DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 9.           DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

As part of its overall asset and liability management strategy, the Company uses derivative instruments to minimize fluctuations in earnings and cash flows caused by interest rate volatility. The Company’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so the changes in interest rates do not have a significant effect on net interest income. Thus, all of the Company's derivative contracts are considered to be interest rate contracts.

The Company recognizes its derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss.

The Company offers derivative products in the form of interest rate swaps, to commercial loan customers to facilitate their risk management strategies. These instruments are executed through Master Netting Arrangements ("MNA") with financial institution counterparties or Risk Participation Agreements ("RPA") with commercial bank counterparties, for which the Company assumes a pro rata share of the credit exposure associated with a borrower's performance related to the derivative contract with the counterparty.

The following tables present information about derivative assets and liabilities at March 31, 2020 and December 31, 2019:

	March 31, 2020
			Weighted				Location Fair
	Notional		Average		Fair Value		Value Asset
	Amount		Maturity		Asset (Liability)		(Liability)
	(in thousands)		(in years)		(in thousands)
Cash flow hedges:
Interest rate swap on wholesale funding	$	100,000		4.3	$	(6,467)	Other liabilities
Total cash flow hedges		100,000		4.3		(6,467)
Fair value hedges:
Interest rate swap on securities		37,190		9.3		3,368	Other liabilities
Total fair value hedges		37,190				3,368
Economic hedges:
Forward sale commitments		53,751		0.2		(73)	Other liabilities
Customer Loan Swaps-MNA Counterparty		150,490		7.8		(15,463)	Other liabilities (1)
Customer Loan Swaps-RPA Counterparty		78,505		8.7		(9,470)	Other liabilities (1)
Customer Loan Swaps-Customer		228,995		8.1		24,933	Other liabilities (1)
Total economic hedges		511,741				(73)
Non-hedging derivatives:
Interest rate lock commitments		23,146		0.1		93	Other assets
Total non-hedging derivatives		23,146				93
Total	$	672,077			$	(3,079)

(1) Customer loan derivatives are subject to MNA or RPA arrangements with financial institution counterparties.

	December 31, 2019
			Weighted				Location Fair
	Notional		Average		Fair Value		Value Asset
	Amount		Maturity		Asset (Liability)		(Liability)
	(in thousands)		(in years)		(in thousands)
Cash flow hedges:
Interest rate swap on wholesale funding	$	100,000		4.6	$	(1,311)	Other liabilities
Total cash flow hedges		100,000				(1,311)
Fair value hedges:
Interest rate swap on securities		37,190		9.6		593	Other liabilities
Total fair value hedges		37,190				593
Economic hedges:
Forward sale commitments		11,228		0.1		(84)	Other liabilities
Customer Loan Swaps-MNA Counterparty		135,598		7.5		(4,669)	(1)
Customer Loan Swaps-RPA Counterparty		69,505		8.8		(3,377)	(1)
Customer Loan Swaps-Customer		205,103		8.1		8,046	(1)
Total economic hedges		421,434				(84)
Non-hedging derivatives:
Interest rate lock commitments		21,748		0.1		59	Other assets
Total non-hedging derivatives		21,748				59
Total	$	580,372			$	(743)

(1) Customer loan derivatives are subject to MNA or RPA arrangements with financial institution counterparties, thus assets and liabilities with the counterparty are netted for financial statement presentation.

As of March 31, 2020 and December 31, 2019, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:

				Cumulative Amount of Fair
	Location of Hedged Item on	Carrying Amount of Hedged		Value Hedging Adjustment in
	Balance Sheet	Assets (Liabilities)		Carrying Amount
March 31, 2020
Fair value hedges:
Interest rate swap on securities	Securities Available for Sale	$	38,710	$	207
December 31, 2019
Fair value hedges:
Interest rate swap on securities	Securities Available for Sale	$	39,026	$	523

Information about derivative assets and liabilities for March 31, 2020 and December 31, 2019, follows:

