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Derivative Financial Instruments | 3 Months Ended
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Mar. 31, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Derivative Financial Instruments The Company primarily enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments. The derivative financial instruments currently used by the Company to manage its exposure to interest rate risk include: (1) interest rate swaps and collars to manage the interest rate risk of certain fixed and variable rate assets and variable rate liabilities; (2) interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market; (3) forward commitments for the future delivery of such mortgage loans to protect the Company from adverse changes in interest rates and corresponding changes in the value of mortgage loans held-for-sale; (4) covered call options to economically hedge specific investment securities and receive fee income effectively enhancing the overall yield on such securities to compensate for net interest margin compression; and (5) options and swaps to economically hedge a portion of the fair value adjustments related to the Company’s mortgage servicing rights portfolio. The Company also enters into derivatives (typically interest rate swaps) with certain qualified borrowers to facilitate the borrowers’ risk management strategies and concurrently enters into mirror-image derivatives with a third party counterparty, effectively making a market in the derivatives for such borrowers. Additionally, the Company enters into foreign currency contracts to manage foreign exchange risk associated with certain foreign currency denominated assets. The Company recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. The Company records derivative assets and derivative liabilities on the Consolidated Statements of Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. Changes in fair values of derivatives accounted for as fair value hedges are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges are recorded as a component of accumulated other comprehensive income or loss, net of deferred taxes, and reclassified to earnings when the hedged transaction affects earnings. Changes in fair values of derivative financial instruments not designated in a hedging relationship pursuant to ASC 815 are reported in non-interest income during the period of the change. Derivative financial instruments are valued by a third party and are corroborated by comparison with valuations provided by the respective counterparties. Fair values of certain mortgage banking derivatives (interest rate lock commitments and forward commitments to sell mortgage loans) are estimated based on changes in mortgage interest rates from the date of the loan commitment. The fair value of foreign currency derivatives is computed based on changes in foreign currency rates stated in the contract compared to those prevailing at the measurement date. The table below presents the fair value of the Company’s derivative financial instruments as of March 31, 2022, December 31, 2021 and March 31, 2021:
| Derivative Assets |  | Derivative Liabilities
(In thousands) | March 31, 2022 |  | December 31, 2021 |  | March 31, 2021 |  | March 31, 2022 |  | December 31, 2021 |  | March 31, 2021
Derivatives designated as hedging instruments under ASC 815: |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives designated as Cash Flow Hedges | $ | 13,257 |  |  | $ | 47,309 |  |  | $ | 50,420 |  |  | $ | 3,361 |  |  | $ | 10,401 |  |  | $ | 31,161 |
Interest rate derivatives designated as Fair Value Hedges | 7,388 |  |  | 1,474 |  |  | 121 |  |  | 1,716 |  |  | 5,841 |  |  | 9,569 |
Total derivatives designated as hedging instruments under ASC 815 | $ | 20,645 |  |  | $ | 48,783 |  |  | $ | 50,541 |  |  | $ | 5,077 |  |  | $ | 16,242 |  |  | $ | 40,730 |
Derivatives not designated as hedging instruments under ASC 815: |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives | $ | 119,056 |  |  | $ | 103,710 |  |  | $ | 155,695 |  |  | $ | 115,002 |  |  | $ | 103,665 |  |  | $ | 155,361 |
Interest rate lock commitments | 3,447 |  |  | 10,560 |  |  | 44,313 |  |  | 1,558 |  |  | 885 |  |  | 1,342 |
Forward commitments to sell mortgage loans | 10,063 |  |  | 1,625 |  |  | 2,920 |  |  | 147 |  |  | 1,878 |  |  | 3,283 |
Foreign exchange contracts | 323 |  |  | 330 |  |  | 40 |  |  | 323 |  |  | 330 |  |  | 42 |
Total derivatives not designated as hedging instruments under ASC 815 | $ | 132,889 |  |  | $ | 116,225 |  |  | $ | 202,968 |  |  | $ | 117,030 |  |  | $ | 106,758 |  |  | $ | 160,028 |
Total Derivatives | $ | 153,534 |  |  | $ | 165,008 |  |  | $ | 253,509 |  |  | $ | 122,107 |  |  | $ | 123,000 |  |  | $ | 200,758 |
Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of amounts in which the interest rate specified in the contract exceeds the agreed upon cap strike price or the payment of amounts in which the interest rate specified in the contract is below the agreed upon floor strike price at the end of each period. As of March 31, 2022, the Company had various interest rate swap derivatives designated as cash flow hedges of variable rate deposits and one interest rate collar derivative designated as a cash flow hedge of the Company's variable rate Term Facility. When the relationship between the hedged item and hedging instrument is highly effective at achieving offsetting changes in cash flows attributable to the hedged risk, changes in the fair value of these cash flow hedges are recorded in accumulated other comprehensive income or loss and are subsequently reclassified to interest expense as interest payments are made on such variable rate deposits. The changes in fair value (net of tax) are separately disclosed in the Consolidated Statements of Comprehensive Income. The table below provides details on these cash flow hedges, summarized by derivative type and maturity, as of March 31, 2022:
| March 31, 2022
(In thousands) | Notional |  | Fair Value
Maturity Date | Amount |  | Asset (Liability)
Interest Rate Swaps: |  |  |
May 2022 | $ | 370,000 |  |  | $ | (643) |
June 2022 | 160,000 |  |  | (450) |
July 2022 | 230,000 |  |  | (716) |
August 2022 | 235,000 |  |  | (857) |
March 2023 (1) | 250,000 |  |  | 3,454 |
April 2024 (1) | 250,000 |  |  | 9,804 |
Interest Rate Collars: |  |  |
September 2023 | 75,000 |  |  | (696) |
Total Cash Flow Hedges | $ | 1,570,000 |  |  | $ | 9,896 |
(1)Subsequently terminated in April 2022. In the first quarter of 2022, the Company terminated interest rate swap derivative contracts designated as cash flow hedges of variable rate deposits with a total notional value of $1.0 billion and a five-year term effective July 2022. At the time of termination, the fair value of the derivative contracts totaled an asset of $66.5 million, with such adjustments to fair value recorded in accumulated other comprehensive income or loss. Subsequently, in April 2022, the Company terminated additional interest rate swap derivative contracts designated as cash flow hedges of variable rate deposits with a total notional value of $500.0 million each effective since April 2020. The remaining terms of such derivative contracts as shown in the table above were through March 2023 and April 2024 and, at the time of termination, the fair value of the derivative contracts totaled assets of $3.7 million and $10.7 million, respectively, with such adjustments to fair value recorded in accumulated other comprehensive income or loss. For all such terminations, as the hedged forecasted transactions (interest payments on variable rate deposits) are still expected to occur over the remaining term of such terminated derivatives, such adjustments will remain in accumulated other comprehensive income or loss and be reclassified as a reduction to interest expense on a straight-line basis over the original term of the terminated derivative contracts. A rollforward of the amounts in accumulated other comprehensive income or loss related to interest rate derivatives designated as cash flow hedges, including such derivative contracts terminated during the period, follows:
| Three Months Ended |  |
(In thousands) | March 31, 2022 |  | March 31, 2021 |  |  |  |
Unrealized gain (loss) at beginning of period | $ | 36,908 |  |  | $ | (31,533) |  |  |  |  |
Amount reclassified from accumulated other comprehensive income to interest expense on deposits, other borrowings and junior subordinated debentures | 5,353 |  |  | 6,696 |  |  |  |  |
Amount of income recognized in other comprehensive income | 34,128 |  |  | 44,096 |  |  |  |  |
Unrealized gain at end of period | $ | 76,389 |  |  | $ | 19,259 |  |  |  |  |
As of March 31, 2022, the Company estimates that during the next twelve months $16.4 million will be reclassified from accumulated other comprehensive income or loss as a decrease to interest expense. Such estimate includes approximately $19.0 million of amounts reclassified as a reduction to interest expense on the terminated cash flow hedges discussed above. Fair Value Hedges of Interest Rate Risk Interest rate swaps designated as fair value hedges involve the payment of fixed amounts to a counterparty in exchange for the Company receiving variable payments over the life of the agreements without the exchange of the underlying notional amount. As of March 31, 2022, the Company had 14 interest rate swaps with an aggregate notional amount of $211.3 million that were designated as fair value hedges primarily associated with fixed rate commercial and industrial and commercial real estate loans as well as life insurance premium finance receivables. One of these interest rate swaps with an aggregate notional amount of $73.9 million has terms starting after March 31, 2022. For derivatives designated and that qualify as fair value hedges, the net gain or loss from the entire change in the fair value of the derivative instrument is recognized in the same income statement line item as the earnings effect, including the net gain or loss, of the hedged item (interest income earned on fixed rate loans) when the hedged item affects earnings. The following table presents the carrying amount of the hedged assets/(liabilities) and the cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/(liabilities) that are designated as a fair value hedge accounting relationship as of March 31, 2022:
|  |  | March 31, 2022
