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Derivatives | 9 Months Ended
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Sep. 30, 2020
Derivative Instruments And Hedging Activities Disclosure [Abstract] |
Derivatives | 7. Derivatives Risk Management Objective of Using Derivatives The Company enters into derivative financial instruments to manage risks related to differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments, currently associated with fixed rate brokered deposits, certain investment securities and select pools of variable rate loans. The Company also enters into interest rate derivative agreements as a service to certain qualifying customers. A matched book is managed with respect to these customer derivatives in order to minimize its net interest rate risk exposure resulting from such agreements. The Company also enters into risk participation agreements under which it may either sell or buy credit risk associated with a customer’s performance under certain interest rate derivative contracts related to loans in which participation interests have been sold to or purchased from other banks. Fair Values of Derivative Instruments on the Balance Sheet The table below presents the notional or contractual amounts and fair values of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets at September 30, 2020 and December 31, 2019.
|  |  |  | September 30, 2020 |  |  | December 31, 2019 |
|  |  |  |  |  |  |  | Derivative (1) |  |  |  |  |  |  | Derivative (1) |
(in thousands) |  | Type of Hedge |  | Notional or Contractual Amount |  |  | Assets |  |  | Liabilities |  |  | Notional or Contractual Amount |  |  | Assets |  |  | Liabilities |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - variable rate loans |  | Cash Flow |  | $ | 1,175,000 |  |  | $ | 57,412 |  |  | — |  |  | $ | 1,175,000 |  |  | $ | 24,172 |  |  | $ | 337 |
Interest rate swaps - securities |  | Fair Value |  |  | 762,650 |  |  |  | 842 |  |  |  | 24,203 |  |  |  | 441,400 |  |  |  | 1,474 |  |  |  | 1,759 |
Interest rate swaps - brokered deposits |  | Fair Value |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 43,000 |  |  |  | — |  |  |  | 9 |
|  |  |  |  | 1,937,650 |  |  |  | 58,254 |  |  |  | 24,203 |  |  |  | 1,659,400 |  |  |  | 25,646 |  |  |  | 2,105 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps (2) |  | N/A |  |  | 4,560,306 |  |  |  | 164,273 |  |  |  | 168,207 |  |  |  | 3,759,232 |  |  |  | 54,512 |  |  |  | 55,664 |
Risk participation agreements |  | N/A |  |  | 205,787 |  |  |  | 78 |  |  |  | 136 |  |  |  | 254,825 |  |  |  | 21 |  |  |  | 45 |
Forward commitments to sell residential mortgage loans |  | N/A |  |  | 345,871 |  |  |  | 82 |  |  |  | 3,584 |  |  |  | 145,623 |  |  |  | 651 |  |  |  | 744 |
Interest rate-lock commitments on residential mortgage loans |  | N/A |  |  | 265,957 |  |  |  | 2,452 |  |  |  | 59 |  |  |  | 83,224 |  |  |  | 369 |  |  |  | 375 |
Foreign exchange forward contracts |  | N/A |  |  | 81,492 |  |  |  | 1,937 |  |  |  | 1,888 |  |  |  | 64,632 |  |  |  | 303 |  |  |  | 366 |
Visa Class B derivative contract |  | N/A |  |  | 43,565 |  |  | — |  |  |  | 4,616 |  |  |  | 43,753 |  |  |  | — |  |  |  | 5,704 |
|  |  |  |  | 5,502,978 |  |  |  | 168,822 |  |  |  | 178,490 |  |  |  | 4,351,289 |  |  |  | 55,856 |  |  |  | 62,898 |
Total derivatives |  |  |  | $ | 7,440,628 |  |  | $ | 227,076 |  |  | $ | 202,693 |  |  | $ | 6,010,689 |  |  | $ | 81,502 |  |  | $ | 65,003 |
Less: netting adjustment (3) |  |  |  |  |  |  |  |  | (58,254 | ) |  |  | (146,415 | ) |  |  |  |  |  |  | (27,056 | ) |  |  | (43,914 | )
Total derivative assets/liabilities |  |  |  |  |  |  |  | $ | 168,822 |  |  | $ | 56,278 |  |  |  |  |  |  | $ | 54,446 |  |  | $ | 21,089 |
(1) | Derivative assets and liabilities are reported at fair value in other assets or other liabilities, respectively, in the consolidated balance sheets.
(2) | The notional amount represents both the customer accommodation agreements and offsetting agreements with unrelated financial institutions.
