DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

14. DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

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

Fair Values of Derivative Instruments

The table below presents the fair value of derivative financial instruments as well as their location on the unaudited Consolidated Statements of Financial Condition as of September 30, 2020.

	Fair Values of Derivative Instruments
(Dollars in thousands)		Notional		Balance Sheet Location	Derivatives (Fair Value)
Derivatives not designated as hedging instruments:
Interest rate products		$	65,068	Other assets	$	6,339
Interest rate products		65,068		Other liabilities	(7,067)
Risk participation agreements		4,410		Other liabilities	(12)
Interest rate lock commitments with customers		308,807		Other assets	11,606
Interest rate lock commitments with customers		22,134		Other liabilities	(174)
Forward sale commitments		56,290		Other assets	503
Forward sale commitments		245,224		Other liabilities	(1,097)
Financial derivatives related to sales of certain Visa Class B shares		113,177		Other liabilities	(25,205)
Total derivatives		$	880,178		$	(15,107)

The table below presents the fair value of 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

The Company's objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its 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 the Company 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 first half of 2020, such derivatives were used to hedge the variable cash flows associated with a variable rate loan pool.

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

In April 2020, the Company terminated its three interest rate derivatives that were designated as cash flow hedges for a net gain of $1.3 million. At this point, hedge accounting was discontinued, and the net gain was recognized in accumulated other comprehensive income (loss). Once a cash flow hedge is discontinued, the net gain or loss that remains in accumulated comprehensive income (loss) is reclassified into earnings when the transaction affects earnings. As the underlying hedged transaction continues to be probable, the $1.3 million net gain will be recognized into earnings on a straight-line basis over each derivative's original contract term. During the next twelve months, the Company estimates that $0.6 million will be reclassified as an increase to interest income. During the three and nine months ended September 30, 2020, $0.1 million and $0.3 million was reclassified into interest income, respectively.

Swap Guarantees

The Company entered into agreements with four unrelated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) directly with customers referred to them by the Company. Under the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction, only in the event that the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement that allows us to provide access to interest rate swap transactions for our customers without creating the swap ourselves. These swap guarantees are accounted for as credit derivatives.

At September 30, 2020 and December 31, 2019, there were 226 and 172 variable-rate to fixed-rate swap transactions between the third-party financial institutions and the Company's customers, respectively. The initial notional aggregate amount was approximately $1.1 billion at September 30, 2020 compared to $941.0 million at December 31, 2019. At September 30, 2020, the swap transactions remaining maturities ranged from under 1 year to 15 years. At September 30, 2020, 223 of these customer swaps were in a paying position to third parties for $93.9 million, with our swap guarantees having a fair value of $12.2 million. At December 31, 2019, 156 of these customer swaps were in a paying position to third parties for $27.4 million, with our swap guarantees having a fair value of $8.8 million. However, for both periods, none of the Company's customers were in default of the swap agreements.

The table below presents the effect of the derivative financial instruments on the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2020 and September 30, 2019.

	Amount of Gain Recognized in OCI on Derivative (Effective Portion)				Amount of Gain Recognized in OCI on Derivative (Effective Portion)				Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
(Dollars in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships	2020		2019		2020		2019
Interest Rate Products	$	—	$	368	$	1,560	$	2,005	Interest income
Total	$	—	$	368	$	1,560	$	2,005
	Amount of Gain or (Loss) Recognized in Income				Amount of Gain or (Loss) Recognized in Income				Location of Gain or (Loss) Recognized in Income
(Dollars in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives Not Designated as a Hedging Instrument	2020		2019		2020		2019
Interest Rate Lock Commitments	$	3,261	$	322	$	9,488	$	1,496	Mortgage banking activities, net
Forward Sale Commitments	(3,110)		(481)		(9,594)		$	(1,203)	Mortgage banking activities, net
Total	$	151	$	(159)	$	(106)	$	293

The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $8.4 million in securities and $11.1 million in cash against its obligations under these agreements. If the Company had breached any of these provisions at September 30, 2020, it could have been required to settle its obligations under the agreements at the termination value.