(In thousands) Derivatives in Fair Value Hedging Relationships | Location in the Statement of Condition |  | Carrying Amount of the Hedged Assets/(Liabilities) |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities) |  |  | Cumulative Amount of Fair Value Hedging Adjustment Remaining for any Hedged Assets/(Liabilities) for which Hedge Accounting has been Discontinued
Interest rate swaps | Loans, net of unearned income |  | $ | 131,138 |  |  | $ | (5,664) |  |  |  | $ | (125) |
| Available-for-sale debt securities |  | 1,070 |  |  | 24 |  |  |  | — |
The following table presents the loss or gain recognized related to derivative instruments that are designated as fair value hedges for the respective period:
(In thousands) Derivatives in Fair Value Hedging Relationships | Location of (Loss)/Gain Recognized in Income on Derivative |  | Three Months Ended |  |
March 31, 2022 |  |
Interest rate swaps | Interest and fees on loans |  | $ | 16 |  |  |
| Interest income - investment securities |  | — |  |  |
Non-Designated Hedges The Company does not use derivatives for speculative purposes. Derivatives not designated as accounting hedges are used to manage the Company’s economic exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. Interest Rate Derivatives—Periodically, the Company may purchase interest rate cap derivatives designed to act as an economic hedge of the risk of the negative impact on its fixed-rate loan portfolios from rising interest rates, most notably the LIBOR index. As of March 31, 2022, the Company held interest rate caps with an aggregate notional value of $1.0 billion. Additionally, the Company has interest rate derivatives, including swaps and option products, resulting from a service the Company provides to certain qualified borrowers. The Company’s banking subsidiaries execute certain derivative products (typically interest rate swaps) directly with qualified commercial borrowers to facilitate their respective risk management strategies. For example, these arrangements allow the Company’s commercial borrowers to effectively convert a variable rate loan to a fixed rate. In order to minimize the Company’s exposure on these transactions, the Company simultaneously executes offsetting derivatives with third parties. In most cases, the offsetting derivatives have mirror-image terms, which result in the positions’ changes in fair value substantially offsetting through earnings each period. However, to the extent that the derivatives are not a mirror-image and because of differences in counterparty credit risk, changes in fair value will not completely offset resulting in some earnings impact each period. Changes in the fair value of these derivatives are included in other non-interest income. At March 31, 2022, the Company had interest rate derivative transactions with an aggregate notional amount of approximately $9.7 billion (all interest rate swaps and caps with customers and third parties) related to this program. These interest rate derivatives had maturity dates ranging from April 2022 to February 2045. Mortgage Banking Derivatives—These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. It is the Company’s practice to enter into forward commitments for the future delivery of a portion of our residential mortgage loan production when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale. The Company’s mortgage banking derivatives have not been designated as being in hedge relationships. At March 31, 2022, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $761.7 million and interest rate lock commitments with an aggregate notional amount of approximately $404.7 million. The fair values of these derivatives were estimated based on changes in mortgage rates from the dates of the commitments. Changes in the fair value of these mortgage banking derivatives are included in mortgage banking revenue. Foreign Currency Derivatives—These derivatives include foreign currency contracts used to manage the foreign exchange risk associated with foreign currency denominated assets and transactions. Foreign currency contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. As a result of fluctuations in foreign currencies, the U.S. dollar-equivalent value of the foreign currency denominated assets or forecasted transactions increase or decrease. Gains or losses on the derivative instruments related to these foreign currency denominated assets or forecasted transactions are expected to substantially offset this variability. As of March 31, 2022, the Company held foreign currency derivatives with an aggregate notional amount of approximately $13.9 million. Other Derivatives—Periodically, the Company will sell options to a bank or dealer for the right to purchase certain securities held within the banks’ investment portfolios (covered call options). These option transactions are designed to increase the total return associated with the investment securities portfolio. These options do not qualify as accounting hedges pursuant to ASC 815, and, accordingly, changes in fair value of these contracts are recognized as other non-interest income. There were no covered call options outstanding as of March 31, 2022, December 31, 2021 or March 31, 2021. Periodically, the Company will purchase options for the right to purchase securities not currently held within the banks' investment portfolios or enter into interest rate swaps in which the Company elects to not designate such derivatives as hedging instruments. These option and swap transactions are designed primarily to economically hedge a portion of the fair value adjustments related to the Company's mortgage servicing rights portfolio. The gain or loss associated with these derivative contracts are included in mortgage banking revenue. There were no such options or swaps outstanding as of March 31, 2022, December 31, 2021 or March 31, 2021. Amounts included in the Consolidated Statements of Income related to derivative instruments not designated in hedge relationships were as follows:
