Note 15 – 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 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 economically 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/ (loss) on financial instruments on the unaudited interim 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 gains on residential mortgage banking activities, net of variable loan expenses on the unaudited interim consolidated statements of income.

The following tables summarize the Company’s use of derivatives and their effect on the unaudited interim consolidated financial statements. Notional amounts included in the table are the average notional amounts on the unaudited interim 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, 2018 the Company had one open credit default swap contract and 55 open interest rate swap contracts with counterparties. As of December 31, 2017 the Company had one open credit default swap contract and 52 open interest rate swap contracts with counterparties.

The following table summarizes the Company’s derivatives as of the unaudited interim consolidated balance sheet dates:


		As of June 30, 2018						As of December 31, 2017
				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	$	140	$	—	$	15,000	$	—	$	(66)
Interest Rate Swaps	Interest rate risk		365,571		1,786		(935)		391,381		2,898		(216)
Interest rate lock commitments	Interest rate risk		228,027		2,832		—		167,533		1,827		—
Total		$	608,598	$	4,758	$	(935)	$	573,914	$	4,725	$	(282)

The following tables summarize the gains and losses on the Company’s derivatives:


	Three Months Ended June 30, 2018				Six Months Ended June 30, 2018
			Net Change in				Net Change in
	Net Realized		Unrealized		Net Realized		Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit default swaps (1)	$	—	$	198	$	—	$	206
Interest rate swaps (1)		(951)		931		3,603		(415)
Residential mortgage banking activities interest rate swaps (2)		—		(230)		—		(712)
Interest rate lock commitments (2)		—		(638)		—		1,005
Total	$	(951)	$	261	$	3,603	$	84
(1) Gains/ (losses) are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the consolidated statements of income. (2) Gains/ (losses) are recorded in gains on residential mortgage banking activities, net of variable loan expenses, in the consolidated statements of income.


	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)	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit default swaps (1)	$	—	$	(108)	$	—	$	(78)
Interest rate swaps (1)		(118)		(103)		(343)		32
Residential mortgage banking activities interest rate swaps (2)		—		(1,606)		—		(1,869)
Interest rate lock commitments (2)		—		1,341		—		29
Total	$	(118)	$	(476)	$	(343)	$	(1,886)
(1) Gains/ (losses) are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the consolidated statements of income. (2) Gains/ (losses) are recorded in gains on residential mortgage banking activities, net of variable loan expenses, in the consolidated statements of income.