Derivative Financial Instruments

6 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company uses interest rate swaps and interest rate caps/floors to manage its interest rate risk and market risk in accommodating the needs of its customers. Interest rate swaps include both traditional interest rate swaps and interest rate swaps which can be canceled by the customer on specified dates at no cost, typically referred to as swaptions. The Company recognizes all derivatives on the consolidated balance sheet at fair value in either other assets or accrued expenses and other liabilities as appropriate.

The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by the Company as of March 31, 2020 and September 30, 2019.


	March 31, 2020										September 30, 2019
	Notional Amount		Gross Asset Fair Value		Gross Liability Fair Value		Notional Amount		Gross Asset Fair Value		Gross Liability Fair Value
	(dollars in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps
Financial institution counterparties	$	1,279,918	$	—	$	(68,412)	$	1,259,765	$	35	$	(38,755)
Customer counterparties	574,453		83,802		—		499,643		48,652		—
Interest rate caps
Financial institution counterparties	3,438		4		—		100		2		—
Customer counterparties	3,438		—		(4)		100		—		(2)
Risk participation agreements	78,194		—		(593)		56,833		—		(58)
Mortgage loan commitments	170,012		636		—		56,665		—		(11)
Mortgage loan forward sale contracts	166,683		—		(636)		61,872		11		—
Total	$	2,276,136	$	84,442	$	(69,645)	$	1,934,978	$	48,700	$	(38,826)

Netting of Derivatives

The Company records the derivatives on a net basis when a right of offset exists, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement. When bilateral netting agreements or similar agreements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by derivative contract by counterparty basis.

The following tables provide information on the Company's netting adjustments as of March 31, 2020 and September 30, 2019.


	Gross Fair Value		Fair Value Offset Amount		Cash Collateral		Net Amount Presented on the Consolidated Balance Sheet
	(dollars in thousands)
As of March 31, 2020
Total Derivative Assets	$	84,442	$	(6,922)	$	21,203	$	98,723
Total Derivative Liabilities ¹	(69,645)		6,922		62,083		(640)

¹ There was an additional $23.6 million of collateral held for initial margin with a Futures Clearing Merchant for clearing derivatives at March 31, 2020 and is included in other assets in the consolidated balance sheets.


	Gross Fair Value		Fair Value Offset Amount		Cash Collateral		Net Amount Presented on the Consolidated Balance Sheet
	(dollars in thousands)
As of September 30, 2019
Total Derivative Assets	$	48,700	$	(2,445)	$	12,279	$	58,534
Total Derivative Liabilities ¹	(38,826)		2,445		36,368		(13)
¹There was an additional $18.3 million of collateral held for initial margin with a Futures Clearing Merchant for clearing derivatives at September 30, 2019 and is included in other assets in the consolidated balance sheets.

As with any financial instrument, derivative financial instruments have inherent risk including adverse changes in interest rates. The Company’s exposure to derivative credit risk is defined as the possibility of sustaining a loss due to the failure of the counterparty to perform in accordance with the terms of the contract. Credit risks associated with interest rate swaps are similar to those relating to traditional on-balance sheet financial instruments. The Company manages interest rate swap credit risk with the same standards and procedures applied to its commercial lending activities.

Credit-risk-related contingent features

The Company has agreements with its derivative counterparties that contain a provision where if the Company or the derivative counterparty fails to maintain its status as a well/adequately capitalized institution, then the other party has the right to terminate the derivative positions and the Company or the derivative counterparty would be required to settle its obligations under the agreements. The Company has minimum collateral pledging thresholds with its Swap Dealers and Futures Clearing Merchant.

In 2018, the Company entered into RPAs with some of its derivative counterparties to assume the credit exposure related to interest rate derivative contracts. The Company's loan customer enters into an interest rate swap directly with a derivative counterparty and the Company agrees through an RPA to take on the counterparty's risk of loss on the interest rate swap due to a default by the customer.

The effect of derivatives on the consolidated statements of income for the three and six months ended March 31, 2020 and 2019 was as follows.


		Amount of Loss Recognized in Consolidated Statements of Income
		Three Months Ended March 31,						Six Months Ended March 31,
	Location of Loss Recognized in Consolidated Statements of Income	2020		2019		2020		2019
		(dollars in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps and other derivatives	Net realized and unrealized loss on derivatives	$	(50,214)	$	(11,032)	$	(36,698)	$	(29,348)
Mortgage loan commitments	Net realized and unrealized loss on derivatives	620		9		648		21
Mortgage loan forward sale contracts	Net realized and unrealized loss on derivatives	(620)		(9)		(648)		(21)