(In thousands) |  |  | Three Months Ended |  |
Derivative | Location in income statement |  | March 31, 2022 |  | March 31, 2021 |  |  |  |
Interest rate swaps and caps | Trading gains, net |  | $ | 4,024 |  |  | $ | 428 |  |  |  |  |
Mortgage banking derivatives | Mortgage banking revenue |  | (7,369) |  |  | (17,479) |  |  |  |  |
Foreign exchange contracts | Trading gains, net |  | — |  |  | (5) |  |  |  |  |
Covered call options | Fees from covered call options |  | 3,742 |  |  | — |  |  |  |  |
Credit Risk Derivative instruments have inherent risks, primarily market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the risk that the counterparty will fail to perform according to the terms of the agreement. The amounts potentially subject to market and credit risks are the streams of interest payments under the contracts and the market value of the derivative instrument and not the notional principal amounts used to express the volume of the transactions. Market and credit risks are managed and monitored as part of the Company's overall asset-liability management process, except that the credit risk related to derivatives entered into with certain qualified borrowers is managed through the Company's standard loan underwriting process since these derivatives are secured through collateral provided by the loan agreements. Actual exposures are monitored against various types of credit limits established to contain risk within parameters. When deemed necessary, appropriate types and amounts of collateral are obtained to minimize credit exposure. The Company has agreements with certain of its interest rate derivative counterparties that contain cross-default provisions, which provide that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain of its derivative counterparties that contain a provision allowing the counterparty to terminate the derivative positions if the Company fails to maintain its status as a well or adequately capitalized institution, which would require the Company to settle its obligations under the agreements. As of March 31, 2022, the fair value of interest rate derivatives in a net liability position that were subject to such agreements, which includes accrued interest related to these agreements, was approximately $271,000. If the Company had breached any of these provisions and the derivatives were terminated as a result, the Company would have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty. The Company is also exposed to the credit risk of its commercial borrowers who are counterparties to interest rate derivatives with the banks. This counterparty risk related to the commercial borrowers is managed and monitored through the banks' standard underwriting process applicable to loans since these derivatives are secured through collateral provided by the loan agreement. The counterparty risk associated with the mirror-image swaps executed with third parties is monitored and managed in connection with the Company's overall asset liability management process. The Company records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative assets and liabilities on the Consolidated Statements of Condition. The tables below summarize the Company's interest rate derivatives and offsetting positions as of the dates shown.
| Derivative Assets |  | Derivative Liabilities
| Fair Value |  | Fair Value
(In thousands) | March 31, 2022 |  | December 31, 2021 |  | March 31, 2021 |  | March 31, 2022 |  | December 31, 2021 |  | March 31, 2021
Gross Amounts Recognized | $ | 139,701 |  |  | $ | 152,493 |  |  | $ | 206,236 |  |  | $ | 120,079 |  |  | $ | 119,907 |  |  | $ | 196,091 |
Less: Amounts offset in the Statements of Condition | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Net amount presented in the Statements of Condition | $ | 139,701 |  |  | $ | 152,493 |  |  | $ | 206,236 |  |  | $ | 120,079 |  |  | $ | 119,907 |  |  | $ | 196,091 |
Gross amounts not offset in the Statements of Condition |  |  |  |  |  |  |  |  |  |  |
Offsetting Derivative Positions | (19,557) |  |  | (52,832) |  |  | (60,593) |  |  | (19,557) |  |  | (52,832) |  |  | (60,593) |
Collateral Posted | (70,807) |  |  | (3,530) |  |  | — |  |  | (257) |  |  | (55,201) |  |  | (125,818) |
Net Credit Exposure | $ | 49,337 |  |  | $ | 96,131 |  |  | $ | 145,643 |  |  | $ | 100,265 |  |  | $ | 11,874 |  |  | $ | 9,680 |

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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 http://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 http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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