BALANCE SHEET OFFSETTING

6 Months Ended

Jun. 30, 2020

DERIVATIVES AND HEDGING

The Company uses derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. The Company controls the credit risk associated with these derivative financial instruments through collateral, credit approvals and monitoring procedures.

Derivative financial instruments are carried at fair value on the consolidated statements of condition. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it has been designated as a hedge for accounting purposes, and, if so, the type of hedge it has been designated as. The changes in fair value of the Company's derivative instruments not designated as hedges are accounted for within the consolidated statements of income.

Quarterly, in conjunction with financial reporting, each cash flow hedge is assessed for ineffectiveness. To the extent ineffectiveness is identified, this amount is recorded within the consolidated statements of income. The gain or loss on the effective portion of the cash flow hedge is reclassified from AOCI into interest within the consolidated statements of income in the period the hedged transaction affects earnings.

Derivatives Not Designated as Hedges

Customer Loan Swaps

The Company will enter into interest rate swaps with its commercial customers to provide them with a means to lock into a long-term fixed rate, while simultaneously entering into an arrangement with a counterparty to swap the fixed rate to a variable rate to manage its interest rate exposure effectively. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not materially change the Company's interest rate risk or present any material exposure to its consolidated statements of income.

The following table presents the total positions, notional and fair value of the Company's customer loans swaps with each party for the dates indicated:



(In thousands, except number of positions)		June 30, 2020						December 31, 2019
(In thousands, except number of positions)	Presentation on Consolidated Statements of Condition	Number of Positions	Notional Amount		Fair Value			Number of Positions	Notional Amount		Fair Value
Receive fixed, pay variable	Accrued interest and other liabilities	—	$	—	$	—		10	$	45,243	$	(514	)
Receive fixed, pay variable	Other assets	83	400,934		47,338			75	366,351		17,756
Pay fixed, receive variable	Accrued interest and other liabilities	83	400,934		(47,338		)	85	411,594		(17,242		)
Total		166	$	801,868	$	—		170	$	823,188	$	—

The Company seeks to mitigate its customer counterparty credit risk exposure through its loan policy and underwriting process, which includes credit approval limits, monitoring procedures, and obtaining collateral, where appropriate. The Company mitigates its institutional counterparty credit risk exposure by limiting the institutions for which it will enter into

interest swap arrangements through an approved listing by its Board of Directors, as well as by posting cash or other financial assets from or to the counterparty.

The Company has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Company's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its customer loan swap contracts in a net liability position based on their aggregate fair value and the Company's credit rating. The Company may also receive cash collateral for contracts in a net asset position as requested. At June 30, 2020 and December 31, 2019 the Company posted $48.2 million and $18.4 million, respectively, of cash to the counterparty as collateral on its customer loan swap contracts which was presented within other assets on the consolidated statements of condition. Refer to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.

Fixed-Rate Mortgage Interest Rate Lock Commitments

As part of the origination process of a residential loan, the Company may enter into rate lock agreements with its borrower, which is considered an interest rate lock commitment. If the Company intends to sell the loan upon origination, it will account for the interest rate lock commitment as a derivative. The Company's pipeline of mortgage loans with fixed-rate interest rate lock commitments for which it intends to sell the loan upon origination was as follows for the dates indicated:



		June 30, 2020					December 31, 2019
(In thousands)	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value			Notional Amount		Fair Value
Fixed-rate mortgage interest rate locks	Other assets	$	69,914	$	1,287		$	27,087	$	480
Fixed-rate mortgage interest rate locks	Accrued interest and other liabilities	34,138		(329		)	2,519		(18		)
Total		$	104,052	$	958		$	29,606	$	462

For the three months ended June 30, 2020 and 2019, the net unrealized (loss) gain from the change in fair value on the Company's fixed-rate mortgage rate locks reported within mortgage banking income, net, on the consolidated statements of income was ($1.0) million and $223,000, respectively. For the six months ended June 30, 2020 and 2019, the net unrealized gain from the change in fair value on the Company's fixed-rate mortgage rate locks reported within mortgage banking income, net, on the consolidated statements of income was $496,000 and $404,000, respectively.

Forward Delivery Commitments

The Company typically enters into a forward delivery commitment with a secondary market investor, which has been approved by the Company within its normal governance process, at the onset of the loan origination process. The Company may enter into these arrangements with the secondary market investors on a "best effort" or "mandatory delivery" basis. The Company's normal practice is typically to enter into these arrangements on a "best effort" basis. The Company enters into these arrangements with the secondary market investors to manage its interest rate exposure. The Company accounts for the forward delivery commitment as a derivative upon origination of a loan identified as held for sale.