(3) | Represents balance sheet netting of derivative assets and liabilities for variation margin collateral held or placed with the same central clearing counterparty. See offsetting assets and liabilities for further information.
Cash Flow Hedges of Interest Rate Risk The Company is party to various interest rate swap agreements designated and qualifying as cash flow hedges of the Company’s forecasted variable cash flows for pools of variable rate loans. For each agreement, the Company receives interest at a fixed rate and pays at a variable rate. Amortization of other comprehensive loss on terminated cash flow hedges totaled $1.4 million and 3.4 million for the nine months ended September 30, 2020 and 2019. The notional amounts of the swap agreements in place at September 30, 2020 expire as follows: $50 million in 2021; $475 million in 2022; $550 million in 2023; and $100 million in 2024. Fair Value Hedges of Interest Rate Risk Interest rate swaps on securities available for sale The Company is party to forward-starting fixed payer swaps that convert the latter portion of the term of certain available for sale securities to a floating rate. These derivative instruments are designated as fair value hedges of interest rate risk. This strategy provides the Company with a fixed rate coupon during the front-end unhedged tenor of the bonds and results in a floating rate security during the back-end hedged tenor with hedged start dates between August 2023 through September 2025, and maturity dates from January 2028 through March 2031. The fair value of the hedged item attributable to interest rate risk will be presented in interest income along with the change in the fair value of the hedging instrument. The majority of the hedged available for sale securities is a closed portfolio of pre-payable commercial mortgage backed securities. In accordance with ASC 815, prepayment risk may be excluded when measuring the change in fair value of such hedged items attributable to interest rate risk under the last-of-layer approach. At September 30, 2020, the amortized cost basis of the closed portfolio of pre-payable commercial mortgage backed securities totaled $823.6 million. The amount that represents the hedged items was $752.5 million and the basis adjustment associated with the hedged items totaled $23.8 million. Interest rate swaps on brokered deposits Prior to January 2020, the Company was party to certain interest rate swap agreements that modified the Company’s exposure to interest rate risk by effectively converting a portion of the Company’s brokered certificates of deposit from fixed rates to variable rates. The maturities and call features of these interest rate swaps matched the features of the hedged deposits. As interest rates declined or increased, the corresponding movement in the value of the certificates of deposit were offset by the change in the value of the interest rate swaps, resulting in no impact to earnings. Interest expense was adjusted by the difference between the fixed and floating rates for the period the swaps are in effect. Derivatives Not Designated as Hedges Customer interest rate derivative program The Company enters into interest rate derivative agreements, primarily rate swaps, with commercial banking customers to facilitate their risk management strategies. The Bank enters into offsetting agreements with unrelated financial institutions, thereby mitigating its net risk exposure resulting from such transactions. Because the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. The Company has offered customers a deferral of the monthly derivative payment/settlement if the associated loan was on deferral. At September 30, 2020, the Company had a receivable totaling $0.1 million related to these deferrals. Risk participation agreements The Company also enters into risk participation agreements under which it may either assume or sell credit risk associated with a borrower’s performance under certain interest rate derivative contracts. In those instances where the Bank has assumed credit risk, it is not a direct counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because it is a party to the related loan agreement with the borrower. In those instances in which the Bank has sold credit risk, it is the sole counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because other banks participate in the related loan agreement. The Bank manages its credit risk under risk participation agreements by monitoring the creditworthiness of the borrower, based on the Bank’s normal credit review process. Mortgage banking derivatives The Company also enters into certain derivative agreements as part of its mortgage banking activities. These agreements include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis. Customer foreign exchange forward contract derivatives The Company enters into foreign exchange forward derivative agreements, primarily forward foreign currency contracts, with commercial banking customers to facilitate their risk management strategies. The Bank manages its risk exposure from such transactions by entering into offsetting agreements with unrelated financial institutions. Because the foreign exchange forward contract derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. Visa Class B derivative contract The Company is a member of Visa USA. During the fourth quarter of 2018, the Company sold the majority of its Visa Class B holdings, at which time it entered into a derivative agreement with the purchaser whereby the Company will make or receive cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. The conversion ratio changes when Visa deposits funds to a litigation escrow account established by Visa to pay settlements for certain litigation, for which Visa is indemnified by Visa USA members. The Company is also required to make periodic financing payments to the purchaser until all of Visa’s covered litigation matters are resolved. Thus, the derivative contract extends until the end of Visa’s covered litigation matters, the timing of which is uncertain. The contract includes a contingent accelerated termination clause based on the credit ratings of the Company. At September 30, 2020 and December 31, 2019 the fair value of the liability associated with this contract was $4.6 million and $5.7 million, respectively. Effect of Derivative Instruments on the Statement of Income The effects of derivative instruments on the consolidated statements of income for the nine months ended September 30, 2020 and 2019 are presented in the table below. Interest income or the reduction of interest income attributable to cash flow hedges includes amortization of accumulated other comprehensive loss that resulted from termination of interest rate swap contracts.
