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Derivative Financial Instruments

12 Months Ended

Dec. 31, 2021

Derivative Financial Instruments

Derivative Financial Instruments

Note 28—Derivative Financial Instruments

The Company uses certain derivative instruments to meet the needs of its customers as well as to manage the interest rate risk associated with certain transactions. The following table summarizes the derivative financial instruments utilized by the Company:


							December 31, 2021									December 31, 2020
		Balance Sheet		Notional			Estimated Fair Value						Notional			Estimated Fair Value
(Dollars in thousands)		Location		Amount			Gain			Loss			Amount			Gain			Loss

Fair value hedge of interest rate risk:
Pay fixed rate swap with counterparty		Other Liabilities		$	15,716		$	—		$	1,355		$	16,439		$	—		$	2,086

Not designated hedges of interest rate risk:
Customer related interest rate contracts:
Matched interest rate swaps with borrowers		Other Assets and Other Liabilities			10,404,605			408,776			69,998			9,324,359			802,717			46
Matched interest rate swaps with counterparty		Other Assets and Other Liabilities			10,402,394			—			338,784			9,324,359			46			802,700

Not designated hedges of interest rate risk - mortgage banking activities:
Contracts used to hedge mortgage servicing rights		Other Assets and Other Liabilities			205,000			1,228			—			149,000			119			—
Contracts used to hedge mortgage pipeline		Other Assets			324,000			4,738			—			528,500			11,017			—
Total derivatives				$	21,351,715		$	414,742		$	410,137		$	19,342,657		$	813,899		$	804,832

Cash Flow Hedges of Interest Rate Risk

The Company is exposed to interest rate risk in the course of its business operations and manages a portion of this risk through the use of derivative financial instruments, in the form of interest rate swaps. The Company accounts for interest rate swaps that are classified as a cash flow hedges in accordance with FASB ASC 815, Derivatives and Hedging, which requires that all derivatives be recognized as assets or liabilities on the balance sheet at fair value. We had no cash flow hedges as of December 31, 2021 and 2020. For more information regarding the fair value of the Company’s derivative financial instruments, see Note 25—Fair Value, to these financial statements.

During 2020 the Company utilized interest rate swap agreements to manage interest rate risk related to funding through short term FHLB advances. During the fourth quarter of 2020, the Company made the decision to repay the FHLB advances and terminate the interest rate swap agreements due to the current low interest rate environment and

the expectation that interest rates will remain low during the average life of these interest rate swaps. As a result, in December 2020, the Company recorded through earnings termination costs of $40.8 million related to the interest rate swaps which included $2.0 million in interest expense on the interest rate swap hedges.

For derivatives designated as hedging exposure to variable cash flows of a forecasted transaction (cash flow hedge), the derivative’s entire gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings or when the hedge is terminated. For derivatives that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately. Historically, for designated hedging relationships, we have had a third-party perform retrospective and prospective effectiveness testing on a quarterly basis using quantitative methods to determine if the hedge is still highly effective. Hedge accounting ceases on transactions that are no longer deemed highly effective, or for which the derivative has been terminated or de-designated.

The Company did not maintain any cash flow hedges on the balance sheet throughout the year ended December 31, 2021. The Company recognized an after-tax unrealized gain on its cash flow hedges in other comprehensive income of $10.8 million for the year ended December 31, 2020. During 2020, at the time of the termination of the cash flow hedges, the Company reclassified into current earnings the unrealized loss on the cash flow hedge of $38.8 million ($30.3 million after-tax). There was no ineffectiveness in the cash flow hedges during the year ended December 31, 2020. (See Note 15—Accumulated Other Comprehensive Income (Loss) for activity in accumulated comprehensive income (loss) and the amounts reclassified into earnings related the cash flow hedges.)

Credit risk related to the derivative arises when amounts receivable from the counterparty (derivatives dealer) exceed those payable. We control the risk of loss by only transacting with derivatives dealers that are national market makers whose credit ratings are strong. Each party to the interest rate swap is required to provide collateral in the form of cash or securities to the counterparty when the counterparty’s exposure to a mark-to-market replacement value exceeds certain negotiated limits. These limits are typically based on current credit ratings and vary with ratings changes. With the Company not maintaining any cash flow hedges at December 31, 2021 and 2020, there was no collateral pledged.

