Derivative Instruments

9 Months Ended

Jun. 30, 2020

Summary of Derivative Instruments [Abstract]

Derivative Instruments

DERIVATIVE INSTRUMENTS

The Company enters into interest rate swaps to add stability to interest expense and manage exposure to interest rate movements as part of an overall risk management strategy. For hedges of the Company's borrowing program, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. These derivatives are used to hedge the forecasted cash outflows associated with the Company's FHLB borrowings. At June 30, 2020 and September 30, 2019, the interest rate swaps used in the Company's asset/liability management strategy have weighted average terms of 3.3 years and 3.7 years and weighted average fixed-rate interest payments of 1.80% and 1.92%, respectively.

Cash flow hedges are initially assessed for effectiveness using regression analysis. Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in OCI and are subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Quarterly, a qualitative analysis is performed to monitor the ongoing effectiveness of the hedging instrument. All derivative positions were initially and continue to be highly effective at June 30, 2020.

The Company enters into forward commitments for the sale of mortgage loans principally to protect against the risk of adverse interest rate movements on net income. The Company recognizes the fair value of such contracts when the characteristics of those contracts meet the definition of a derivative. These derivatives are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the Consolidated Statement of Income.

In addition, the Company is party to derivative instruments when it enters into interest rate lock commitments to originate a portion of its loans, which when funded, are classified as held for sale. Such commitments are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the Consolidated Statement of Income.

The following tables provide the locations within the Consolidated Statements of Condition, notional values and fair values, at the reporting dates, for all derivative instruments.

	June 30, 2020				September 30, 2019
	Notional Value		Fair Value		Notional Value		Fair Value
Derivatives designated as hedging instruments
Cash flow hedges: Interest rate swaps
Other Assets	$	—	$	—	$	825,000	$	—
Other Liabilities	3,075,000		—		1,925,000		—
Total cash flow hedges: Interest rate swaps	$	3,075,000	$	—	$	2,750,000	$	—
Derivatives not designated as hedging instruments
Interest rate lock commitments
Other Assets	$	14,164	$	681	$	10,358	$	44
Forward Commitments for the sale of mortgage loans
Other Assets	43,236		13		—		—
Total derivatives not designated as hedging instruments	$	57,400	$	694	$	10,358	$	44

The following tables present the net gains and losses recorded within the Consolidated Statements of Income and the Consolidated Statements of Comprehensive Income relating to derivative instruments.

		Three Months Ended				Nine Months Ended
	Location of Gain or (Loss)	June 30,				June 30,
	Recognized in Income	2020		2019		2020		2019
Cash flow hedges
Amount of gain/(loss) recognized	Other comprehensive income	$	(20,324)	$	(43,108)	$	(114,522)	$	(94,033)
Amount of gain/(loss) reclassified from AOCI	Interest expense: Borrowed funds	(5,677)		3,530		(5,490)		10,526
Derivatives not designated as hedging instruments
Interest rate lock commitments	Other non-interest income	$	89	$	70	$	637	$	213
Forward commitments for the sale of mortgage loans	Net gain on the sale of loans	13		—		13		—

The Company estimates that $46,282 of the amounts reported in AOCI will be reclassified as a debit to interest expense during the twelve months ending June 30, 2021.

Derivatives contain an element of credit risk which arises from the possibility that the Company will incur a loss because a counterparty fails to meet its contractual obligations. The Company's exposure is limited to the replacement value of the contracts rather than the notional or principal amounts. Credit risk is minimized through counterparty margin payments, transaction limits and monitoring procedures. All of the Company's swap transactions are cleared through a registered clearing broker to a central clearing organization. The clearing organization establishes daily cash and upfront cash or securities margin requirements to cover potential exposure in the event of default. This process shifts the risk away from the counterparty, since the clearing organization acts as the middleman on each cleared transaction. For derivative transactions cleared through certain clearing parties, variation margin payments representing changes in fair value are recognized as settlements on a daily basis. The fair value of derivative instruments are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements.