DERIVATIVES

Interest Rate Swap Agreements

The Company is party to derivative financial instruments in the normal course of business to manage exposure to fluctuations in interest rates and to meet the needs of commercial customers. These financial instruments have been generally limited to loan level interest rate swap agreements, which are entered into with counterparties that meet established credit standards. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. The fair value of the derivative instruments is reflected on the Company’s consolidated balance sheet as other assets or accrued expenses and other liabilities as appropriate. Changes in the fair value of these agreements are recorded in miscellaneous income in the consolidated statements of net income.

The table below presents information about derivative financial instruments not designated as hedging instruments at March 31, 2018 and December 31, 2017.



	Derivative Gains				Derivative Losses
	Notional Amount		Fair Value		Notional Amount		Fair Value
	(In thousands)
March 31, 2018
Economic hedges:
Commercial loan level interest rate swap agreements	$	597,239	$	13,313	$	597,239	$	13,313
Other contracts	37,519		37		54,114		25
Total derivatives	$	634,758	$	13,350	$	651,353	$	13,338
December 31, 2017
Economic hedges:
Commercial loan level interest rate swap agreements	$	582,388	$	8,741	$	582,388	$	8,741
Other contracts	27,689		25		54,293		44
Total derivatives	$	610,077	$	8,766	$	636,681	$	8,785

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company has minimum collateral posting thresholds with certain of its interest rate swap derivative counterparties.

Other contracts represent risk participation agreements on commercial loan level interest rate swap agreements. The Company has entered into risk participation agreements with the correspondent institutions to share in any interest rate swap gains or losses incurred as a result of the commercial loan customers’ termination of a loan level interest rate swap agreement prior to maturity. The Company records these risk participation agreements at fair value.

Mortgage Banking Derivatives

The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that loans will subsequently be sold in the secondary market. Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. These commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in non-interest income.

Outstanding loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might change from inception of the rate lock to funding of the loan due to changes in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.

To protect against the price risk inherent in derivative loan commitments, the Company utilizes both "mandatory delivery" and "best efforts" forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Included in the mandatory delivery forward commitments are To Be Announced securities (“TBAs”).

Mandatory delivery forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in other non-interest income.

With best effort contracts, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally best efforts cash contracts have no pair off risk regardless of market movement. The price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). The Company expects that these best efforts forward loan sale commitments will experience a net neutral shift in fair value with related derivative loan commitments.

The Company utilizes both mandatory delivery contracts and TBA securities to protect against the price risk inherent in derivative loan commitments. With mandatory delivery contracts, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor/counterparty to compensate the investor for the shortfall. Generally the Company makes this type of commitment once mortgage loans have been funded and are held for sale, in order to minimize the risk of failure to deliver the requisite volume of loans to the investor and paying pair-off fees as a result. The Company also sells TBA securities to offset potential changes in the fair value of derivative loan commitments. Generally the Company sells TBA securities upon entering derivative loan commitments for settlement in 30 to 90 days. The Company expects that mandatory delivery contracts, including TBA securities, will experience changes in fair value opposite to the changes in the fair value of derivative loan commitments.

At March 31, 2018, the Company had $14.7 million of interest rate lock commitments to borrowers and loans held for sale of $3.0 million with $17.7 million of forward commitments for the future delivery of residential mortgage loans on a best efforts basis. At March 31, 2018, the Company had $12.1 million of interest rate lock commitments to borrowers and loans held for sale of $2.8 million with $14.9 million of forward commitments for the future delivery of residential mortgage loans on a mandatory delivery basis. Included in the forward commitments are open TBAs with a notional amount of $12.0 million and $3.0 million of closed hedge instruments that are not settled at March 31, 2018.

At December 31, 2017, the Company had $16.4 million of loan commitments to borrowers and loans held for sale of $8.9 million with $25.3 million of forward commitments for the future delivery of residential mortgage loans on a best efforts basis. The Company did not have any commitments under mandatory delivery at December 31, 2017.

The fair value of such commitments as of March 31, 2018 and December 31, 2017 are outlined below:



	Assets			Liabilities
	Balance sheet location	Fair Value		Balance sheet location	Fair Value
	(In thousands)
March 31, 2018
Derivative loan commitments:
Mortgage loan commitments best efforts	Other assets	$	206	Other liabilities	$	16
Mortgage loan commitments mandatory delivery	Other assets	171		Other liabilities	—
Total mortgage derivative commitments		$	377		$	16

Forward loan sale commitments:
Forward loan sale commitments best efforts	Other assets	$	30	Other liabilities	$	66
Forward loan sale commitments mandatory delivery	Other assets	—		Other liabilities	55
Total forward loan sale commitments		$	30		$	121
Total		$	407		$	137

December 31, 2017
Derivative loan commitments:
Mortgage loan commitments best efforts	Other assets	$	210	Other liabilities	$	36
Mortgage loan commitments mandatory delivery	Other assets	—		Other liabilities	—
Total mortgage derivative commitments		$	210		$	36
Forward loan sale commitments:
Forward loan sale commitments best efforts	Other assets	$	22	Other liabilities	$	69
Forward loan sale commitments mandatory delivery	Other assets	—		Other liabilities	—
Total forward loan sale commitments		$	22		$	69
Total		$	232		$	105