The Company's forward delivery commitments on loans held for sale for the dates indicated were as follows:



		June 30, 2020					December 31, 2019
(In thousands)	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value			Notional Amount		Fair Value
Forward delivery commitments ("best effort")	Other Assets	$	19,649	$	359		$	10,846	$	312
Forward delivery commitments ("best effort")	Accrued interest and other liabilities	16,260		(218		)	1,069		(15		)
Total		$	35,909	$	141		$	11,915	$	297

For the three months ended June 30, 2020 and 2019, the net unrealized (loss) gain from the change in fair value on the Company's forward delivery commitments reported within mortgage banking income, net, on the consolidated statements of income was ($1.0) million and $159,000, respectively. For the six months ended June 30, 2020 and 2019, the net unrealized (loss) gain from the change in fair value on the Company's forward delivery commitments reported within mortgage banking income, net, on the consolidated statements of income was ($156,000) and $242,000, respectively.

Derivatives Designated as Hedges

Interest Rate Swap on Loans

In 2019, the Company entered into a $100.0 million interest rate swap contract with a counterparty to manage interest rate risk associated with its variable-rate loans. The Company has entered into a master netting arrangement with its institutional counterparty and settles payments monthly on a net basis.

The arrangement with the institutional counterparty requires it to post collateral for its interest rate swaps on loans and borrowings when they are in a net liability position based on their fair values. If the interest rate swaps are in a net asset position based on their fair values, the counterparty will post collateral to the Company as requested. At June 30, 2020, the institutional counterparty posted $4.0 million of cash as collateral on its interest rate swaps on loans and borrowings, which was presented within interest-bearing deposits in other banks as restricted cash with a matching liability within accrued interest and other liabilities on the consolidated statements of condition. At December 31, 2019, the counterparty posted $560,000 as collateral on its interest rate swap on loans. Refer to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.

The details of the interest rate swap for the dates indicated were as follows:

(Dollars in thousands)

June 30, 2020

December 31, 2019

Trade
Date

Maturity Date

Variable Index
Paid

Fixed Rate
Received

Presentation on Consolidated

Statements of Condition

Notional
Amount

Fair

Value

Notional
Amount

Fair

Value

6/12/2019

6/10/2024

1-Month

USD LIBOR

1.693%

Other assets

100,000

6,109

100,000

483

For the three and six months ended June 30, 2020, the Company did not record any ineffectiveness within the consolidated statements of income.

Net payments received from the institutional counterparty for the six months ended June 30, 2020 were $299,000, and were classified as cash flows from operating activities within the consolidated statements of cash flows.

Interest Rate Swaps on Borrowings

In March 2020, the Company entered into two $50.0 million interest rate swap arrangements with an institutional counterparty to mitigate interest rate risk. The Company entered into a master netting arrangement with the institutional counterparty and settles payments on a net basis, monthly for the Federal Funds Effective Rate swap and quarterly for the 3-Month USD LIBOR swap.

The details of the Company's interest rate swaps on borrowings for the dates indicated were as follows:



(Dollars in thousands)					June 30, 2020
Trade Date	Maturity Date	Variable Index Received	Fixed Rate Paid	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value
3/2/2020	3/1/2023	Fed Funds Effective Rate	0.705%	Accrued interest and other liabilities	$	50,000	$	(952	)
3/26/2020	3/26/2030	3-Month USD LIBOR	0.857%	Accrued interest and other liabilities	50,000		(1,171		)
					$	100,000	$	(2,123	)

For the three and six months ended June 30, 2020, the Company did not record any ineffectiveness within the consolidated statements of income.

Net payments received from the institutional counterparty for the six months ended June 30, 2020 were $30,000 and were classified as cash flows from operating activities within the consolidated statements of cash flows.

Junior Subordinated Debt Interest Rate Swaps

The Company entered into five interest rate swap agreements with an institutional counterparty to manage interest rate risk associated with the Company's variable rate borrowings. The Company entered into a master netting arrangement with its institutional counterparty and settles payments quarterly on a net basis. The interest rate swap arrangements contain provisions that require the Company to post cash or other assets as collateral with the counterparty for contracts that are in a net liability position based on their aggregate fair value and the Company’s credit rating. If the interest rate swaps are in a net asset position based on their aggregate fair value, the institutional counterparty will post collateral to the Company as requested. At June 30, 2020 and December 31, 2019, the Company posted $13.3 million and $8.8 million, respectively, of cash as collateral to the institutional counterparty, which was presented within other assets on the consolidated statements of financial condition. Refer to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.

