DERIVATIVE FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

15. DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both economic conditions and our business operations. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our assets and liabilities. We manage a matched book with respect to our derivative instruments in order to minimize our net risk exposure resulting from such transactions.

Fair Values of Derivative Instruments

The table below presents the fair value of our derivative financial instruments as well as their location on the unaudited Consolidated Statements of Financial Condition as of March 31, 2020.


	Fair Values of Derivative Instruments
(Dollars in thousands)		Count	Notional		Balance Sheet Location	Derivatives (Fair Value)
Derivatives designated as hedging instruments:
Interest rate products		3	$	75,000	Other assets	$	1,327
Total			$	75,000		$	1,327
Derivatives not designated as hedging instruments:
Interest rate products			$	71,258	Other assets	$	6,783
Interest rate products			71,258		Other liabilities	(7,216)
Risk participation agreements			4,487		Other liabilities	(13)
Interest rate lock commitments with customers			184,693		Other assets	4,050
Interest rate lock commitments with customers			76,901		Other liabilities	(382)
Forward sale commitments			103,222		Other assets	1,531
Forward sale commitments			148,090		Other liabilities	(3,041)
Total			$	659,909		$	1,712
Total derivatives			$	734,909		$	3,039

The table below presents the fair value of our derivative financial instruments as well as their location on the Consolidated Statements of Financial Condition as of December 31, 2019.


	Fair Values of Derivative Instruments
(Dollars in thousands)		Count	Notional		Balance Sheet Location	Derivatives (Fair Value)
Derivatives designated as hedging instruments:
Interest rate products		3	$	75,000	Other liabilities	$	(759)
Total			$	75,000		$	(759)
Derivatives not designated as hedging instruments:
Interest rate products			$	71,804	Other assets	$	2,520
Interest rate products			71,804		Other liabilities	(2,688)
Risk participation agreements			4,524		Other liabilities	(4)
Interest rate lock commitments with customers			99,057		Other assets	1,768
Interest rate lock commitments with customers			28,505		Other liabilities	(191)
Forward sale commitments			61,301		Other assets	596
Forward sale commitments			90,177		Other liabilities	(276)
Total			$	427,172		$	1,725
Total derivatives			$	502,172		$	966

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest income and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for us making variable-rate payments over the life of the agreements without exchange of the underlying notional amount.

Changes to the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecast transaction affects earnings. During the three months ended March 31, 2020, such derivatives were used to hedge the variable cash flows associated with a variable rate loan pool.

Amounts reported in accumulated other comprehensive income (loss) related to derivatives are reclassified to interest income as interest payments are received on our variable-rate pooled loans. During the next twelve months, we estimate that $0.6 million will be reclassified as an increase to interest income. During the three months ended March 31, 2020, $0.1 million was reclassified into interest income.

We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of one month (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

As of March 31, 2020, we had three outstanding interest rate derivatives with an aggregate notional amount of $75.0 million that were designated as cash flow hedges of interest rate risk.

Effect of Derivative Instruments on the Income Statement

The table below presents the effect of the derivative financial instruments on the unaudited Consolidated Statements of Income for the three months ended March 31, 2020 and March 31, 2019.


	Amount of (Loss) or Gain Recognized in OCI on Derivative (Effective Portion)					Location of (Loss) or Gain Reclassified from Accumulated OCI into Income (Effective Portion)
(Dollars in thousands)	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships	2020		2019
Interest Rate Products	$	1,585	$	630	Interest income
Total	$	1,585	$	630

	Amount of Gain or (Loss) Recognized in Income					Location of Gain or (Loss) Recognized in Income
(Dollars in thousands)	Three Months Ended March 31,
Derivatives Not Designated as a Hedging Instrument	2020		2019
Interest Rate Lock Commitments	$	3,049	$	632	Mortgage banking activities, net
Forward Sale Commitments	(4,045)		(234)		Mortgage banking activities, net
Total	$	(996)	$	398

Credit Risk-related Contingent Features

We have agreements with certain derivative counterparties that contain a provision under which, if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. We also have agreements with certain derivative counterparties that contain a provision where if we fail to maintain our status as a well-capitalized or adequately capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements.

As of March 31, 2020, the termination value of derivatives designated as hedging instruments in a net asset position related to these agreements was $1.3 million. These agreements were terminated in April 2020.

We have minimum collateral posting thresholds with certain of our derivative counterparties, and have posted collateral of $10.4 million against our obligations under these agreements. If we had breached any of these provisions at March 31, 2020, we could have been required to settle our obligations under the agreements at the termination value.