Derivatives and Hedging

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging

Derivatives and HedgingDerivatives not designated as hedges are not speculative and result from a service the Company provides to clients. The Company executes interest rate swaps with customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its

net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. The gains and losses are included in “other assets” on the Statement of Cash Flows.

During 2019, the Company changed an input associated with the fair market value related to derivatives not designated as hedges. The model utilized to calculate the non-performance risk, also known as the credit valuation adjustment, or CVA, was adjusted from a more conservative default methodology to a review of the historical defaults recognized by the Company. Management believes this change better aligns with the Company’s credit methodology and underwriting standards.

As of June 30, 2020 and December 31, 2019, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships:

	June 30, 2020			December 31, 2019
Product	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
	(Dollars in thousands)
Back-to-back swaps	58	$	487,255	56	$	380,050

The table below presents the fair value of the Company’s derivative financial instruments and their classification on the Balance Sheet as of June 30, 2020 and December 31, 2019:

	Asset Derivatives					Liability Derivatives
	Balance Sheet	June 30,		December 31,		Balance Sheet	June 30,		December 31,
	Location	2020		2019		Location	2020		2019
	(Dollars in thousands)
Derivatives not designated as hedging instruments
Interest rate products	Other assets	$	29,302	$	9,838	Other liabilities	$	29,432	$	9,907

The effect of the Company’s derivative financial instruments that are not designated as hedging instruments are reported on the Consolidated Statements of Operations as swap fee income, net. The effect of the Company’s derivative financial instruments gain and loss are reported on the Consolidated Statements of Cash Flows within other assets and other liabilities.

The tables below show a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2020 and December 31, 2019:

June 30, 2020
(Dollars in thousands)
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets and Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
Offsetting of derivative assets
Derivatives	$	29,302	$	—	$	29,302	$	8	$	—	$	29,294
Offsetting of derivative liabilities
Derivatives	$	29,432	$	—	$	29,432	$	8	$	—	$	29,424

December 31, 2019
(Dollars in thousands)
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets and Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
Offsetting of derivative assets
Derivatives	$	9,838	$	—	$	9,838	$	97	$	—	$	9,741
Offsetting of derivative liabilities
Derivatives	$	9,907	$	—	$	9,907	$	97	$	—	$	9,810

The net presentation above can be reconciled to the tabular disclosure of fair value.

The Company has agreements with some of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well capitalized institution, then the Company could be considered in default. As of June 30, 2020, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted collateral of $31 million. If the Company had breached any of the underlying provisions at June 30, 2020, it could have been required to settle its obligations under the agreements at their termination value of $30 million.