	Three Months Ended March 31, 2020
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income(1)		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	4,949	Other income	$	—	Interest expense	$	1
Total cash flow hedges		4,949			—			1
Fair value hedges:
Interest rate swap on securities		(2,736)	Interest income		—	Interest income		13
Total fair value hedges		(2,736)			—			13
Economic hedges:
Forward commitments		—	Other income		—	Other income		11
Total economic hedges		—			—			11
Non-hedging derivatives:
Interest rate lock commitments		—	Other Income		—	Other Income		34
Total non-hedging derivatives		—			—			34
Total	$	2,213		$	—		$	59

(1) As of March 31, 2020 the Company does not expect any gains or losses from accumulated other comprehensive income into earnings within the next 12 months.

	Three Months Ended March 31, 2019
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)			Amount of
	Recognized in			Reclassified		Location of	Gain (Loss)
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Recognized
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income(1)		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	402	Other income	$	—	Interest expense	$	—
Interest rate cap agreements		2,494	Acquisition, restructuring, and other expenses			Interest expense		163
Total cash flow hedges		2,896			—			—
Economic hedges:
Forward commitments		—	Other income		—	Other income		(65)
Total economic hedges		—			—			—
Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other Income		6
Total non-hedging derivatives		—			—			6
Total	$	2,896		$	—		$	6

(1) As of March 31, 2019 the Company does not expect any gains or losses from accumulated other comprehensive income into earnings within the next 12 months.

Cash flow hedges

Interest rate cap agreements

In 2014, interest rate cap agreements were purchased to limit the Company’s exposure to rising interest rates on four rolling, three-month borrowings indexed to three-month LIBOR. Under the terms of the agreements, the Company paid total premiums of $4.6 million for the right to receive cash flow payments if three-month LIBOR rises above the caps of 3.00%, thus effectively ensuring interest expense on the borrowings at maximum rates of 3.00% for the duration of the agreements. The interest rate cap agreements were designated as cash flow hedges, however the caps were terminated in the fourth quarter of 2019, with $3.2 million recognized in acquisition, restructuring and other expenses. The caps were terminated because it was probable that the original forecasted transaction would not occur by the end of the original specified period.

Interest rate swap on deposits

In March and November 2019, the Company entered into interest rate swaps on brokered deposits (the "SWAPS") to limit its exposure to rising interest rates over a five year term.  Under the terms of the agreement, the Company has two swaps each with a $50.0 million notional amount and pays a fixed interest rate of 2.46% and 1.55% respectively, and the financial institution counterparty pays the Company interest on the three-month LIBOR rate. The Company designated the swap as a cash flow hedge.

Economic hedges

Forward sale commitments

The Company utilizes forward sale commitments on residential mortgage loans to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives. The Company typically uses a combination of best efforts and mandatory delivery contracts. The contracts are loan sale agreements where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into contracts just prior to the loan closing with a customer.

Customer loan derivatives

The Company enters into customer loan derivatives to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting loan swap agreements with highly rated third-party financial institutions. The loan swap agreements are free-standing derivatives and are recorded at fair value in the Company's consolidated balance sheet. The Company is party to master netting arrangements with its financial institutional counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.

The master netting arrangements provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. Currently, the Company has posted cash of $26.2 million with counterparties.

	Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount
As of March 31, 2020
Customer Loan Derivatives:
MNA counterparty	$	(15,463)	$	15,463	$	26,200	$	—
RPA counterparty		(9,470)		9,470		—		—
Total	$	(24,933)	$	24,933	$	26,200	$	—

	Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount
As of December 31, 2019
Customer Loan Derivatives:
MNA counterparty	$	(4,669)	$	4,669	$	10,700	$	—
RPA counterparty		(3,377)		3,377		—		—
Total	$	(8,046)	$	8,046	$	10,700	$	—

Non-hedging derivatives

Interest rate lock commitments

The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs relate to the origination of residential mortgage loans that are held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in non-interest income in the Company’s Consolidated Statements of Income. Changes in the fair value of IRLCs subsequent to inception are based on; (i) changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and (ii) changes in the probability when the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.