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Derivative Financial Instruments

12 Months Ended

Dec. 31, 2022

Derivative Financial Instruments

Derivative Financial Instruments

Note 28—Derivative Financial Instruments

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


							December 31, 2022									December 31, 2021
		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 Assets and Other Liabilities		$	12,289		$	414		$	—		$	15,716		$	—		$	1,355

Not designated hedges of interest rate risk:
Customer related interest rate contracts:
Matched interest rate swaps with borrowers		Other Assets and Other Liabilities			10,480,171			8,539			1,033,980			10,404,605			408,776			69,998
Matched interest rate swaps with counterparty		Other Assets and Other Liabilities			10,400,733			201,263			—			10,402,394			—			217,208

Not designated hedges of interest rate risk - mortgage banking activities:
Contracts used to hedge mortgage servicing rights		Other Assets and Other Liabilities			35,000			—			163			205,000			1,228			—
Contracts used to hedge mortgage pipeline		Other Assets			51,000			800			—			324,000			4,738			—
Total derivatives				$	20,979,193		$	211,016		$	1,034,143		$	21,351,715		$	414,742		$	288,561

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. We account for interest rate swaps that are classified as cash flow hedges on the balance sheet at fair value. We had no cash flow hedges as of December 31, 2022 and 2021. For more information regarding the fair value of the Company’s derivative financial instruments, see Note 25—Fair Value, to these financial statements.

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 hedged instrument and related swap are terminated before maturity. 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 years ended December 31, 2022 and 2021 (See Note 15—Accumulated Other Comprehensive 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, 2022 and 2021, there was no collateral pledged.

Balance Sheet Fair Value Hedge

As of December 31, 2022 and 2021, the Company maintained loan swaps, with an aggregate notional amount of $12.3 million and $15.7 million, respectively, accounted for as a fair value hedge. This derivative protects us from interest rate risk caused by changes in the LIBOR curve 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 and the difference is recorded in net interest income. The fair value of this hedge is recorded in either other assets or in other liabilities depending on the position of the hedge with the offset recorded in loans. For the year ended December 31, 2022, a gain of $174,000 was recorded. There was no gain or loss recorded on this derivative in 2021.

Non-designated Hedges of Interest Rate Risk

Interest Rate Contracts

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 the 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.

During 2022, the Company determined the variation margin payments for its interest rate swaps centrally cleared through LCH and CME met the legal characteristics of daily settlements of the derivatives rather than collateral. As a result, the variation margin settlement payment and the related derivative instruments fair value are considered a single unit of account for accounting and financial reporting purposes. Depending on the net position of the swaps with LCH and CME, the fair value, net of the variation margin, is reported in Derivative Assets or Derivative Liabilities on the Consolidated Balance Sheets. In addition, the expense or income attributable to the variation margin for the centrally cleared swaps with LCH and CME is reported in Noninterest Income, specifically within Correspondent and Capital Markets Income, as opposed to interest income or interest expense. The daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument.

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, 2022 and 2021, the interest rate swaps had an aggregate notional amount of approximately $20.9 billion and $20.8 billion, respectively. At December 31, 2022, the fair value of the interest rate swap derivatives recorded in

derivative assets was $209.8 million with $1.0 billion recorded in derivative liabilities. The fair value of derivative assets at December 31, 2022 was reduced by $824.3 million in variation margin payments applicable to swaps centrally cleared through LCH and CME. At December 31, 2021, the fair value of the interest rate swap derivatives recorded in derivative assets was $408.8 million with $287.2 million recorded in derivative liabilities. The fair value of derivative liabilities at December 31, 2021 was reduced by $121.6 million in variation margin payments applicable to swaps centrally cleared through LCH and CME. All changes in fair value are recorded through earnings within Correspondent and Capital Markets Income, a component of Noninterest Income on the Consolidated Statements of Income. As of December 31, 2022, we provided $183.7 million of cash collateral on the counterparty swaps, which is included in Cash and Cash Equivalents on the Consolidated Balance Sheets as Deposits in Other Financial Institutions (Restricted Cash). The Company also provided $114.9 million in investment securities at market value as collateral on the counterparty swaps, which is included in Investment Securities on the Consolidated Balance Sheets. Counterparties provided $166.3 million of cash collateral to the Company to secure swap asset positions that were not centrally cleared, which is included in Interest-bearing Deposits within Total Liabilities on the Consolidated Balance Sheets.

Foreign Exchange

The Company may enter 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 may enter into substantially identical agreements with an unrelated market counterparty to hedge these foreign exchange contracts. At December 31, 2022 and 2021, there were no outstanding contracts or agreements related to foreign currency. There was no gain or loss recorded related to the foreign exchange derivative for the years ended December 31, 2022 or 2021.

Mortgage Banking

The Company also has derivatives contracts that are not classified as accounting hedges to mitigate risks related to the Company’s mortgage banking activities. These instruments may include financial forwards, futures contracts, and options written and purchased, which are used to hedge MSRs; 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 MSRs are used to help offset changes in fair value. On December 31, 2022 and 2021, the Company had derivative financial instruments outstanding with notional amounts totaling $35.0 million and $205.0 million related to mortgage servicing rights, respectively. The estimated net fair value of the open contracts related to the mortgage servicing rights was a loss of $163,000 at December 31, 2022 compared to a gain of $1.2 million at December 31, 2021.

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)		2022			2021
Mortgage loan pipeline		$	40,850		$	264,000
Expected closures			37,210			233,265
Fair value of mortgage loan pipeline commitments			524			4,759
Forward sales commitments			51,000			324,000
Fair value of forward commitments			276			(21)