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Derivative Financial Instruments | 6 Months Ended
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Jun. 30, 2021
Derivative Financial Instruments |
Derivative Financial Instruments | 11. Derivative Financial Instruments ​ The Company enters into derivative contracts primarily to manage its interest rate risk, as well as for customer accommodation purposes. Derivatives used for risk management purposes consist of interest rate swaps that are designated as either a fair value hedge or a cash flow hedge. The derivatives are recognized on the unaudited interim consolidated balance sheets as either assets or liabilities at fair value. Derivatives entered into for customer accommodation purposes consist of various free-standing interest rate derivative products and foreign exchange contracts. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. ​ The following table summarizes notional amounts and fair values of derivatives held by the Company as of June 30, 2021 and December 31, 2020: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | June 30, 2021 | ​ | December 31, 2020
​ | ​ | ​ | ​ | ​ | Fair Value | ​ | ​ | ​ | ​ | Fair Value
​ | ​ | Notional | ​ | Asset | ​ | Liability | ​ | Notional | ​ | Asset | ​ | Liability
(dollars in thousands) |  | Amount |  | Derivatives(1) |  | Derivatives(2) |  | Amount |  | Derivatives(1) |  | Derivatives(2)
Derivatives designated as hedging instruments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate swaps | ​ | $ | 22,066 | ​ | $ | — | ​ | $ | (963) | ​ | $ | 22,451 | ​ | $ | — | ​ | $ | (1,276)
Derivatives not designated as hedging instruments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate swaps | ​ | ​ | 2,988,086 | ​ | ​ | 82,703 | ​ | ​ | — | ​ | ​ | 3,002,333 | ​ | ​ | 129,888 | ​ | ​ | —
Visa derivative | ​ | ​ | 99,059 | ​ | ​ | — | ​ | ​ | (2,132) | ​ | ​ | 92,647 | ​ | ​ | — | ​ | ​ | (4,554)
Interest rate caps and floors | ​ | ​ | 148,800 | ​ | ​ | 9 | ​ | ​ | (9) | ​ | ​ | 148,800 | ​ | ​ | 7 | ​ | ​ | (7)
Foreign exchange contracts | ​ | ​ | 71 | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 326 | ​ | ​ | — | ​ | ​ | —
(1) | The positive fair values of derivative assets are included in other assets.
(2) | The negative fair values of derivative liabilities are included in other liabilities.
​ Certain interest rate swaps noted above, are cleared through clearinghouses, rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and variation margin payments depending on the contracts being in a net asset or liability position. As of June 30, 2021, the amount of initial margin cash collateral received by the Company was $1.8 million. As of December 31, 2020, the amount of initial margin cash collateral posted by the Company was $4.8 million. As of June 30, 2021 and December 31, 2020, the variation margin was $82.7 million and $129.9 million, respectively. ​ As of June 30, 2021, the Company pledged $30.6 million in financial instruments and $20.3 million in cash as collateral for interest rate swaps. As of December 31, 2020, the Company pledged $30.8 million in financial instruments and $25.2 million in cash as collateral for interest rate swaps. As of June 30, 2021 and December 31, 2020, the cash collateral includes the excess initial margin for interest rate swaps cleared through clearinghouses and cash collateral for interest rate swaps with financial institution counterparties. ​ Fair Value Hedges ​ To manage the risk related to the Company’s net interest margin, interest rate swaps are utilized to hedge certain fixed-rate loans. These swaps have maturity, amortization and prepayment features that correspond to the loans hedged, and are designated and qualify as fair value hedges. Any gain or loss on the swaps, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized in current period earnings. ​ At June 30, 2021 and December 31, 2020, the Company carried one interest rate swap with a notional amount of $22.1 million and $22.5 million, respectively. As of June 30, 2021 and December 31, 2020, the interest rate swap was categorized as a fair value hedge for a commercial and industrial loan with a negative fair value of $1.0 million and $1.3 million, respectively. The Company received a USD Prime floating rate and paid a fixed rate of 2.90%. The swap matures in 2023. ​ The following table shows the gains and losses recognized in income related to derivatives in fair value hedging relationships for the three and six months ended June 30, 2021 and 2020: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Gains (losses) recognized in | ​ | Three Months Ended | ​ | Six Months Ended
​ | ​ | the consolidated statements | ​ | June 30, | ​ | June 30,
(dollars in thousands) |  | of income line item |  | 2021 |  | 2020 |  | 2021 |  | 2020
Gains (losses) on fair value hedging relationships recognized in interest income(1): | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Recognized on interest rate swap | ​ | Loans and lease financing | ​ | $ | 121 | ​ | $ | 57 | ​ | $ | 313 | ​ | $ | (898)
Recognized on hedged item | ​ | Loans and lease financing | ​ | ​ | (138) | ​ | ​ | 35 | ​ | ​ | (387) | ​ | ​ | 942
​ ​ As of June 30, 2021 and December 31, 2020, the following amounts were recorded in the unaudited interim consolidated balance sheets related to the cumulative basis adjustments for fair value hedges: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | Cumulative Amount of Fair Value
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Hedging Adjustment Included in the
​ | ​ | Carrying Amount of the Hedged Asset | ​ | Carrying Amount of the Hedged Asset
(dollars in thousands) |  | June 30, 2021 |  | December 31, 2020 |  | June 30, 2021 |  | December 31, 2020
Line item in the consolidated balance sheets in which the hedged item is included | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Loans and leases | ​ | $ | 23,600 | ​ | $ | 24,355 | ​ | $ | 1,100 | ​ | $ | 1,487
