XML 23 R13.htm IDEA: XBRL DOCUMENT
v3.22.2.2

Derivatives | 9 Months Ended
--- | ---
Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | 5. 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. The Bank also enters into interest rate derivative agreements as a service to certain qualifying customers. The Bank manages a matched book with respect to these customer derivatives in order to minimize its net interest rate risk exposure resulting from such agreements. In addition, the Bank 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, 2022 and December 31, 2021.
|  |  |  | September 30, 2022 |  |  | December 31, 2021 |
|  |  |  |  |  |  | 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 |  | $ | 2,050,000 |  |  | $ | — |  |  | $ | 122,433 |  |  | $ | 1,125,000 |  |  | $ | 5,884 |  |  | $ | 4,421 |
Interest rate swaps - securities |  | Fair Value |  |  | 934,900 |  |  |  | 62,610 |  |  |  | — |  |  |  | 1,837,650 |  |  |  | 22,138 |  |  |  | 10,690 |
|  |  |  |  | 2,984,900 |  |  |  | 62,610 |  |  |  | 122,433 |  |  |  | 2,962,650 |  |  |  | 28,022 |  |  |  | 15,111 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | N/A |  |  | 5,046,771 |  |  |  | 188,799 |  |  |  | 185,546 |  |  |  | 5,193,991 |  |  |  | 75,819 |  |  |  | 75,861 |
Risk participation agreements |  | N/A |  |  | 286,091 |  |  |  | 1 |  |  |  | 9 |  |  |  | 217,437 |  |  |  | 11 |  |  |  | 35 |
Interest rate-lock commitments on residential mortgage loans |  | N/A |  |  | 28,414 |  |  |  | 143 |  |  |  | 178 |  |  |  | 82,037 |  |  |  | 1,525 |  |  |  | 1 |
Forward commitments to sell residential mortgage loans |  | N/A |  |  | 18,517 |  |  |  | 158 |  |  |  | 69 |  |  |  | 46,739 |  |  |  | 1 |  |  |  | 645 |
To Be Announced (TBA) securities |  | N/A |  |  | 15,000 |  |  |  | 431 |  |  |  | 4 |  |  |  | 55,000 |  |  |  | 15 |  |  |  | 53 |
Foreign exchange forward contracts |  | N/A |  |  | 153,430 |  |  |  | 4,667 |  |  |  | 4,601 |  |  |  | 48,364 |  |  |  | 778 |  |  |  | 758 |
Visa Class B derivative contract |  | N/A |  |  | 43,111 |  |  |  | — |  |  |  | 2,295 |  |  |  | 43,439 |  |  |  | — |  |  |  | 4,116 |
|  |  |  |  | 5,591,334 |  |  |  | 194,199 |  |  |  | 192,702 |  |  |  | 5,687,007 |  |  |  | 78,149 |  |  |  | 81,469 |
Total derivatives |  |  |  | $ | 8,576,234 |  |  | $ | 256,809 |  |  | $ | 315,135 |  |  | $ | 8,649,657 |  |  | $ | 106,171 |  |  | $ | 96,580 |
Less: netting adjustment (2) |  |  |  |  |  |  |  | (137,709 | ) |  |  | (88,697 | ) |  |  |  |  |  | (30,304 | ) |  |  | (61,534 | )
Total derivative assets/liabilities |  |  |  |  |  |  | $ | 119,100 |  |  | $ | 226,438 |  |  |  |  |  | $ | 75,867 |  |  | $ | 35,046 |
(1) Derivative assets and liabilities are reported at fair value in other assets or other liabilities, respectively, in the consolidated balance sheets. (2) 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. T he Company terminated six swap agreements in 2021 and received cash of approximately $23.7 million, which was recorded as accumulated other comprehensive income and is being accreted into earnings through the original maturity dates of the respective contracts. The notional amounts of the swap agreements in place at September 30, 2022 expire as follows: $125 million in 2022; $150 million in 2023; $50 million in 2025; $600 million in 2026; $1 billion in 2027, and $100 million thereafter. 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. At September 30, 2022, these instruments have hedge start dates between February 2024 and July 2026, and maturity dates from December 2027 through March 2031. The fair value of the hedged item attributable to interest rate risk is presented in interest income along with the change in the fair value of the hedging instrument. The hedged available for sale securities are part of closed portfolios 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, 2022, the amortized cost basis of the closed portfolio of pre-payable commercial mortgage backed securities totaled $1.0 billion. The amount that represents the hedged items was $872.2 million and the basis adjustment associated with the hedged items totaled $62.7 million. T he Company terminated 21 fair value swap agreements during the nine months ended September 30, 2022 and received cash of approximately $74.0 million. At the time of termination, the value of the swap was recorded as an adjustment to the book value of the underlying security, thereby changing its current book yield and extending its duration. Derivatives Not Designated as Hedges Customer interest rate derivative program The Bank 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. Risk participation agreements The Bank 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 Bank 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 loans to investors on either a best efforts or a mandatory delivery basis. The Company uses these forward sales commitments, which may include To Be Announced (“TBA”) security contracts, on the open market to protect the value of its rate locks and mortgage loans held for sale from changes in interest rates and pricing between the origination of the rate lock and the final sale of these loans. These instruments meet the definition of derivative financial instruments and are reflected in other assets and other liabilities in the Consolidated