Derivative Instruments

6 Months Ended

Jun. 30, 2017

Derivative Instruments

Derivative Instruments

Note 13 – Derivative Instruments

The Company is exposed to changing interest rates and market conditions, which affects cash flows associated with borrowings. The Company uses derivative instruments to manage interest rate risk and conditions in the commercial mortgage market and, as such, views them as economic hedges. Interest rate swaps are used to mitigate the exposure to changes in interest rates and involve the receipt of variable-rate interest amounts from a counterparty in exchange for us making payments based on a fixed interest rate over the life of the swap contract. CDS are executed in order to mitigate the risk of deterioration in the current credit health of the commercial mortgage market. IRLCs are entered into with customers who have applied for residential mortgage loans and meet certain underwriting criteria. These commitments expose GMFS to market risk if interest rates change, and if the loan is not hedged or committed to an investor.

The Company has not elected hedge accounting for these derivative instruments and, as a result, the fair value adjustments on such instruments are recorded in earnings. The fair value adjustments for interest rate swaps and CDS, along with the related interest income, interest expense and gains/(losses) on termination of such instruments, are reported as a net realized gain on financial instruments on the consolidated statements of income. The fair value adjustments for IRLCs, along with the related interest income, interest expense and gains/(losses) on termination of such instruments, are reported in residential mortgage banking activities, net on the consolidated statements of income.

The following tables summarize the Company’s use of derivatives and their effect on the consolidated financial statements. Notional amounts included in the table are the average notional amounts on the consolidated balance sheet dates. We believe these are the most relevant measure of volume or derivative activity as they best represent the Company’s exposure to underlying instruments.

As of June 30, 2017 and December 31, 2016 the Company had oneopen credit default swap contract and 49 open interest rate swap contracts with counterparties.

The following table summarizes the Company’s derivatives as of June 30, 2017 and December 31, 2016.

		As of June 30, 2017						As of December 31, 2016
				Asset		Liability				Asset		Liability
		Notional		Derivatives		Derivatives		Notional		Derivatives		Derivatives
(In Thousands)	Primary Underlying Risk	Amount		Fair Value		Fair Value		Amount		Fair Value		Fair Value
Credit Default Swaps	Credit Risk	$	15,000	$	95	$	—	$	15,000	$	173	$	–
Interest Rate Swaps	Interest rate risk		412,550		1,373		(931)		378,050		2,922		(643)
Interest rate lock commitments (IRLCs)	Interest rate risk		217,489		2,719		—		212,530		2,690		—
Total		$	645,039	$	4,187	$	(931)	$	605,580	$	5,785	$	(643)

The following tables summarize the gains and losses on the Company’s derivatives for the three and six months ended June 30, 2017 and 2016:

		Three Months Ended June 30, 2017				Six Months Ended June 30, 2017
				Net Change in				Net Change in
		Net Realized		Unrealized		Net Realized		Unrealized
(In Thousands)	Income Statement Location	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit default swaps	Net unrealized gain (loss) on financial instruments; Net realized gain (loss) on financial instruments	$	—	$	(108)	$	—	$	(78)
Interest rate swaps	Net unrealized gain (loss) on financial instruments; Net realized gain (loss) on financial instruments		(118)		(103)		(343)		32
Residential mortgage banking activities interest rate swaps	Residential mortgage banking activities, net		—		(1,606)		—		(1,869)
Interest rate lock commitments (IRLCs)	Residential mortgage banking activities, net		—		1,341		—		29
Total		$	(118)	$	(476)	$	(343)	$	(1,886)

		Three Months Ended June 30, 2016				Six Months Ended June 30, 2016
				Net Change in				Net Change in
	Income Statement	Net Realized		Unrealized		Net Realized		Unrealized
(In Thousands)	Location	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit default swaps	Gain/loss on financial instruments	$	—	$	(116)	$	—	$	(165)
Interest rate swaps	Gain/loss on financial instruments		(564)		(645)		(1,129)		(2,872)
Total		$	(564)	$	(761)	$	(1,129)	$	(3,037)