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Derivatives and Hedging Activities | 3 Months Ended
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Mar. 31, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives and Fair Value | DERIVATIVE AND HEDGING ACTIVITIES The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally to manage the Company’s interest rate risk. Additionally, the Company enters into interest rate derivatives, foreign exchange contracts and risk participation agreements to accommodate the business requirements of its customers (“customer related positions”). The Company minimizes the market and liquidity risks of customer related positions by entering into similar offsetting positions with broker-dealers. Derivative instruments are carried at fair value in the Company's financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship. The Company does not enter into proprietary trading positions for any derivatives. The Company is subject to over-the-counter derivative clearing requirements which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company clears certain derivative transactions through the Chicago Mercantile Exchange Clearing House ("CME"). This clearing house requires the Company to post initial and variation margin to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. Interest Rate Positions The Company may utilize various interest rate derivatives as hedging instruments against interest rate risk associated with the Company’s borrowings and loan portfolios. An interest rate derivative is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. The following tables reflect the Company's derivative positions at the dates indicated below for interest rate swaps which qualify as cash flow hedges for accounting purposes:
March 31, 2024
|  |  |  |  |  | Weighted Average Rate |  |
|  | Notional Amount |  | Average Maturity |  | Current Rate Received |  | Pay Fixed Swap Rate |  | Fair Value
|  | (in thousands) |  | (in years) |  |  |  |  |  | (in thousands)
Interest rate swaps on borrowings |  | $ | 400,000 |  |  | 2.33 |  | 5.32 | % |  | 3.67 | % |  | $ | 6,695 |
|  |  |  |  |  | Current Rate Paid |  | Receive Fixed Swap Rate |  |
Interest rate swaps on loans |  | 800,000 |  |  | 2.40 |  | 5.33 | % |  | 2.70 | % |  | (34,008) |
|  |  |  |  |  | Current Rate Paid |  | Receive Fixed Swap Rate Cap - Floor |  |
Interest rate collars on loans |  | 300,000 |  |  | 1.47 |  | 5.43 | % |  | 3.09% - 2.01% |  | (4,679) |
Total |  | $ | 1,500,000 |  |  |  |  |  |  |  |  | $ | (31,992) |
December 31, 2023
|  |  |  |  |  | Weighted Average Rate |  |
|  | Notional Amount |  | Average Maturity |  | Current Rate Received |  | Pay Fixed Swap Rate |  | Fair Value
|  | (in thousands) |  | (in years) |  |  |  |  |  | (in thousands)
Interest rate swaps on borrowings |  | $ | 400,000 |  |  | 2.58 |  | 5.34 | % |  | 3.67 | % |  | $ | 1,901 |
|  | Notional Amount |  | Average Maturity |  | Current Rate Paid |  | Receive Fixed Swap Rate |  | Fair Value
Interest rate swaps on loans |  | 850,000 |  |  | 2.50 |  | 5.36 | % |  | 2.72 | % |  | (27,350) |
|  |  |  |  |  | Current Rate Paid |  | Receive Fixed Swap Rate Cap - Floor |  |
Interest rate collars on loans |  | 350,000 |  |  | 1.48 |  | 5.45 | % |  | 3.09% - 2.12% |  | (4,714) |
Total |  | $ | 1,600,000 |  |  |  |  |  |  |  |  | $ | (30,163) |
The maximum length of time over which the Company is currently hedging its exposure to the variability in future cash flows for forecasted transactions related to the payment of variable interest on existing financial instruments is 5.0 years. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of the gains or losses is reported as a component of other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company expects approximately $4.9 million (pre-tax) to be reclassified as an increase to interest income and $20.6 million (pre-tax) to be reclassified as an increase to interest expense, from OCI related to the Company’s cash flow hedges in the twelve months following March 31, 2024. