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Balance Sheet Offsetting

12 Months Ended

Dec. 31, 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.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same line item on the consolidated statements of income as the earnings effect of the hedged item (e.g., in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate debt). Any initial fair value of hedge components that are excluded from the assessment of effectiveness are recognized in earnings under a systematic and rational method over the life of the hedging instrument and is presented in the same line item on the consolidated statements of income as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings is recorded as a component of OCI. For the year ended December 31, 2020, 2019 and 2018, the Company did not have any hedge components that were excluded from the assessment of effectiveness.

Quarterly, in conjunction with financial reporting, each cash flow hedge is assessed to determine it continues to be highly effective.

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 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. Customer loan swaps are presented on a gross basis within other assets and accrued interest and other liabilities on the consolidated statements of condition.

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:


		December 31,
		2020					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	80	376,290		39,627		75	366,351		17,756
Pay fixed, receive variable	Accrued interest and other liabilities	80	376,290		(39,627)		85	411,594		(17,242)
Total		160	$	752,580	$	—	170	$	823,188	$	—

The Company mitigates 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 institutional 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 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 December 31, 2020 and 2019, the Company posted $44.2 million and $18.4 million, respectively, of cash as collateral and it was presented within other assets on the consolidated statements of condition. Refer to Note 13 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.

Fixed Rate Mortgage Interest Rate Locks 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:


		December 31,
		2020				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	$	58,574	$	608	$	27,087	$	480
Fixed rate mortgage interest rate locks	Accrued interest and other liabilities	28,346		(248)		2,519		(18)
Total		$	86,920	$	360	$	29,606	$	462

For the year ended December 31, 2020, 2019 and 2018, 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 ($102,000), $395,000, and ($218,000), 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 has been 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:


		December 31,
		2020				2019
(In thousands)	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value		Notional Amount		Fair Value
Forward delivery commitments ("best effort")	Other assets	$	24,951	$	311	$	10,846	$	312
Forward delivery commitments ("best effort")	Accrued interest and other liabilities	15,548		(196)		1,069		(15)
Total		$	40,499	$	115	$	11,915	$	297

For the year ended December 31, 2020, 2019 and 2018, the net unrealized gain (loss) 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 were ($182,000), $282,000, and ($127,000), respectively.

Derivatives Designated as Cash Flow Hedges

Interest Rate Swap on Loans

On June 12, 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 institutional counterparty will post collateral to the Company as requested. At December 31, 2020, the institutional counterparty posted $4.3 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 institutional counterparty posted $560,000 of cash as collateral on its interest rate swap on loans, 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. Refer to Note 13 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:


					December 31,
(Dollars in thousands)					2020				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	$	5,169	$	100,000	$	483

For the year ended December 31, 2020 and 2019, net payments received from (paid to) the institutional counterparty were $1.0 million and ($214,000), respectively, and were classified as cash flows from operating activities in the Company's consolidated statements of cash flow.

Interest Rate Swap 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 date indicated was as follows:


(Dollars in thousands)					December 31, 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	$	(680)
3/26/2020	3/26/2030	3-Month USD LIBOR	0.857%	Accrued interest and other liabilities	50,000		(33)
					$	100,000	$	(713)

Net payments to the institutional counterparty for the year ended December 31, 2020 were $232,000, and were classified as cash flows from operating activities within the consolidated statements of cash flow.

Junior Subordinated Debt Interest Rate Swaps

In July 2020, the Company entered into a $10.0 million forward-starting interest rate swap with an effective date of June 30, 2021, that will effectively replace its $10.0 million interest rate swap that is scheduled to mature on June 30, 2021. The Company has entered into this new interest rate swap agreement, as well as its existing 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 December 31, 2020 and 2019, the Company posted $13.3 million and $8.8 million, respectively, of cash as collateral to the institutional counterparty, which is presented within other assets on the consolidated statements of condition. Refer to Note 13 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:


