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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 12 Months Ended
Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

At year-end 2019, the Company held derivatives with a total notional amount of $4.1 billion. The Company had economic hedges and non-hedging derivatives totaling $3.9 billion and $169 million, respectively, which are not designated as hedges for accounting purposes and are therefore recorded at fair value with changes in fair value recorded directly through earnings. Economic hedges included interest rate swaps totaling $3.3 billion, risk participation agreements with dealer banks of $315 million, and $237 million in forward commitment contracts. Forward sale commitments and commitments to lend are included in discontinued operations. See Note 3 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

As part of the Company’s risk management strategy, the Company enters into interest rate swap agreements to mitigate the interest rate risk inherent in certain of the Company’s assets and liabilities. Interest rate swap agreements involve the risk of dealing with both Bank customers and institutional derivative counterparties and their ability to meet contractual terms. The agreements are entered into with counterparties that meet established credit standards and contain master netting and collateral provisions protecting the at-risk party. The derivatives program is overseen by the Risk Management Committee of the Company’s Board of Directors. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant at December 31, 2019.

The Company pledged collateral to derivative counterparties in the form of cash totaling $96.3 million and securities with an amortized cost of $25.7 million and a fair value of $25.8 million at year-end 2019. At December 31, 2018, the Company pledged cash collateral of $25.4 million and securities with an amortized cost of $13.1 million and a fair value of $12.8 million. The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back economic hedges. However certain language is written into the International Swaps Dealers Association, Inc. (“ISDA”) and loan documents where, in default situations, the Bank is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Company may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.

Information about interest rate swap agreements and non-hedging derivative assets and liabilities at December 31, 2019 follows:

 
 
Notional
Amount
 
Weighted
Average
Maturity
 
Weighted Average Rate
 
Estimated
Fair Value
Asset (Liability)
December 31, 2019
 
 
 
Received
 
Contract pay rate
 
 
 
(In thousands)
 
(In years)
 
 
 
 
 
(In thousands)
Economic hedges:
 
 

 
 
 
 

 
 

 
 

Interest rate swap on tax advantaged economic development bond
 
$
9,390

 
9.9
 
2.08
%
 
5.09
%
 
$
(1,488
)
Interest rate swaps on loans with commercial loan customers
 
1,669,895

 
6.4
 
4.38
%
 
3.28
%
 
75,326

Reverse interest rate swaps on loans with commercial loan customers
 
1,669,895

 
6.4
 
3.28
%
 
4.38
%
 
(77,051
)
Risk participation agreements with dealer banks
 
315,140

 
7.5
 
 
 
 
 
320

Forward sale commitments (1)
 
237,412

 
0.2
 
 

 
 

 
(227
)
Total economic hedges
 
3,901,732

 
 
 
 

 
 

 
(3,120
)
 
 
 
 
 
 
 
 
 
 
 
Non-hedging derivatives:
 
 

 
 
 
 

 
 

 
 

Commitments to lend (1)
 
168,997

 
0.2
 
 

 
 

 
2,628

Total non-hedging derivatives
 
168,997

 
 
 
 

 
 

 
2,628

Total
 
$
4,070,729

 
 
 
 

 
 

 
$
(492
)
(1) Includes the impact of discontinued operations.

Information about interest rate swap agreements and non-hedging derivative asset and liabilities at December 31, 2018 follows:
 
 
Notional
Amount
 
Weighted
Average
Maturity
 
Weighted Average Rate
 
Estimated
Fair Value
Asset (Liability)
December 31, 2018
 
 
 
Received
 
Contract pay rate
 
 
 
(In thousands)
 
(In years)
 
 
 
 
 
(In thousands)
Economic hedges:
 
 

 
 
 
 

 
 

 
 

Interest rate swap on tax advantaged economic development bond
 
$
10,090

 
10.9
 
2.72
%
 
5.09
%
 
$
(1,240
)
Interest rate swaps on loans with commercial loan customers
 
1,346,894

 
6.7
 
4.53
%
 
4.04
%
 
11,443

Reverse interest rate swaps on loans with commercial loan customers
 
1,346,894

 
6.7
 
4.04
%
 
4.53
%
 
(11,953
)
Risk participation agreements with dealer banks
 
243,806

 
5.7
 


 
 