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve at March 31, 2024. The Company had no fair value hedges as of March 31, 2024 or December 31, 2023. Customer Related Positions Loan level derivatives, primarily interest rate swaps, offered to commercial borrowers through the Company’s loan level derivative program do not qualify as hedges for accounting purposes. The Company believes that its exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an offsetting dealer transaction. Derivatives with dealer counterparties are then either cleared through a clearinghouse or settled directly with a single counterparty. The commercial customer derivative program allows the Company to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. The amounts relating to the notional principal amount are not actually exchanged. Foreign exchange contracts offered to commercial borrowers through the Company’s derivative program do not qualify as hedges for accounting purposes. The Company acts as a seller and buyer of foreign exchange contracts to accommodate its customers. To mitigate the market and liquidity risk associated with these derivatives, the Company enters into similar offsetting positions. The amounts relating to the notional principal amount are exchanged. The Company has entered into risk participation agreements with other dealer banks in commercial loan agreements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and, therefore, changes in fair value are recognized in earnings. Under a risk participation-out agreement, a derivative asset, the Company participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Company assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank. The following tables reflect the Company’s customer related derivative positions at the dates indicated below for those derivatives not designated as hedging:
|  |  | Notional Amount Maturing |  |
| Number of Positions (1) |  | Less than 1 year |  | Less than 2 years |  | Less than 3 years |  | Less than 4 years |  | Thereafter |  | Total |  | Fair Value
| March 31, 2024
| (Dollars in thousands)
Loan level swaps |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Receive fixed, pay variable | 276 |  |  | $ | 134,253 |  |  | $ | 237,171 |  |  | $ | 235,290 |  |  | $ | 247,638 |  |  | $ | 910,248 |  |  | $ | 1,764,600 |  |  | $ | (110,626) |
Pay fixed, receive variable | 276 |  |  | 134,253 |  |  | 237,171 |  |  | 235,290 |  |  | 247,638 |  |  | 910,248 |  |  | 1,764,600 |  |  | 110,519 |
Foreign exchange contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |
Buys foreign currency, sells U.S. currency | 24 |  |  | 85,312 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 85,312 |  |  | (463) |
Buys U.S. currency, sells foreign currency | 24 |  |  | 85,312 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 85,312 |  |  | 502 |
Risk participation agreements |  |  |  |  |  |  |  |  |  |  |  |  |  |
Participation out | 17 |  |  | 24,063 |  |  | — |  |  | — |  |  | 34,491 |  |  | 92,158 |  |  | 150,712 |  |  | 111 |
Participation in | 12 |  |  | — |  |  | — |  |  | 36,275 |  |  | — |  |  | 15,639 |  |  | 51,914 |  |  | (24) |
|  |  | Notional Amount Maturing |  |
| Number of Positions (1) |  | Less than 1 year |  | Less than 2 years |  | Less than 3 years |  | Less than 4 years |  | Thereafter |  | Total |  | Fair Value
| December 31, 2023
| (Dollars in thousands)
Loan level swaps |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Receive fixed, pay variable | 281 |  |  | $ | 80,682 |  |  | $ | 252,260 |  |  | $ | 223,928 |  |  | $ | 230,513 |  |  | $ | 997,108 |  |  | $ | 1,784,491 |  |  | $ | (88,415) |
Pay fixed, receive variable | 281 |  |  | 80,682 |  |  | 252,260 |  |  | 223,928 |  |  | 230,513 |  |  | 997,108 |  |  | 1,784,491 |  |  | 88,280 |
Foreign exchange contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |
Buys foreign currency, sells U.S. currency | 22 |  |  | 65,586 |  |  | 12,957 |  |  | — |  |  | — |  |  | — |  |  | 78,543 |  |  | 2,197 |
Buys U.S. currency, sells foreign currency | 22 |  |  | 65,586 |  |  | 12,957 |  |  | — |  |  | — |  |  | — |  |  | 78,543 |  |  | (2,160) |
Risk participation agreements |  |  |  |  |  |  |  |  |  |  |  |  |  |
Participation out | 17 |  |  | — |  |  | 24,193 |  |  | — |  |  | 13,119 |  |  | 114,027 |  |  | 151,339 |  |  | 200 |
Participation in | 8 |  |  | — |  |  | — |  |  | 13,016 |  |  | 18,989 |  |  | 15,725 |  |  | 47,730 |  |  | (44) |
