Derivative Financial Instruments

9 Months Ended

Sep. 30, 2021

Notes To Financial Statements

Derivative Financial Instruments

11.     Derivative Financial Instruments

At September 30, 2021 and December 31, 2020, the Company’s derivative financial instruments consisted of interest rate swaps. The Company’s interest rate swaps are used for three purposes: 1) to mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $308.4. million and $316.1 million at September 30, 2021 and December 31, 2020, respectively; 2) to facilitate risk management strategies for our loan customers with $229.7 million of swaps outstanding, which include $114.8 million with customers and $114.8 million with bank counterparties at September 30, 2021 and $125.6 million of swaps outstanding, which include $62.8 million with customers and $62.8 million with bank counterparties at December 31, 2020; and 3) to mitigate exposure to rising interest rates on certain short-term advances and brokered CD’s totaling $996.5 million and $1,021.5 million at September 30, 2021 and December 31, 2020, respectively. Additionally, at December 31, 2020, the Company had swaps outstanding to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million. These swaps were terminated during the three months ended September 30, 2021, realizing a loss of $4.7 million upon termination.

At September 30, 2021 and December 31, 2020, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not designated as hedges.

The Company’s derivative instruments are carried at fair value in the Company’s financial statements as part of Other Assets for derivatives with positive fair values and Other Liabilities for derivatives with negative fair values. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.

At September 30, 2021 and December 31, 2020, derivatives with a combined notional amount of $229.7 million and $143.6 million, respectively, were not designated as hedges. At September 30, 2021 and December 31, 2020, derivatives with a combined notional amount of $308.4 million and $316.1 million, respectively, were designated as fair value hedges. At September 30, 2021 and December 31, 2020, derivatives with a combined notional amount of $996.5 million and $1,021.5 million, respectively, were designated as cash flow hedges.

For cash flow hedges, the changes in the fair value of the derivative is reported in accumulated other comprehensive income (loss), net of tax. Amounts in accumulated other comprehensive income (loss) are reclassified into earnings in the same period during which the hedged forecasted transaction effects earnings. During the three months ended September 30, 2021 and 2020, $2.6 million and $1.4 million, respectively, were reclassified from accumulated other comprehensive loss to interest expense. During the nine months ended September 30, 2021 and 2020, $7.9 million and $2.1 million, respectively, were reclassified from accumulated other comprehensive loss to interest expense. The estimated amount to be reclassified in the next 12 months out of accumulated other comprehensive income (loss) is $10.5 million.

Changes in the fair value of interest rate swaps not designated as hedges are reflected in “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income.

The following table sets forth information regarding the Company’s derivative financial instruments at the periods indicated:

	September 30, 2021				December 31, 2020
	Notional		Net Carrying		Notional		Net Carrying
	Amount		Value (1)		Amount		Value (1)
	(In thousands)
Interest rate swaps (non-hedge)	$	114,835	$	3,225	$	62,779	$	1,319
Interest rate swaps (cash flow hedge)		355,000		4,168		—		—
Interest rate swaps (fair value hedge)		308,350		(15,296)		316,051		(28,689)
Interest rate swaps (cash flow hedge)		641,500		(14,675)		1,021,500		(25,300)
Interest rate swaps (non-hedge)		114,835		(3,225)		80,779		(6,998)
Total derivatives	$	1,534,520	$	(25,803)	$	1,481,109	$	(59,668)

(1)Derivatives in a positive position are recorded as “Other assets” and derivatives in a negative position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition.

The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income for the periods indicated:

		For the three months ended				For the nine months ended
		September 30,				September 30,
(In thousands)	Affected Line Item in the Statement Where Net income is Presented	2021		2020		2021		2020
Financial Derivatives:
	Other interest expense	$	(33)	$	(132)	$	(305)	$	(298)
	Net gain (loss) from fair value adjustments		(445)		590		978		(3,220)
Interest rate swaps (non-hedge)			(478)		458		673		(3,518)
Interest rate swaps (fair value hedge)	Interest and fees on loans		(1,206)		(1,158)		(3,231)		(4,863)
Interest rate swaps (cash flow hedge)	Other interest expense		(2,737)		(2,511)		(7,942)		(4,057)
Net loss		$	(4,421)	$	(3,211)	$	(10,500)	$	(12,438)

The Company’s interest rate swaps are subject to master netting arrangements between the Company and its three designated counterparties. The Company has not made a policy election to offset its derivative positions.

The following tables present the effect of the master netting arrangements on the presentation of the derivative assets and liabilities in the Consolidated Statements of Condition as of the dates indicated:

September 30, 2021

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount Offset in

Net Amount of Assets

Condition

Gross Amount of

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Recognized Assets

Condition

Condition

Instruments

Received

Net Amount

Interest rate swaps

$

7,393

$

—

$

7,393

$

—

$

—

$

7,393

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount of

Gross Amount Offset in

Net Amount of Liabilities

Condition

Recognized

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Liabilities

Condition

Condition

Instruments

Pledged

Net Amount

Interest rate swaps

$

33,196

$

—

$

33,196

$

—

$

29,067

$

4,129

December 31, 2020

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount Offset in

Net Amount of Assets

Condition

Gross Amount of

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Recognized Assets

Condition

Condition

Instruments

Received

Net Amount

Interest rate swaps

$

1,319

$

—

$

1,319

$

—

$

—

$

1,319

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount of

Gross Amount Offset in

Net Amount of Liabilities

Condition

Recognized

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Liabilities

Condition

Condition

Instruments

Pledged

Net Amount

Interest rate swaps

$

60,987

$

—

$

60,987

$

99

$

63,517

$

(2,629)