 
237

Forward sale commitments (1)
 
190,807

 
0.2
 
 

 
 

 
(734
)
Total economic hedges
 
3,138,491

 
 
 
 

 
 

 
(2,247
)
 
 


 
 
 
 
 
 
 


Non-hedging derivatives:
 
 

 
 
 
 

 
 

 
 

Commitments to lend (1)
 
165,079

 
0.2
 
 

 
 

 
3,927

Total non-hedging derivatives
 
165,079

 
 
 
 

 
 

 
3,927

Total
 
$
3,303,570

 
 
 
 

 
 

 
$
1,680


(1) Includes the impact of discontinued operations.
Cash Flow Hedges
In the first quarter of 2017, the Company maintained six interest rate swap contracts with an aggregate notional value of $300 million with original durations of three years. This hedge strategy converted one month rolling FHLB borrowings based on the FHLB’s one month fixed interest rate to fixed interest rates, thereby protecting the Company from floating interest rate variability.

On February 7, 2017, the Company terminated all of its interest rate swaps associated with FHLB borrowings with 1-month LIBOR based floating interest rates of an aggregate notional amount of $300 million. As of March 31, 2017, the Company no longer held the FHLB borrowings associated with the interest rate swaps. As a result, the Company reclassified $6.6 million of losses from the effective portion of the unrealized changes in the fair value of the terminated derivatives from other comprehensive income to non-interest income as the forecasted transactions to the related FHLB advances will not occur.c

Prior to the termination, the effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges was reported in other comprehensive income. Each quarter, the Company assessed the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. For the years ended December 31, 2019 and 2018, there was no hedge ineffectiveness on interest rate swaps designated as cash flow hedges.
 
Amounts included in the Consolidated Statements of Income and in the other comprehensive income section of the Consolidated Statements of Comprehensive Income (related to interest rate derivatives designated as hedges of cash flows), were as follows:
 
 
Years Ended December 31,
(In thousands)
 
2019
 
2018
 
2017
Interest rate swaps on FHLB borrowings:
 
 

 
 

 
 
Unrealized (loss) recognized in accumulated other comprehensive loss
 
$
—

 
$
—

 
$
(449
)
Less: Reclassification of unrealized (loss) from accumulated other comprehensive loss to interest expense
 
—

 
—

 
(393
)
Less: reclassification of unrealized (loss) from accumulated other
comprehensive income to other non-interest expense
 
—

 
—

 
(6,629
)
Net tax effect on items recognized in accumulated other comprehensive income
 
—

 
—

 
(2,589
)
Other comprehensive income recorded in accumulated other comprehensive income, net of reclassification adjustments and tax effects
 
$
—

 
$
—

 
$
3,984


 



Economic hedges
As of December 31, 2019 the Company has an interest rate swap with a $9.4 million notional amount to swap out the fixed rate of interest on an economic development bond bearing a fixed rate of 5.09%, currently within the Company’s trading portfolio under the fair value option, in exchange for a LIBOR-based floating rate. The intent of the economic hedge is to improve the Company’s asset sensitivity to changing interest rates in anticipation of favorable average floating rates of interest over the 21-year life of the bond. The fair value changes of the economic development bond are mostly offset by fair value changes of the related interest rate swap.
 
The Company also offers certain derivative products directly to qualified commercial borrowers. The Company economically hedges derivative transactions executed with commercial borrowers by entering into mirror-image, offsetting derivatives with third-party financial institutions. The transaction allows the Company’s customer to convert a variable-rate loan to a fixed rate loan. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts mostly offset each other in earnings. Credit valuation loss adjustments arising from the difference in credit worthiness of the commercial loan and financial institution counterparties totaled $1.2 million at year-end 2019. The interest income and expense on these mirror image swaps exactly offset each other.
 
The Company has risk participation agreements with dealer banks. Risk participation agreements occur when the Company participates on a loan and a swap where another bank is the lead. The Company earns a fee to take on the risk associated with having to make the lead bank whole on Berkshire’s portion of the pro-rated swap should the borrower default.
 