(1)The Company may enter into one dealer swap agreement which offsets multiple commercial borrower swap agreements. Mortgage Derivatives The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that loans may be sold subsequently in the secondary market. Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. These commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded within mortgage banking income. In addition, the Company has elected the fair value option to carry loans held for sale at fair value. The change in fair value of loans held for sale is recorded in current period earnings as a component of mortgage banking income in accordance with the Company's fair value election. The fair value of loans held for sale increased by $70,000 and decreased by $17,000 for the three months ended March 31, 2024 and 2023, respectively. These amounts were offset in earnings by the change in the fair value of mortgage derivatives. Outstanding loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might change from inception of the rate lock to funding of the loan due to changes in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. To protect against the price risk inherent in derivative loan commitments, the Company utilizes both "mandatory delivery" and "best efforts" forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Included in the mandatory delivery forward commitments are To Be Announced securities ("TBAs"). Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future hedges. The accuracy of underlying assumptions will impact the ultimate effectiveness of any hedging strategies. With mandatory delivery contracts, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a "pair-off" fee, based on then-current market prices, to the investor/counterparty to compensate the investor for the shortfall. Generally, the Company makes this type of commitment once mortgage loans have been funded and are held for sale, in order to minimize the risk of failure to deliver the requisite volume of loans to the investor and paying pair-off fees as a result. The Company also sells TBA securities to offset potential changes in the fair value of derivative loan commitments. Generally, the Company sells TBA securities by entering into derivative loan commitments for settlement in 30 to 90 days. The Company expects that mandatory delivery contracts, including TBA securities, will experience changes in fair value opposite to the changes in the fair value of derivative loan commitments. With best effort contracts, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality 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 (e.g., on the same day the lender commits to lend funds to a 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. The aggregate amount of net realized gains on sales of mortgage loans included within mortgage banking income was $593,000 and $174,000 for the three months ended March 31, 2024 and 2023, respectively. Balance Sheet Offsetting The Company does not offset fair value amounts recognized for derivative instruments. The Company does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be maintained at dealer banks by the Company is monitored and adjusted as necessary. A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company's financial statements are not equal and offsetting. The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet and the potential effect of netting arrangements on its financial position, at the dates indicated:
|  |  | Asset Derivatives (1) |  |  |  | Liability Derivatives (2) |
|  |  | Fair Value at |  | Fair Value at |  |  |  | Fair Value at |  | Fair Value at |
|  |  | March 31 2024 |  | December 31 2023 |  |  |  | March 31 2024 |  | December 31 2023 |
|  |  | (Dollars in thousands) |
Derivatives designated as hedges |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | $ | 6,695 |  | (3) | $ | 1,927 |  |  |  |  | $ | 38,687 |  | (4) | $ | 32,090 |  | (4)
Derivatives not designated as hedges |  |  |  |  |  |  |  |  |  |  |  |
Customer Related Positions |  |  |  |  |  |  |  |  |  |  |  |
Loan level derivatives |  |  | 111,146 |  | (3) | 99,416 |  | (3) |  |  | 111,252 |  | (4) | 99,551 |  | (4)
Foreign exchange contracts |  |  | 1,304 |  |  | 2,220 |  |  |  |  | 1,265 |  |  | 2,183 |  |
Risk participation agreements |  |  | 111 |  |  | 200 |  |  |  |  | 24 |  |  | 44 |  |
Mortgage Derivatives |  |  |  |  |  |  |  |  |  |  |  |
Interest rate lock commitments |  |  | 357 |  |  | 168 |  |  |  |  | 85 |  |  | — |  |
Forward sale loan commitments |  |  | 129 |  |  | 17 |  |  |  |  | — |  |  | — |  |
Total derivatives not designated as hedges |  |  | 113,047 |  |  | 102,021 |  |  |  |  | 112,711 |  |  | 101,778 |  |
Total |  |  | 119,742 |  |  | 103,948 |  |  |  |  | 151,398 |  |  | 133,868 |  |