					December 31,
(Dollars in thousands)					2020				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	3.69%	Accrued interest and other liabilities	$	10,000	$	(174)	$	10,000	$	(299)
7/8/2009	6/30/2029	3-Month USD LIBOR	4.44%	Accrued interest and other liabilities	10,000		(3,095)		10,000		(2,318)
5/6/2010	6/30/2030	3-Month USD LIBOR	4.31%	Accrued interest and other liabilities	10,000		(3,245)		10,000		(2,384)
3/14/2011	3/30/2031	3-Month USD LIBOR	4.35%	Accrued interest and other liabilities	5,000		(1,739)		5,000		(1,279)
5/4/2011	7/7/2031	3-Month USD LIBOR	4.14%	Accrued interest and other liabilities	8,000		(2,659)		8,000		(1,907)
7/16/2020	6/30/2036	3-Month USD LIBOR	0.83%	Other assets	10,000		562		—		—
					$	53,000	$	(10,350)	$	43,000	$	(8,187)

Net payments to the institutional counterparty for the year ended December 31, 2020, 2019 and 2018 were $1.4 million, $738,000 and $889,000, respectively, and were classified as cash flows from operating activities in the consolidated statements of cash flows.

The table below presents the effect of cash flow hedge accounting on AOCI for the periods indicated:


	Amount of Gain (Loss) Recognized in OCI on Derivatives, Net of Tax						Location of Gain (Loss) Reclassified from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income, Gross
	For the Year Ended December 31,							For the Year Ended December 31,
(Dollars in thousands)	2020		2019		2018			2020		2019		2018
Derivatives in Cash Flow Hedge Relationships
Interest rate contracts	$	954	$	(2,334)	$	837	Interest and fees on loans	$	1,006	$	(214)	$	—
							Interest on deposits	(130)		—		—
							Interest on borrowings	(102)		32		58
							Interest on subordinated debentures	(1,371)		(739)		(889)
Total	$	954	$	(2,334)	$	837	Total	$	(597)	$	(921)	$	(831)

The table below presents the effect of cash flow hedge accounting on the consolidated statements of income for the periods indicated:


	Location and Amount of Gain (Loss) Recognized in Income
	For the Year Ended December 31,
	2020							2019						2018
(Dollars in thousands)	Interest and fees on loans		Interest on deposits		Interest on borrowings	Interest on subordinated debentures		Interest and fees on loans		Interest on borrowings		Interest on subordinated debentures		Interest on borrowings		Interest on subordinated debentures
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded	$	134,000	$	15,544	1,837	$	3,512	$	143,399	$	3,621	$	3,266	$	7,456	$	3,415
Gain (loss) on cash flow hedging relationships
Interest rate contracts:
Amount of gain (loss) reclassified from AOCI into income	1,006		(130)		(102)	(1,371)		(214)		32		(739)		58		(889)

The Company expects approximately $1.4 million of losses (pre-tax) related to the Company’s cash flow hedges to be reclassified to earnings from AOCI over the next 12 months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of December 31, 2020.

BALANCE SHEET OFFSETTINGThe 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 10 for further discussion of repurchase agreements and Note 12 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 consolidated statements of condition, 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
December 31, 2020
Derivative assets:
Customer loan swaps - commercial customer(2)	$	39,627	$	—	$	39,627	$	—	$	—	$	39,627
Interest rate swap on loans(3)	5,169		—		5,169		—		(5,033)		136
Junior subordinated debt interest rate swaps(3)	562		—		562		—		(562)		—
Total	$	45,358	$	—	$	45,358	$	—	$	(5,595)	$	39,763
Derivative liabilities:
Customer loan swaps - dealer bank(3)	$	39,627	$	—	39,627		$	—	$	39,627	$	—
Junior subordinated debt interest rate swaps(3)	10,912		—		10,912		—		10,912		—
Interest rate swaps on borrowings(3)	713		—		713		—		713		—
Total	$	51,252	$	—	$	51,252	$	—	$	51,252	$	—
Customer repurchase agreements	$	162,439	$	—	$	162,439	$	162,439	$	—	$	—
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(3)	$	17,242	$	—	17,242		$	—	$	17,242	$	—
Junior subordinated debt interest rate swaps(3)	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) The Company maintains a master netting arrangement and settles collateral requested or pledged on a net basis.