The Company utilizes forward sale commitments to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans held for sale. The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings. Forward sale commitments are
included in discontinued operations. See Note 3 - Discontinued Operations for more information on assets and
liabilities classified as discontinued operations.
 
The company uses the following types of forward sale commitments contracts:
•
Best efforts loan sales,
•
Mandatory delivery loan sales, and
•
To be announced (TBA) mortgage-backed securities sales.
 
A best efforts contract refers to a loan sales agreement where the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. The Company may enter into a best efforts contract once the price is known, which is shortly after the potential borrower’s interest rate is locked.
 
A mandatory delivery contract is a loan sales agreement 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 mandatory delivery contracts shortly after the loan closes with a customer.
 
The Company may sell to-be-announced mortgage-backed securities to hedge the changes in fair value of interest rate lock commitments and held for sale loans, which do not have corresponding best efforts or mandatory delivery contracts. These security sales transactions are closed once mandatory contracts are written. On the closing date the price of the security is locked-in, and the sale is paired-off with a purchase of the same security. Settlement of the security purchase/sale transaction is done with cash on a net-basis.
 
Non-hedging derivatives
The Company enters into commitments to lend 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. Commitments that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding commitments 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 commitments 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 commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time. Commitments to lend are included in discontinued operations. See Note 3 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

Amounts included in the Consolidated Statements of Income related to economic hedges and non-hedging derivatives were as follows:
 
 
Years Ended December 31,
(In thousands)
 
2019
 
2018
 
2017
Economic hedges
 
 

 
 

 
 
Interest rate swap on industrial revenue bond:
 
 

 
 

 
 
Unrealized (loss)/gain recognized in other non-interest income
 
$
(248
)
 
$
409

 
$
371

Interest rate swaps on loans with commercial loan customers:
 
 

 
 

 
 
Unrealized gain/(loss) recognized in other non-interest income
 
65,098

 
8,758

 
(3,557
)
(Unfavorable)/Favorable change in credit valuation adjustment recognized in other non-interest income
 
(1,214
)
 
(519
)
 
(316
)
Reverse interest rate swaps on loans with commercial loan customers:
 
 

 
 

 
 
Unrealized (loss)/gain recognized in other non-interest income
 
(65,098
)
 
(8,758
)
 
3,557

Risk Participation Agreements:
 
 

 
 

 
 
Unrealized gain/(loss) recognized in other non-interest income
 
83

 
263

 
(31
)
Forward Commitments:
 
 

 
 

 
 
Unrealized gain/(loss) recognized in discontinued operations
 
507

 
(611
)
 
(123
)
Realized (loss) in discontinued operations
 
(9,195
)
 
(1,532
)
 
(1,764
)
 
 
 
 
 
 
 
Non-hedging derivatives
 
 

 
 

 
 
Commitments to lend:
 
 

 
 

 
 
Unrealized (loss)/gain recognized in discontinued operations
 
$
(1,299
)
 
$
3,358

 
$
5,259

Realized gain in discontinued operations
 
57,699

 
33,982

 
50,879


Assets and Liabilities Subject to Enforceable Master Netting Arrangements

Interest Rate Swap Agreements (“Swap Agreements”)
The Company enters into swap agreements to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting swap agreements with highly rated third party financial institutions. The swap agreements are free-standing derivatives and are recorded at fair value in the Company’s Consolidated Balance Sheets. The Company is party to master netting arrangements with its financial institution 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 swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral generally in the form of marketable securities is received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds.

The Company had net asset positions with its financial institution counterparties totaling $0.6 million and $5.9 million as of December 31, 2019 and December 31, 2018, respectively. The Company had net asset positions with its commercial banking counterparties totaling $76.4 million and $21.2 million as of December 31, 2019 and December 31, 2018, respectively.

The Company had net liability positions with its financial institution counterparties totaling $78.8 million and $18.8 million as of December 31, 2019 and December 31, 2018, respectively. At December 31, 2019, the Company had net liability positions with its commercial banking counterparties totaling $1.1 million and $9.7 million as of December 31, 2019 and December 31, 2018, respectively. The collateral posted by the Company that covered liability positions was $122.1 million and $38.2 million as of December 31, 2019 and December 31, 2018, respectively.
 