Netting Adjustments (5) |  |  | (57,796) |  |  | (48,253) |  |  |  |  | 32,323 |  |  | 25,360 |  |
Net Derivatives on the Balance Sheet |  |  | 61,946 |  |  | 55,695 |  |  |  |  | 119,075 |  |  | 108,508 |  |
Financial instruments (6) |  |  | 6,220 |  |  | 12,018 |  |  |  |  | 6,220 |  |  | 12,018 |  |
Cash collateral pledged (received) |  |  | (26,969) |  |  | (17,076) |  |  |  |  | — |  |  | — |  |
Net Derivative Amounts |  |  | $ | 28,757 |  |  | $ | 26,601 |  |  |  |  | $ | 112,855 |  |  | $ | 96,490 |  |
(1)All asset derivatives are reflected in other assets on the balance sheet. (2)All liability derivatives are reflected in other liabilities on the balance sheet. (3)Approximately $426,000 and $3.2 million of accrued interest receivable is included in the fair value of interest rate and loan level derivative assets, respectively, at March 31, 2024, in comparison to accrued interest receivable of approximately $316,000 and $3.0 million, respectively, at December 31, 2023. (4)Approximately $1.8 million and $3.2 million of accrued interest payable is included in the fair value of interest rate and loan level derivative liabilities, respectively, at March 31, 2024, in comparison to accrued interest payable of approximately $1.9 million and $3.0 million, respectively, at December 31, 2023. (5)Netting adjustments represent the amounts recorded to convert derivative assets and liabilities cleared through CME from a gross basis to a net basis, inclusive of the variation margin payments, in accordance with applicable accounting guidance. (6)Reflects offsetting derivative positions with the same counterparty that are not netted on the balance sheet. The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:
| Three Months Ended |  |
| March 31 |  |
| 2024 |  | 2023 |  |  |  |
| (Dollars in thousands)
Derivatives designated as hedges |  |  |  |  |  |  |
(Loss) gain in OCI on derivatives (effective portion), net of tax | $ | (1,488) |  |  | $ | 10,163 |  |  |  |  |
Loss reclassified from OCI into interest income or interest expense (effective portion) | $ | (5,856) |  |  | $ | (6,239) |  |  |  |  |
Derivatives not designated as hedges |  |  |  |  |  |  |
Changes in fair value of customer related positions |  |  |  |  |  |  |
Other income | $ | 35 |  |  | $ | 272 |  |  |  |  |
Other expense | (72) |  |  | (77) |  |  |  |  |
Changes in fair value of mortgage derivatives |  |  |  |  |  |  |
Mortgage banking income | 131 |  |  | (46) |  |  |  |  |
Total | $ | 94 |  |  | $ | 149 |  |  |  |  |
The Company's derivative agreements with institutional counterparties contain various credit-risk related contingent provisions, such as requiring the Company to maintain a well-capitalized capital position. If the Company fails to meet these conditions, the counterparties could request the Company make immediate payment or demand that the Company provide immediate and ongoing full collateralization on derivative positions in net liability positions. All derivative instruments with credit-risk contingent features were in a net asset position at March 31, 2024 and December 31, 2023. By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company's credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. Institutional counterparties must have an investment grade credit rating and be approved by the Company's Board of Directors. In addition, certain derivative contracts executed bilaterally with a dealer counterparty in the over-the-counter market are cleared through a clearinghouse, whereby the clearinghouse becomes the counterparty to the transaction. As such, management believes the risk of incurring credit losses on derivative contracts with those counterparties is remote. The Company's exposure relating to institutional counterparties was $117.5 million and $95.8 million at March 31, 2024 and December 31, 2023, respectively. The Company’s exposure relating to customer counterparties was approximately $313,000 and $5.6 million at March 31, 2024 and December 31, 2023, respectively. Credit exposure may be reduced by the value of collateral pledged by the counterparty.

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- Definition The entire disclosure for derivatives and fair value of assets and liabilities. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 820 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//820/tableOfContent + Details
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