interest rate swaps do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. At March 31, 2021 and December 31, 2020, the Company had 174 and 172 loan related interest rate swaps, respectively, with aggregate notional amounts of $2.62 billion and $2.63 billion, respectively.

The Company periodically enters into risk participation agreements ("RPAs"), with the Company functioning as either the lead institution, or as a participant when another company is the lead institution on a commercial loan. These RPAs are entered into to manage the credit exposure on interest rate contracts associated with these loan participation agreements. Under the RPAs, the Company will either receive or make a payment in the event the borrower defaults on the related interest rate contract. The Company has minimum collateral posting thresholds with certain of its risk participation counterparties, and has posted collateral of $650,000 against the potential risk of default by the borrower under these agreements. At March 31, 2021 and December 31, 2020, the Company had 13 credit derivatives, with aggregate notional amounts of $131.4 million and $121.7 million, respectively, from participations in interest rate swaps as part of these loan participation arrangements. At March 31, 2021 and December 31, 2020, the fair value of these credit derivatives were $96,000 and $97,000, respectively.

Cash Flow Hedges of Interest Rate Risk. The Company’s objective in using interest rate derivatives is 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 payment 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.

Changes in the fair value of derivatives designated and that qualify as cash flow hedges of interest rate risk are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2021 and 2020, such derivatives were used to hedge the variable cash outflows associated with borrowings and brokered money market deposits.

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s borrowings. During the next twelve months, the Company estimates that $3.5 million will be reclassified as an increase to interest expense. As of March 31, 2021, the Company had 14 outstanding interest rate derivatives with an aggregate notional amount of $600.0 million that were each designated as a cash flow hedge of interest rate risk.

The tables below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition at March 31, 2021 and December 31, 2020 (in thousands):


	At March 31, 2021
	Asset Derivatives			Liability Derivatives
	Consolidated Statements of Financial Condition	Fair Value		Consolidated Statements of Financial Condition	Fair Value
Derivatives not designated as a hedging instrument:
Interest rate products	Other assets	$	74,668	Other liabilities	$	75,740
Credit contracts	Other assets	96		Other liabilities	—
Total derivatives not designated as a hedging instrument		$	74,764		$	75,740

Derivatives designated as a hedging instrument:
Interest rate products	Other assets	$	1,778	Other liabilities	$	2,488

Total derivatives designated as a hedging instrument		$	1,778		$	2,488


	At December 31, 2020
	Asset Derivatives			Liability Derivatives
	Consolidated Statements of Financial Condition	Fair Value		Consolidated Statements of Financial Condition	Fair Value
Derivatives not designated as a hedging instrument:
Interest rate products	Other assets	$	107,652	Other liabilities	$	109,148
Credit contracts	Other assets	97		Other liabilities	—
Total derivatives not designated as a hedging instrument		$	107,749		$	109,148

Derivatives designated as a hedging instrument:
Interest rate products	Other assets	$	(6,671)	Other liabilities	$	—

Total derivatives designated as a hedging instrument		$	(6,671)		$	—

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income during the three months ended March 31, 2021 and 2020 (in thousands).


		Gain (loss) recognized in income on derivatives for the three months ended
	Consolidated Statements of Income	March 31, 2021		March 31, 2020
Derivatives not designated as a hedging instrument:
Interest rate products	Other income	$	400	(819)
Credit contracts	Other income	23		(1)
Total		$	423	(820)

Derivatives designated as a hedging instrument:
		Loss recognized in expense on derivatives
Interest rate products	Interest expense	$	879	106
Total		$	879	106

The Company has agreements with certain of its dealer counterparties which contain a provision that if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be deemed in default on its derivative obligations.

In addition, the Company has agreements with certain of its dealer counterparties which contain a provision that if the Company fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

At March 31, 2021, the Company had four dealer counterparties. The Company had a net liability position with respect to all four of the counterparties. The termination value for this net liability position, which includes accrued interest, was $38.5 million at March 31, 2021. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $42.0 million against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2021, it could have been required to settle its obligations under the agreements at the termination value.