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Derivative Financial Instruments | 3 Months Ended
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Mar. 31, 2023
Derivative Financial Instruments |
Derivative Financial Instruments | Note 17 — 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: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | March 31, 2023 | ​ | ​ | ​ | ​ | December 31, 2022
​ | ​ | 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 | ​ | $ | 12,186 | ​ | $ | 206 | ​ | $ | — | ​ | $ | 12,289 | ​ | $ | 414 | ​ | $ | —
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Not designated hedges of interest rate risk: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Customer related interest rate contracts: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Matched interest rate swaps with borrowers | ​ | Other Assets and Other Liabilities | ​ | ​ | 10,701,004 | ​ | ​ | 28,580 | ​ | ​ | 805,749 | ​ | ​ | 10,480,171 | ​ | ​ | 8,539 | ​ | ​ | 1,033,980
Matched interest rate swaps with counterparty | ​ | Other Assets and Other Liabilities | ​ | ​ | 10,606,749 | ​ | ​ | 128,227 | ​ | ​ | 835 | ​ | ​ | 10,400,733 | ​ | ​ | 201,263 | ​ | ​ | —
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Not designated hedges of interest rate risk - mortgage banking activities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Contracts used to hedge mortgage servicing rights | ​ | Other Assets and Other Liabilities | ​ | ​ | 67,500 | ​ | ​ | 1,158 | ​ | ​ | — | ​ | ​ | 35,000 | ​ | ​ | — | ​ | ​ | 163
Contracts used to hedge mortgage pipeline | ​ | Other Assets | ​ | ​ | 100,500 | ​ | ​ | 1,115 | ​ | ​ | — | ​ | ​ | 51,000 | ​ | ​ | 800 | ​ | ​ | —
Total derivatives | ​ | ​ | ​ | $ | 21,487,939 | ​ | $ | 159,286 | ​ | $ | 806,584 | ​ | $ | 20,979,193 | ​ | $ | 211,016 | ​ | $ | 1,034,143
​ Cash Flow Hedge 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 March 31, 2023 and December 31, 2022. For more information regarding the fair value of our derivative financial instruments, see Note 15 — 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 three months ended March 31, 2023 and year ended December 31, 2022 (See Note 16—Accumulated Other Comprehensive Income (Loss) for activity in accumulated comprehensive income (loss) and the amounts reclassified into earnings). ​ 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 March 31, 2023 and December 31, 2022, there was no collateral pledged. Balance Sheet Fair Value Hedge ​ As of March 31, 2023 and December 31, 2022, the Company maintained loan swaps, with an aggregate notional amount of $12.2 million and $12.3 million, respectively, accounted for as fair value hedges. 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. ​ Non-designated Hedges of Interest Rate Risk ​ Customer Swap ​ 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 2—Summary of Significant Accounting Policies. The interest rate swaps are settled monthly with varying maturities. ​ 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 Condensed 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. 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 March 31, 2023 and December 31, 2022, the interest rate swaps had an aggregate notional amount of approximately $21.3 billion and $20.9 billion, respectively. At March 31, 2023, the fair value of the interest rate swap derivatives is recorded in other assets at $156.8 million and in other liabilities at $806.6 billion. The fair value of derivative assets at March 31, 2023 was reduced by $650.0 million in variation margin payments applicable to swaps centrally cleared through LCH and CME. At December 31, 2022, the fair value of the interest rate swap derivatives was recorded in other assets at $209.8 million and other liabilities at $1.0 billion. 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. All changes in fair value are recorded through earnings within Correspondent and Capital Markets Income, a component of Noninterest Income on the Condensed Consolidated Statements of Net Income. There was a net gain of $96,000 recorded on these derivatives for the year ended March 31, 2023. There was a net gain of $41,000 recorded on these derivatives for the quarter ended March 31, 2022. As of March 31, 2023, we provided $222.7 million of cash collateral on the customer swaps, which is included in Cash and Cash Equivalents on the Condensed Consolidated Balance Sheets as Deposits in Other Financial Institutions (Restricted Cash). We also provided $113.2 million in investment securities at market value as collateral on the customer swaps which is included in Investment Securities – available for sale on the Condensed Consolidated Balance Sheets. Counterparties provided $100.3 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 Condensed 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 March 31, 2023 and December 31, 2022, there were no outstanding contracts or agreements related to foreign currency. If there were foreign currency contracts outstanding at March 31, 2023, the fair value of these contracts would be included in Other Assets and Other Liabilities in the accompanying Condensed Consolidated Balance Sheets. 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 three months ended March 31, 2023 and 2022. ​ 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 Condensed Consolidated Statements of Net Income in mortgage banking income. ​ Mortgage Servicing Rights (“MSRs”) ​ Derivatives contracts related to MSRs 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 March 31, 2023, we had derivative financial instruments outstanding with notional amounts totaling $67.5 million related to MSRs, compared to $35.0 million on December 31, 2022. The estimated net fair value of the open contracts related to the MSRs was recorded as a gain of $1.2 million at March 31, 2023, compared to a loss of $163,000 at December 31, 2022. ​ Mortgage Pipeline ​ The following table presents our notional value of forward sale commitments and the fair value of those obligations along with the fair value of the mortgage pipeline related to the held for sale portfolio. ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
(Dollars in thousands) |  | March 31, 2023 |  | December 31, 2022 |
Mortgage loan pipeline | ​ | $ | 107,831 | ​ | $ | 40,850 | ​
Expected closures | ​ |  | 90,737 | ​ |  | 37,210 | ​
Fair value of mortgage loan pipeline commitments | ​ |  | 1,848 | ​ |  | 524 | ​
Forward sales commitments | ​ |  | 100,500 | ​ |  | 51,000 | ​
Fair value of forward commitments | ​ |  | (734) | ​ |  | 276 | ​
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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI https://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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