Derivative Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

(In Thousands)

The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. The Company also from time to time enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At March 31, 2020, the Company had notional amounts of $219,068 on interest rate contracts with corporate customers and $219,068 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts and certain fixed-rate loans.

In June 2014, the Company entered into two forward interest rate swap contracts on floating rate liabilities at the Bank level with notional amounts of $15,000 each. The interest rate swap contracts are each accounted for as a cash flow hedge with the objective of protecting against any interest rate volatility on future FHLB borrowings for a four-year and five-year period beginning June 1, 2018 and December 3, 2018 and ending June 2022 and June 2023, respectively. Under these contracts, the Bank pays a fixed interest rate and receives a variable interest rate based on the three-month LIBOR plus a pre-determined spread, with quarterly net settlements.

In March and April 2012, the Company entered into two interest rate swap agreements effective March 30, 2014 and March 17, 2014, respectively. Under these swap agreements, the Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The agreements, which both terminate in March 2022, are accounted for as cash flow hedges to reduce the variability in cash flows resulting from changes in interest rates on $32,000 of the Company’s junior subordinated debentures.

In April 2018, the Company entered into an interest rate swap agreement effective June 15, 2018. Under this swap agreement, the Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The agreement, which terminates in June 2028, is accounted for as a cash flow hedge to reduce the variability in cash flows resulting from changes in interest rates on $30,000 of the Company’s junior subordinated debentures.

In March 2020, the Company entered into a forward interest rate swap contract on floating rate liabilities with a notional amount of $100,000. The interest rate swap contract is accounted for as a cash flow hedge with the objective of protecting against any interest rate volatility on future FHLB borrowings for a ten-year period beginning March 23, 2022 and ending March 23, 2032. Under this contract, the Company pays a fixed interest rate and receives a variable interest rate based on one-month LIBOR with monthly net settlements.

The Company enters into interest rate lock commitments with its customers to mitigate the interest rate risk associated with the commitments to fund fixed-rate and adjustable-rate residential mortgage loans. The notional amount of commitments to fund fixed-rate and adjustable-rate mortgage loans was $1,034,335 and $215,751 at March 31, 2020 and December 31, 2019, respectively. The Company also enters into forward commitments to sell residential mortgage loans to secondary market investors.

The notional amount of commitments to sell residential mortgage loans to secondary market investors was $909,000 and $414,000 at March 31, 2020 and December 31, 2019, respectively.

The following table provides details on the Company’s derivative financial instruments as of the dates presented:



		Fair Value
	Balance Sheet Location	March 31, 2020		December 31, 2019
Derivative assets:
Designated as hedging instruments
Interest rate swap	Other Assets	$	555	$	—
Totals		$	555	$	—
Not designated as hedging instruments:
Interest rate contracts	Other Assets	$	10,910	$	3,880
Interest rate lock commitments	Other Assets	26,437		4,579
Forward commitments	Other Assets	215		39
Totals		$	37,562	$	8,498
Derivative liabilities:
Designated as hedging instruments:
Interest rate swaps	Other Liabilities	$	9,604	$	5,021
Totals		$	9,604	$	5,021
Not designated as hedging instruments:
Interest rate contracts	Other Liabilities	$	10,910	$	3,880
Interest rate lock commitments	Other Liabilities	—		3
Forward commitments	Other Liabilities	16,742		1,096
Totals		$	27,652	$	4,979

Gains (losses) included in the Consolidated Statements of Income related to the Company’s derivative financial instruments were as follows as of the periods presented:



	Three Months Ended
	March 31,
	2020		2019
Derivatives not designated as hedging instruments:
Interest rate contracts:
Included in interest income on loans	$	736	$	1,046
Interest rate lock commitments:
Included in mortgage banking income	21,821		1,222
Forward commitments
Included in mortgage banking income	15,470		901
Total	$	38,027	$	3,169

For the Company’s derivatives designated as cash flow hedges, changes in fair value of the cash flow hedges are, to the extent that the hedging relationship is effective, recorded as other comprehensive income and are subsequently recognized in earnings at the same time that the hedged item is recognized in earnings. The ineffective portions of the changes in fair value of the hedging instruments are immediately recognized in earnings. The assessment of the effectiveness of the hedging relationship is evaluated under the hypothetical derivative method. There were no ineffective portions for the three months ended March 31, 2020 or 2019. The impact on other comprehensive income for the three months ended March 31, 2020 and 2019, respectively, can be seen at Note 13, “Other Comprehensive Income (Loss).”

Offsetting

Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet when the “right of offset” exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements; however, the Company has not elected to offset such financial instruments in the Consolidated Balance Sheets. The following table presents the Company’s gross derivative positions as recognized in the Consolidated Balance Sheets as well as the net derivative positions, including collateral pledged to the extent the application of such collateral did not reduce the net derivative liability position below zero, had the Company elected to offset those instruments subject to an enforceable master netting agreement:



	Offsetting Derivative Assets				Offsetting Derivative Liabilities
	March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Gross amounts recognized	$	770	$	61	$	37,256	$	9,974
Gross amounts offset in the Consolidated Balance Sheets	—		—		—		—
Net amounts presented in the Consolidated Balance Sheets	770		61		37,256		9,974
Gross amounts not offset in the Consolidated Balance Sheets
Financial instruments	770		61		770		61
Financial collateral pledged	—		—		19,604		8,698
Net amounts	$	—	$	—	$	16,882	$	1,215