|  |  |  | Three Months Ended |  |  | Nine Months Ended |
|  |  |  | September 30, |  |  | September 30, |
Derivative Instruments: |  | Location of Gain (Loss) Recognized in the Statement of Income: |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Cash flow hedges - variable rate loans |  | Interest income |  | $ | 5,788 |  |  | $ | (956 | ) |  | $ | 11,249 |  |  | $ | (4,632 | )
Fair value hedges - securities |  | Interest income |  |  | (7 | ) |  |  | 15 |  |  |  | 33 |  |  |  | 15 |
Fair value hedges - brokered deposits |  | Interest expense |  | — |  |  |  | (243 | ) |  |  | 46 |  |  |  | (1,692 | )
All other instruments |  | Other noninterest income |  |  | 1,739 |  |  |  | 4,324 |  |  |  | 9,718 |  |  |  | 8,733 |
Total gain |  |  |  | $ | 7,520 |  |  | $ | 3,140 |  |  | $ | 21,046 |  |  | $ | 2,424 |
Credit Risk-Related Contingent Features Certain of the Company’s derivative instruments contain provisions allowing the financial institution counterparty to terminate the contracts in certain circumstances, such as a downgrade of the Bank’s credit ratings below specified levels, a default by the Bank on its indebtedness, or the failure of the Bank to maintain specified minimum regulatory capital ratios or its regulatory status as a well-capitalized institution. These derivative agreements also contain provisions regarding the posting of collateral by each party. At September 30, 2020, the Company was not in violation of any such provisions. The aggregate fair value of derivative instruments with credit risk-related contingent features that were in a net liability position at September 30, 2020 and December 31, 2019 was $47.1 million and $12.9 million, respectively, for which the Company had posted collateral of $47.8 million and $12.4 million, respectively. Offsetting Assets and Liabilities The Company’s derivative instruments with certain counterparties contain legally enforceable netting provisions that allow for net settlement of multiple transactions to a single amount, which may be positive, negative, or zero. Agreements with certain bilateral counterparties require both parties to maintain collateral in the event that the fair values of derivative instruments exceed established exposure thresholds. For centrally cleared derivatives, the Company is subject to initial margin posting and daily variation margin exchange with the central clearinghouses. Offsetting information in regards to all derivative assets and liabilities, including accrued interest, subject to these master netting agreements at September 30, 2020 and December 31, 2019 is presented in the following tables.
(in thousands) |  |  |  |  |  | Gross Amounts |  |  | Net Amounts |  |  | Gross Amounts Not Offset in the Statement of Financial Condition |
Description |  | Gross Amounts Recognized |  |  | Offset in the Statement of Financial Condition |  |  | Presented in the Statement of Financial Condition |  |  | Financial Instruments |  |  | Cash Collateral |  |  | Net Amount |
As of September 30, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative Assets |  | $ | 60,231 |  |  | $ | (60,231 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Derivative Liabilities |  | $ | 195,780 |  |  | $ | (148,738 | ) |  | $ | 47,042 |  |  | $ | — |  |  | $ | 87,926 |  |  | $ | (40,884 | )
(in thousands) |  |  |  |  |  | Gross Amounts |  |  | Net Amounts |  |  | Gross Amounts Not Offset in the Statement of Financial Condition |
Description |  | Gross Amounts Recognized |  |  | Offset in the Statement of Financial Condition |  |  | Presented in the Statement of Financial Condition |  |  | Financial Instruments |  |  | Cash Collateral |  |  | Net Amount |
As of December 31, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative Assets |  | $ | 27,938 |  |  | $ | (27,915 | ) |  | $ | 23 |  |  | $ | 23 |  |  | $ | — |  |  | $ | — |
Derivative Liabilities |  | $ | 56,523 |  |  | $ | (44,570 | ) |  | $ | 11,953 |  |  | $ | 23 |  |  | $ | 35,113 |  |  | $ | (23,183 | )
The Company has excess collateral compared to total exposure due to initial margin requirements for day-to-day rate volatility.

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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 + Details
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