Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

The Company enters into derivative instruments in connection with its risk management activities. These derivative instruments may include interest rate swaps, swaptions, futures and options on futures. The Company may also purchase or sell “To-Be-Announced,” or TBAs, purchase options on U.S. Treasury futures or invest in other types of mortgage derivative securities. The Company's derivative instruments are currently comprised of interest rate swaps, which are designated as trading instruments.

Derivatives Not Designated as Hedging Instruments

The following table presents the fair value of derivative instruments and their location in our consolidated balance sheets at December 31, 2019 and 2018, respectively (dollar amounts in thousands):



Type of Derivative Instrument	Balance Sheet Location	December 31, 2019		December 31, 2018
Interest rate swaps ⁽¹⁾	Derivative assets	$	15,878	$	10,263

⁽¹⁾

All of the Company’s interest rate swaps outstanding are cleared through a central clearing house. The Company exchanges variation margin for swaps based upon daily changes in fair value. As a result of amendments to rules governing certain central clearing activities, the exchange of variation margin is treated as a legal settlement of the exposure under the swap contract. Previously, such payments were treated as cash collateral pledged against the exposure under the swap contract. Accordingly, the Company accounted for the receipt or payment of variation margin as a direct reduction to or increase of the carrying value of the interest rate swap asset or liability on the Company’s consolidated balance sheets. Includes $29.0 million of derivative liabilities netted against a variation margin of $44.8 million at December 31, 2019. Includes $1.8 million of derivative assets and variation margin of $8.5 million at December 31, 2018.

The tables below summarize the activity of derivative instruments not designated as hedges for the years ended December 31, 2019 and 2018, respectively (dollar amounts in thousands).



	Notional Amount For the Year Ended December 31, 2019
Type of Derivative Instrument	December 31, 2018		Additions		Settlement, Expiration or Exercise		December 31, 2019
Interest rate swaps	$	495,500	$	—	$	—	$	495,500



	Notional Amount For the Year Ended December 31, 2018
Type of Derivative Instrument	December 31, 2017		Additions		Settlement, Expiration or Exercise		December 31, 2018
Interest rate swaps	$	345,500	$	150,000	$	—	$	495,500

The following table presents the components of realized gains (losses), net and unrealized gains (losses), net related to our derivative instruments that were not designated as hedging instruments included in the non-interest income category in our consolidated statements of operations for the years ended December 31, 2019, 2018 and 2017, respectively (dollar amounts in thousands):



	Years Ended December 31,
	2019					2018				2017
	Realized Gains (Losses)		Unrealized Gains (Losses)			Realized Gains (Losses)		Unrealized Gains (Losses)		Realized Gains (Losses)			Unrealized Gains (Losses)
TBA	$	—	$	—		$	—	$	—	$	2,511		$	(141	)
Eurodollar futures	—		—			—		—		1,379			(1,175		)
Interest rate swaps	—		(30,722		)	—		909		(218		)	1,231
Swaptions	—		—			—		—		—			274
U.S. Treasury and interest rate swap futures and options	—		—			—		—		267			(337		)
Total	$	—	$	(30,722	)	$	—	$	909	$	3,939		$	(148	)

Derivatives Designated as Hedging Instruments

As of December 31, 2019 and 2018, there were no derivative instruments designated as hedging instruments. Certain of the Company’s interest rate swaps outstanding during the year ended December 31, 2017 to hedge the variable cash flows associated with borrowings made under our variable rate borrowings were designated as cash flow hedges. There were no costs incurred at the inception of these interest rate swaps, under which the Company agreed to pay a fixed rate of interest and receive a variable interest rate based on one month LIBOR, on the notional amount of the interest rate swaps. As of October 31, 2017, there were no outstanding derivatives designated as cash flow hedges.

The Company documented its risk-management policies, including objectives and strategies, as they related to its hedging activities, and upon entering into hedging transactions, documented the relationship between the hedging instrument and the hedged liability contemporaneously. The Company assessed, both at inception of a hedge and on an on-going basis, whether or not the hedge was “highly effective” when using the matched term basis.

The Company discontinued hedge accounting on a prospective basis and recognized changes in the fair value through earnings when: (i) it was determined that the derivative was no longer effective in offsetting cash flows of a hedged item (including forecasted transactions); (ii) it was no longer probable that the forecasted transaction would occur; or (iii) it was determined that designating the derivative as a hedge was no longer appropriate. The Company’s derivative instruments were carried on the Company’s balance sheets at fair value, as assets, if their fair value was positive, or as liabilities, if their fair value was negative. For the Company’s derivative instruments that were designated as “cash flow hedges,” changes in their fair value were recorded in accumulated other comprehensive income (loss), provided that the hedges were effective. A change in fair value for any ineffective amount of the Company’s derivative instruments would have been recognized in earnings. The Company did not recognize any change in the value of its existing derivative instruments designated as cash flow hedges through earnings as a result of ineffectiveness of any of its hedges.

The following table presents the impact of the Company’s interest rate swaps designated as hedging instruments on the Company’s accumulated other comprehensive income (loss) for the year ended December 31, 2017 (dollar amounts in thousands):



	Year Ended December 31,
	2017
Accumulated other comprehensive income (loss) for derivative instruments:
Balance at beginning of the period	$	102
Unrealized loss on interest rate swaps	(102		)
Balance at end of the period	$	—

The following table details the impact of the Company’s interest rate swaps designated as hedging instruments included in interest income or expense for the year ended December 31, 2017 (dollar amounts in thousands):



	Year Ended December 31,
	2017
Interest Rate Swaps:
Interest income-investment securities	$	267
Interest expense-investment securities	—

Outstanding Derivatives

The following table presents information about our interest rate swaps whereby we receive floating rate payments in exchange for fixed rate payments as of December 31, 2019 and 2018, respectively (dollar amounts in thousands):



	December 31, 2019						December 31, 2018
Swap Maturities	Notional Amount		Weighted Average Fixed Interest Rate		Weighted Average Variable Interest Rate		Notional Amount		Weighted Average Fixed Interest Rate		Weighted Average Variable Interest Rate
2024	$	98,000	2.18	%	1.98	%	$	98,000	2.18	%	2.45	%
2027	247,500		2.39	%	1.94	%	247,500		2.39	%	2.53	%
2028	150,000		3.23	%	1.92	%	150,000		3.23	%	2.53	%
Total	$	495,500	2.60	%	1.95	%	$	495,500	2.60	%	2.52	%

The use of derivatives exposes the Company to counterparty credit risks in the event of a default by a counterparty. If a counterparty defaults under the applicable derivative agreement, the Company may be unable to collect payments to which it is entitled under its derivative agreements and may have difficulty collecting the assets it pledged as collateral against such derivatives. Currently, all of the Company’s interest rate swaps outstanding are cleared through CME Group Inc. (“CME Clearing”) which is the parent company of the Chicago Mercantile Exchange Inc. CME Clearing serves as the counterparty to every cleared transaction, becoming the buyer to each seller and the seller to each buyer, limiting the credit risk by guaranteeing the financial performance of both parties and netting down exposures.