Balance Sheet Fair Value Hedge

As of December 31, 2021 and 2020, the Company maintained loan swaps, with an aggregate notional amount of $15.7 million and $16.4 million, respectively, accounted for as a fair value hedge in accordance with ASC 815, Derivatives and Hedging. This derivative protects the company from interest rate risk caused by changes in interest rates in relation to a certain designated fixed rate loan. The derivative converts the fixed rate loan to a floating rate. Settlement occurs in any given period where there is a difference in the stated fixed rate and variable rate. The fair value of this hedge is recorded in other assets or in other liabilities. All changes in fair value are recorded through earnings as noninterest income. There was no gain or loss recorded on this derivative in 2021 or 2020.

Non-designated Hedges of Interest Rate Risk

Customer Swaps

The Company maintains interest rate swap contracts with customers that are classified as non-designated hedges and are not speculative in nature. These agreements are designed to convert customer’s variable rate loans with the Company to fixed rate. These interest rate swaps are executed with loan customers to facilitate a respective risk management strategy and allow the customer to pay a fixed rate of interest to the Company. These interest rate swaps are simultaneously hedged by executing offsetting interest rate swaps with unrelated market counterparties to minimize the net risk exposure to the Company resulting from the transactions and allow the Company to receive a variable rate of interest. The interest rate swaps pay and receive interest based on a floating rate based on one month LIBOR plus credit spread, with payments being calculated on the notional amount. The Company is in process of implementing a plan to transition these interest rate swap contracts to a reference rate other than LIBOR. For Discussion related to Reference Rate Reform, please refer to Issued But Not Yet Adopted Accounting Standards within Note 1—Summary of Significant Accounting Policies. The interest rate swaps are settled monthly with varying maturities.

As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of

December 31, 2021 and 2020, the interest rate swaps had an aggregate notional amount of approximately $20.8 billion and $18.6 billion, respectively. At December 31, 2021, the fair value of the interest rate swap derivatives was recorded in other assets at $408.8 million and other liabilities at $408.8 million with a net liability position of $5,000. At December 31, 2020, the fair value of the interest rate swap derivatives was recorded in other assets at $802.8 million and other liabilities at $802.7 million for a net asset position of $17,000. All changes in fair value are recorded through earnings as noninterest income. As of December 31, 2021, we provided $347.6 million of cash collateral on the counterparty swaps which is included in cash and cash equivalents on the balance sheet as deposits in other financial institutions (restricted cash). The Company also provided $348.8 million in investment securities at market value as collateral on the counterparty swaps which is included in investment securities.

Foreign Exchange

The Company also enters into foreign exchange contracts with customers to accommodate their need to convert certain foreign currencies into U.S. Dollars. To offset the foreign exchange risk, the Company has entered into substantially identical agreements with an unrelated market counterparty to hedge these foreign exchange contracts. At December 31, 2021 and 2020, there were no outstanding contracts or agreements related to foreign currency. If there were foreign currency contracts outstanding at December 31, 2021 and 2020, the fair value of these contracts would be included in other assets and other liabilities in the accompanying balance sheet. All changes in fair value are recorded as other noninterest income. There was no gain or loss recorded related to the foreign exchange derivative for the years ended December 31, 2021 or 2020.

Mortgage Banking

The Company also has derivatives contracts that are not classified as accounting hedges to mitigate risks related to its mortgage banking activities. These instruments may include financial forwards, futures contracts, and options written and purchased, which are used to hedge mortgage servicing rights; while forward sales commitments are typically used to hedge the mortgage pipeline. Such instruments derive their cash flows, and therefore their values, by reference to an underlying instrument, index or referenced interest rate. The Company does not elect hedge accounting treatment for any of these derivative instruments and as a result, changes in fair value of the instruments (both gains and losses) are recorded in the Company’s consolidated statements of income in mortgage banking income.

Mortgage Servicing Rights

Derivatives contracts related to mortgage servicing rights are used to help offset changes in fair value and are written in amounts referred to as notional amounts. Notional amounts provide a basis for calculating payments between counterparties but do not represent amounts to be exchanged between the parties, and are not a measure of financial risk. On December 31, 2021 and 2020, the Company had derivative financial instruments outstanding with notional amounts totaling $205.0 million and $149.0 million related to mortgage servicing rights, respectively. The estimated net fair value of the open contracts related to the mortgage servicing rights was recorded as a gain of $1.2 million at December 31, 2021 compared to a gain of $119,000 at December 31, 2020.

The following table presents the Company’s notional value of forward sale commitments and the fair value of those obligations along with the fair value of the mortgage loan pipeline.


(Dollars in thousands)			2021			2020
Mortgage loan pipeline			$	264,000		$	510,730
Expected closures				233,265			411,273
Fair value of mortgage loan pipeline commitments				4,759			15,328
Forward sales commitments				324,000			528,500
Fair value of forward commitments				(21)			(4,311)