​ Free-Standing Derivative Instruments ​ For the derivatives that are not designated as hedges, changes in fair value are reported in current period earnings. The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the unaudited interim consolidated statements of income for the three and six months ended June 30, 2021 and 2020: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Net gains (losses) recognized | ​ | Three Months Ended | ​ | Six Months Ended
​ | ​ | in the consolidated statements | ​ | June 30, | ​ | June 30,
(dollars in thousands) |  | of income line item | ​ | 2021 |  | 2020 |  | 2021 |  | 2020
Derivatives Not Designated As Hedging Instruments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate swaps | ​ | Other noninterest income | ​ | $ | — | ​ | $ | — | ​ | $ | — | ​ | $ | —
Visa derivative | ​ | Other noninterest income | ​ | ​ | (23) | ​ | ​ | 103 | ​ | ​ | 3 | ​ | ​ | 109
Foreign exchange contracts | ​ | Other noninterest income | ​ | ​ | — | ​ | ​ | 52 | ​ | ​ | — | ​ | ​ | —
​ As of June 30, 2021, the Company carried multiple interest rate swaps with notional amounts totaling $3.0 billion, all of which were related to the Company’s customer swap program, with a positive fair value of $82.7 million and a negative fair value of nil. The Company received floating rates ranging from 0.00% to 3.33% and paid fixed rates ranging from 2.02% to 6.19%. The swaps mature between July 2021 and June 2040. As of December 31, 2020, the Company carried multiple interest rate swaps with notional amounts totaling $3.0 billion, all of which were related to the Company’s customer swap program, with a positive fair value of $129.9 million and a negative fair value of nil. The Company received floating rates ranging from 0.15% to 3.16% and paid fixed rates ranging from 2.02% to 5.78%. These swaps resulted in net interest expense of nil during both the three and six months ended June 30, 2021 and 2020. ​ The Company’s customer swap program is designed by offering customers a variable-rate loan that is swapped to fixed-rate through an interest rate swap. The Company simultaneously executes an offsetting interest rate swap with a swap dealer. Upfront fees on the dealer swap are recorded in other noninterest income and totaled $1.3 million and $4.6 million for the three months ended June 30, 2021 and 2020, respectively, and $1.7 million and $6.5 million for the six months ended June 30, 2021 and 2020, respectively. ​ In conjunction with the 2016 sale of Class B restricted shares of common stock issued by Visa, the Company entered into a funding swap agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. On June 28, 2018, Visa additionally funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298 effective June 28, 2018. In July 2018, the Company made a payment of approximately $0.7 million to the buyer as a result of the reduction in the Visa Class B conversion rate. On September 27, 2019, Visa additionally funded its litigation escrow account, thereby further reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on September 30, 2019, Visa announced a decrease in conversion rate from 1.6298 to 1.6228 effective September 27, 2019. In October 2019, the Company made a payment of approximately $0.3 million to the buyer as a result of the reduction in the Visa Class B conversion rate. Under the terms of the funding swap agreement, the Company will make monthly payments to the buyer based on Visa’s Class A stock price and the number of Visa Class B restricted shares that were sold until the date on which the covered litigation is settled. A derivative liability (“Visa derivative”) of $2.1 million and $4.6 million was included in the unaudited interim consolidated balance sheets at June 30, 2021 and December 31, 2020, respectively, to provide for the fair value of this liability. There were no sales of these shares prior to 2016. See “Note 16. Fair Value” for more information. ​ Counterparty Credit Risk ​ By using derivatives, the Company is exposed to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset, net of cash or other collateral received, and net of derivatives in a loss position with the same counterparty to the extent master netting arrangements exist. The Company minimizes counterparty credit risk through credit approvals, limits, monitoring procedures, executing master netting arrangements and obtaining collateral, where appropriate. Counterparty credit risk related to derivatives is considered in determining fair value. ​ The Company’s interest rate swap agreements include bilateral collateral agreements with collateral requirements, which begin with exposures in excess of $0.3 million. For each counterparty, the Company reviews the interest rate swap collateral daily. Collateral for customer interest rate swap agreements, calculated as the pledged asset less loan balance, requires valuation of the pledged asset. Counterparty credit risk adjustments of nil and $0.1 million were recognized during the three months ended June 30, 2021 and 2020, respectively, and $0.1 million and $0.3 million were recognized during the six months ended June 30, 2021 and 2020, respectively. ​ Credit-Risk Related Contingent Features ​ Some of our derivative contracts contain provisions whereby if the Company’s credit rating were to be downgraded by certain major credit rating agencies as a result of a merger or material adverse change in the Company’s financial condition, the counterparty could require an early termination of derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with such credit-risk related contingent features that are in a net liability position was $23.3 million and $19.8 million at June 30, 2021 and December 31, 2020, respectively, for which we posted $20.7 million and $20.4 million, respectively, in collateral in the normal course of business. If the Company’s credit rating had been downgraded as of June 30, 2021 and December 31, 2020, we may have been required to settle the contracts in an amount equal to their fair value.

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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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