The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of December 31, 2019 and December 31, 2018 :
 
Offsetting of Financial Assets and Derivative Assets
 
 
Gross
Amounts of
Recognized
Assets
 
Gross Amounts
Offset in the
Statements of
Condition
 
Net Amounts of Assets
Presented in the Statements of
Condition
 
Gross Amounts Not Offset in the Statements
of Condition
 
 
 
 
 
 
 
Financial
Instruments
 
Cash
Collateral Received
 
 
(in thousands)
 
 
 
 
 
 
Net Amount
As of December 31, 2019
 
 

 
 

 
 

 
 

 
 

 
 

Interest Rate Swap Agreements:
Institutional counterparties
 
$
640

 
$
(54
)
 
$
586

 
$
—

 
$
—

 
$
586

Commercial counterparties
 
76,428

 
(22
)
 
76,406

 
—

 
—

 
76,406

Total
 
$
77,068

 
$
(76
)
 
$
76,992

 
$
—

 
$
—

 
$
76,992




Offsetting of Financial Liabilities and Derivative Liabilities
 
 
Gross
Amounts of
Recognized
Liabilities
 
Gross Amounts
Offset in the
Statements of
Condition
 
Net Amounts of Liabilities
Presented in the Statement of
Condition
 
Gross Amounts Not Offset in the Statements
of Condition
 
 
 
 
 
 
 
Financial
Instruments
 
Cash
Collateral Received
 
 
(in thousands)
 
 
 
 
 
 
Net Amount
As of December 31, 2019
 
 

 
 

 
 

 
 

 
 

 
 

Interest Rate Swap Agreements:
Institutional counterparties
 
$
(80,024
)
 
$
1,219

 
$
(78,805
)
 
$
25,828

 
$
96,310

 
$
43,333

Commercial counterparties
 
(1,080
)
 
—

 
(1,080
)
 
—

 
—

 
(1,080
)
Total
 
$
(81,104
)
 
$
1,219

 
$
(79,885
)
 
$
25,828

 
$
96,310

 
$
42,253


Offsetting of Financial Assets and Derivative Assets
 
 
Gross
Amounts of
Recognized
Assets
 
Gross Amounts
Offset in the
Statements of
Condition
 
Net Amounts of Assets
Presented in the Statements of
Condition
 
Gross Amounts Not Offset in the Statements
of Condition
 
 
 
 
 
 
 
Financial
Instruments
 
Cash
Collateral Received
 
 
(in thousands)
 
 
 
 
 
 
Net Amount
As of December 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Interest Rate Swap Agreements:
Institutional counterparties
 
$
9,485

 
$
(3,592
)
 
$
5,893

 
$
—

 
$
—

 
$
5,893

Commercial counterparties
 
21,345

 
(157
)
 
21,188

 
—

 
—

 
21,188

Total
 
$
30,830

 
$
(3,749
)
 
$
27,081

 
$
—

 
$
—

 
$
27,081




Offsetting of Financial Liabilities and Derivative Liabilities
 
 
Gross
Amounts of
Recognized
Liabilities
 
Gross Amounts
Offset in the
Statements of
Condition
 
Net Amounts of Liabilities
Presented in the Statement of
Condition
 
Gross Amounts Not Offset in the Statements
of Condition
 
 
 
 
 
 
 
Financial
Instruments
Cash
Collateral Received
 
 
(in thousands)
 
 
 
 
 
Net Amount
As of December 31, 2018
 
 

 
 

 
 

 
 

 

 
 

Interest Rate Swap Agreements:
Institutional counterparties
 
$
(19,949
)
 
$
1,101

 
$
(18,848
)
 
$
12,793

$
25,412

 
$
19,357

Commercial counterparties
 
(9,932
)
 
187

 
(9,745
)
 
—

—

 
(9,745
)
Total
 
$
(29,881
)
 
$
1,288

 
$
(28,593
)
 
$
12,793

$
25,412

 
$
9,612