The details of the junior subordinated debt interest rate swaps for the dates indicated were as follows:



(Dollars in thousands)					June 30, 2020					December 31, 2019
Trade Date	Maturity Date	Variable Index Received	Fixed Rate Paid	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value			Notional Amount		Fair Value
3/18/2009	6/30/2021	3-Month USD LIBOR	5.09%	Accrued interest and other liabilities	$	10,000	$	(346	)	$	10,000	$	(299	)
7/8/2009	6/30/2029	3-Month USD LIBOR	5.84%	Accrued interest and other liabilities	10,000		(3,497		)	10,000		(2,318		)
5/6/2010	6/30/2030	3-Month USD LIBOR	5.71%	Accrued interest and other liabilities	10,000		(3,693		)	10,000		(2,384		)
3/14/2011	3/30/2031	3-Month USD LIBOR	4.35%	Accrued interest and other liabilities	5,000		(1,988		)	5,000		(1,279		)
5/4/2011	7/7/2031	3-Month USD LIBOR	4.14%	Accrued interest and other liabilities	8,000		(3,060		)	8,000		(1,907		)
					$	43,000	$	(12,584	)	$	43,000	$	(8,187	)

For the three and six months ended June 30, 2020 and 2019, the Company did not record any ineffectiveness on these cash flow hedges within the consolidated statements of income.

Net payments to the counterparty for the six months ended June 30, 2020 and 2019 were $537,000 and $318,000, respectively, and were classified as cash flows from operating activities in the Company's consolidated statements of cash flows.

The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:



	For The Three Months Ended June 30,						For The Six Months Ended June 30,
(In thousands)	2020			2019			2020			2019
Derivatives designated as cash flow hedges:
Effective portion of unrealized losses recognized within OCI during the period, net of tax	$	(11	)	$	(1,203	)	$	(912	)	$	(2,128	)
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense, gross	$	327		$	201		$	567		$	320
Net reclassification adjustment for effective portion of cash flow hedges included in interest income, gross	$	(247	)	$	—		$	(299	)	$	—

The Company expects approximately $771,000 to be reclassified from AOCI, related to the Company’s cash flow hedges, in the next 12 months, decreasing net interest income on the consolidated statements of income. This reclassification is due to anticipated payments that will be made on the swaps based upon the forward curve as of June 30, 2020.BALANCE SHEET OFFSETTING

The Company does not offset the carrying value for derivative instruments or repurchase agreements on the consolidated statements of condition. The Company does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be pledged or received is monitored and adjusted as necessary. Refer to Note 6 for further discussion of repurchase agreements and Note 8 for further discussion of derivative instruments.

The following table presents the Company's derivative positions and repurchase agreements, and the potential effect of netting arrangements on its financial position, as of the dates indicated:



							Gross Amount Not Offset in the Consolidated Statements of Condition
(In thousands)	Gross Amount Recognized in the Consolidated Statements of Condition		Gross Amount Offset in the Consolidated Statements of Condition		Net Amount Presented in the Consolidated Statements of Condition		Financial Instruments Pledged (Received)⁽¹⁾		Cash Collateral Pledged (Received)⁽¹⁾			Net Amount
June 30, 2020
Derivative assets:
Customer loan swaps - commercial customer⁽²⁾	$	47,338	$	—	$	47,338	$	—	$	—		$	47,338
Interest rate swap on loans⁽³⁾	6,109		—		6,109		—		(6,109		)	—
Total	$	53,447	$	—	$	53,447	$	—	$	(6,109	)	$	47,338
Derivative liabilities:
Customer loan swaps - dealer bank	$	47,338	$	—	$	47,338	$	—	$	47,338		—
Junior subordinated debt interest rate swaps	12,584		—		12,584		—		12,584			—
Interest rate swaps on borrowings⁽³⁾	2,123		—		2,123		—		2,123			—
Total	$	62,045	$	—	$	62,045	$	—	$	62,045		$	—
Customer repurchase agreements	$	195,998	$	—	$	195,998	$	195,998	$	—		$	—
December 31, 2019
Derivative assets:
Customer loan swaps - commercial customer⁽²⁾	17,756		—		17,756		—		—			17,756
Interest rate swap on loans	483		—		483		—		(483		)	—
Total	$	18,239	$	—	$	18,239	$	—	$	(483	)	$	17,756
Derivative liabilities:
Customer loan swaps - dealer bank	$	17,242	$	—	$	17,242	$	—	$	17,242		$	—
Junior subordinated debt interest rate swaps	$	8,187	$	—	$	8,187	$	—	$	8,187		$	—
Customer loan swaps - commercial customer⁽²⁾	514		—		514		—		—			514
Total	$	25,943	$	—	$	25,943	$	—	$	25,429		$	514
Customer repurchase agreements	$	237,984	$	—	$	237,984	$	237,984	$	—		$	—


(1)	The amount presented was the lesser of the amount pledged (received) or the net amount presented in the consolidated statements of condition.

(2) The Company manages its net exposure on its commercial customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting practices.

(3)

Interest rate swap contracts were completed with the same dealer bank. The Company maintains a master netting arrangement and settles collateral requested or pledged on a net basis for all contracts.