Balance Sheets, with changes to the fair value recorded in noninterest income within the secondary mortgage market operations line item in the Consolidated Statements of Income. The loans sold on a mandatory basis commit the Company to deliver a specific principal amount of mortgage loans to an investor at a specified price, by a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, we may be obligated to pay a pair-off fee, based on then-current market prices, to the investor/counterparty to compensate the investor for the shortfall. Mandatory delivery forward commitments include TBA security contracts on the open market to provide protection against changes in interest rates on the locked mortgage pipeline. The Company expects that mandatory delivery contracts, including TBA security contracts, will experience changes in fair value opposite to the changes in the fair value of derivative loan commitments. Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future hedges. The accuracy of underlying assumptions could impact the ultimate effectiveness of any hedging strategies. Forward commitments under best effort contracts commit the Company to deliver a specific individual mortgage loan to an investor if the loan to the underlying borrower closes. Generally, best efforts cash contracts have no pair-off risk regardless of market movement. The price the investor will pay the seller for an individual loan is specified prior to the loan being funded, generally the same day the Company enters into the interest rate lock commitment with the potential borrower. The Company expects that these best efforts forward loan sale commitments will experience a net neutral shift in fair value with related derivative loan commitments. At the closing of the loan, the rate lock commitment derivative expires and the Company generally records a loan held for sale at fair value under the election of fair value option. 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. The Bank has not elected to designate these foreign exchange forward contract derivatives as hedges; as such, 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 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, 2022 and December 31, 2021, the fair value of the liability associated with this contract was $2.3 million and $4.1 million, respectively. Refer to Note 13 – Fair Value of Financial Instruments for discussion of the valuation inputs and process for this derivative liability. Effect of Derivative Instruments on the Statements of Income The effects of derivative instruments on the Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021 are presented in the table below.
|  |  |  | Three Months Ended |  |  | Nine Months Ended |
(in thousands) |  |  |  | September 30, |  |  | September 30, |
Derivative Instruments: |  | Location of Gain (Loss) Recognized in the Statements of Income: |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable rate loans |  | Interest income - loans |  | $ | 1,752 |  |  | $ | 6,950 |  |  | $ | 14,519 |  |  | $ | 19,941 |
Fair value hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities |  | Interest income - securities - taxable |  |  | 1,596 |  |  |  | 21 |  |  |  | 2,625 |  |  |  | (6 | )
Securities |  | Noninterest income - securities transactions, net |  |  | — |  |  |  | — |  |  |  | 1,620 |  |  |  | 2,499 |
Derivatives not designated as hedging: |  |  |  |  |  |  |  |  |  |
Residential mortgage banking |  | Noninterest income - secondary mortgage market operations |  |  | (365 | ) |  |  | (1,249 | ) |  |  | 2,595 |  |  |  | 2,223 |
Customer and all other instruments |  | Noninterest income - other noninterest income |  |  | 1,309 |  |  |  | 2,970 |  |  |  | 6,386 |  |  |  | 11,755 |
Total gain |  |  |  | $ | 4,292 |  |  | $ | 8,692 |  |  | $ | 27,745 |  |  | $ | 36,412 |
Credit Risk-Related Contingent Features Certain of the Bank’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, 2022, 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, 2022 and December 31, 2021 was $15.6 million and $49.4 million, respectively, for which the Company had posted collateral of $14.9 million and $15.0 million, respectively. Offsetting Assets and Liabilities The Bank’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, 2022 and December 31, 2021 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, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative Assets |  | $ | 253,109 |  |  | $ | (138,429 | ) |  | $ | 114,680 |  |  | $ | 37,879 |  |  | $ | 14,850 |  |  | $ | 91,651 |
Derivative Liabilities |  | $ | 127,592 |  |  | $ | (89,713 | ) |  | $ | 37,879 |  |  | $ | 37,879 |  |  | $ | — |  |  | $ | — |
(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, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative Assets |  | $ | 36,790 |  |  | $ | (29,882 | ) |  | $ | 6,908 |  |  | $ | 6,908 |  |  | $ | — |  |  | $ | — |
Derivative Liabilities |  | $ | 85,448 |  |  | $ | (63,204 | ) |  | $ | 22,244 |  |  | $ | 6,908 |  |  | $ | 66,207 |  |  | $ | (50,871 | )
The Company has excess posted collateral compared to total exposure due to initial margin requirements for day-to-day rate volatility.

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- 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
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration