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Derivative and Hedging Activities | 3 Months Ended
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Mar. 31, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative and Hedging Activities | Derivative and Hedging Activities The Corporation is exposed to certain risk arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation's known or expected cash receipts and its known or expected cash payments principally related to the Corporation's assets. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. The Corporation is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. To mitigate the counterparty risk, contracts generally contain language outlining collateral pledging requirements for each counterparty. For non-centrally cleared derivatives, collateral must be posted when the market value exceeds certain mutually agreed upon threshold limits. Securities and cash are often pledged as collateral. The Corporation pledged $76 million and $71 million of investment securities as collateral at March 31, 2022, and December 31, 2021, respectively. At March 31, 2022, the Corporation posted $6 million of required cash collateral compared to $11 million at December 31, 2021. Federal regulations require the Corporation to clear all LIBOR and compound SOFR interest rate swaps through a clearing house, if possible. For derivatives cleared through central clearing houses, the variation margin payments are legally characterized as daily settlements of the derivative rather than collateral. The Corporation's clearing agent for interest rate derivative contracts that are centrally cleared through the Chicago Mercantile Exchange (CME) and the London Clearing House (LCH) settles the variation margin daily. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. Depending on the net position, the fair value is reported in other assets or accrued expenses and other liabilities on the consolidated balance sheets. The daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument. Derivatives to Accommodate Customer Needs The Corporation facilitates customer borrowing activity by entering into various derivative contracts which are designated as free standing derivative contracts. Free standing derivative products are entered into primarily for the benefit of commercial customers seeking to manage their exposures to interest rate risk, foreign currency, and until early 2022, commodity prices. As of the end of the first quarter of 2022, the Corporation no longer had any outstanding commodity contracts. These derivative contracts are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and, therefore, do not qualify for hedge accounting treatment. Such derivative contracts are carried at fair value in other assets and accrued expenses and other liabilities on the consolidated balance sheets with changes in the fair value recorded as a component of capital markets, net, and typically include interest rate-related instruments (swaps and caps), foreign currency exchange forwards, and until the end of the first quarter of 2022, commodity contracts. See Note 11 for additional information and disclosures on balance sheet offsetting. Interest rate-related instruments: The Corporation provides interest rate risk management services to commercial customers, primarily forward interest rate swaps and caps. The Corporation’s market risk from unfavorable movements in interest rates related to these derivative contracts is generally economically hedged by concurrently entering into offsetting derivative contracts. The offsetting derivative contracts have identical notional values, terms, and indices. Foreign currency exchange forwards: The Corporation provides foreign currency exchange services to customers, primarily forward contracts. The Corporation's customers enter into a foreign currency exchange forward with the Corporation as a means for them to mitigate exchange rate risk. The Corporation mitigates its risk by then entering into an offsetting foreign currency exchange derivative contract. Commodity contracts: As of the end of the first quarter of 2022, the Corporation no longer had any outstanding commodity contracts. Historically, commodity contracts were entered into primarily for the benefit of commercial customers seeking to manage their exposure to fluctuating commodity prices. The Corporation mitigated its risk by then entering into an offsetting commodity derivative contract. Mortgage Derivatives Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments on residential mortgage loans and TBA securities are considered derivative instruments, and the fair value of these commitments is recorded in other assets and accrued expenses and other liabilities on the consolidated balance sheets with the changes in fair value recorded as a component of mortgage banking, net on the consolidated statements of income. Interest rate-related instruments for MSRs hedge: The fair value of the Corporation's MSRs asset changes in response to change in primary mortgage loan rates and other assumptions. To mitigate the earnings volatility caused by changes in the fair value of MSRs, the Corporation designates certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs and are recorded in other assets and accrued expenses and other liabilities on the consolidated balance sheets with the changes in fair value recorded as a component of mortgage banking, net on the consolidated statements of income. The following table presents the total notional amounts and gross fair values of the Company’s derivatives, as well as the balance sheet netting adjustments as of March 31, 2022 and December 31, 2021. The derivative assets and liabilities are presented on a gross basis prior to the application of bilateral collateral and master netting agreements, but after the variation margin payments with central clearing organizations have been applied as settlement, as applicable. Total derivative assets and liabilities are adjusted to take into consideration the effects of legally enforceable master netting agreements and cash collateral received or paid as of March 31, 2022 and December 31, 2021. The resulting net derivative asset and liability fair values are included in other assets and accrued expenses and other liabilities, respectively, on the consolidated balance sheets.
|  | Mar 31, 2022 | Dec 31, 2021
|  | Asset | Liability | Asset | Liability
($ in Thousands) |  | Notional Amount | Fair Value | Notional Amount | Fair Value | Notional Amount | Fair Value | Notional Amount | Fair Value
Not designated as hedging instruments |  |  |  |  |  |  |  |  |
Interest rate-related instruments |  | $ | 4,090,770 |  | $ | 31,728 |  | $ | 4,130,770 |  | $ | 112,029 |  | $ | 3,874,781 |  | $ | 83,626 |  | $ | 3,874,781 |  | $ | 26,231 |
Foreign currency exchange forwards |  | 506,185 |  | 1,986 |  | 501,213 |  | 1,815 |  | 490,057 |  | 5,490 |  | 478,745 |  | 5,441 |
Commodity contracts |  | — |  | — |  | — |  | — |  | 3,894 |  | 1,264 |  | 3,910 |  | 1,248 |
Mortgage banking(a)(b) |  | 114,909 |  | 4,796 |  | 197,000 |  | 234 |  | 133,990 |  | 2,647 |  | 245,016 |  | — |
Gross derivatives before netting |  |  | $ | 38,511 |  |  | $ | 114,078 |  |  | $ | 93,026 |  |  | $ | 32,921 |
Less: Legally enforceable master netting agreements | 2,514 |  |  | 2,514 |  |  | 2,143 |  |  | 2,143 |
Less: Cash collateral pledged/received | 7,816 |  |  | 987 |  |  | 1,313 |  |  | 11,357 |
Total derivative instruments, after netting | $ | 28,181 |  |  | $ | 110,577 |  |  | $ | 89,570 |  |  | $ | 19,421 |
(a) The notional amount of the mortgage derivative asset includes interest rate lock commitments, while the notional amount of the mortgage derivative liability includes forward commitments. (b) At March 31, 2022, the mortgage derivative asset includes $5 million of forward commitments fair value, while the mortgage derivative liability includes approximately $224,000 of interest rate lock commitments fair value. At December 31, 2021, the mortgage derivative asset included approximately $30,000 of forward commitments fair value. The Corporation terminated its $500 million fair value hedge during the fourth quarter of 2019. At March 31, 2022, the amortized cost basis of the closed portfolios which had previously been used in the terminated hedging relationship was $390 million and is included in loans on the consolidated balance sheets. This amount includes $2 million of hedging adjustments on the discontinued hedging relationships. The table below identifies the effect of fair value hedge accounting on the Corporation's consolidated statements of income for the three months ended March 31, 2022 and 2021:
| Location and Amount of Gain or (Loss) Recognized on the Consolidated Statements of Income in Fair Value and Cash Flow Hedging Relationships
| Three months ended Mar 31, |
| 2022 | 2021 |  |
($ in Thousands) | Interest Income |  |  |  |  |
Total amounts of income presented on the consolidated statements of income in which the effects of the fair value hedge is recorded | $ | (179) |  |  | $ | (485) |  |  |  |  |  |
The effects of fair value hedging: (Loss) on fair value hedging relationships in Subtopic 815-20 |  |  |  |  |  |  |  |
Interest contracts |  |  |  |  |  |  |  |
Hedged items | (179) |  |  | (485) |  |  |  |  |  |
The table below identifies the effect of derivatives not designated as hedging instruments on the Corporation's consolidated statements of income for the three months ended March 31, 2022 and 2021:
| Consolidated Statements of Income Category of Gain / (Loss) Recognized in Income | Three Months Ended Mar 31, |
($ in Thousands) | 2022 | 2021 |  |
Derivative Instruments |  |  |  |  |
Interest rate-related instruments — customer and mirror, net | Capital markets, net | $ | 573 |  | $ | 2,938 |  |  |
Interest rate-related instruments — MSRs hedge | Mortgage banking, net | $ | (3,666) |  | $ | — |  |  |
Foreign currency exchange forwards | Capital markets, net | 123 |  | 143 |  |  |
Commodity contracts | Capital markets, net | (16) |  | (621) |  |  |
Interest rate lock commitments (mortgage) | Mortgage banking, net | (2,842) |  | (2,708) |  |  |
Forward commitments (mortgage) | Mortgage banking, net | (4,757) |  | (6,300) |  |  |

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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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