Derivative Financial Instruments

6 Months Ended

Jun. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 11. Derivative Financial Instruments

The Company uses derivative instruments to manage its exposure to market risks, including interest rate risk, and to assist customers with their risk management objectives. The Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, while other derivatives serve as economic hedges that do not qualify for hedge accounting.

The notional amount and fair value of the Company’s derivative financial instruments as of June 30, 2023, and December 31, 2022, were as follows:


	June 30, 2023					December 31, 2022
(dollars in thousands)	Notional Amount		Fair Value			Notional Amount		Fair Value
Derivatives designated as hedging instruments
Interest Rate Swap Agreements	$	200,000	$	434		$	—	$	—
Derivatives not designated as hedging instruments
Interest Rate Lock Commitments		11,353		225			3,860		58
Forward Commitments		11,531		32			3,256		6
Interest Rate Swap Agreements
Receive Fixed/Pay Variable Swaps		1,911,911		(154,136	)		1,821,433		(160,914	)
Pay Fixed/Receive Variable Swaps		1,911,911		153,680			1,821,433		38,785
Foreign Exchange Contracts		349		1			52,065		1,745
Conversion Rate Swap Agreement 1		141,804		—			124,752	NA

The conversation rate swap agreements were valued at zero as further reductions to the conversion rate were deemed neither probable nor reasonable estimable.

The following table presents the Company’s derivative financial instruments, their fair values, and their location in the consolidated statements of condition as of June 30, 2023, and December 31, 2022:


	June 30, 2023				December 31, 2022
	Asset		Liability		Asset		Liability
(dollars in thousands)	Derivatives		Derivatives		Derivatives		Derivatives
Derivatives designated as hedging instruments
Interest Rate Swap Agreements	$	434	$	—	$	—	$	—
Derivatives not designated as hedging instruments
Interest Rate Lock Commitments		225		—	$	64	$	6
Forward Commitments		33		1		10		4
Interest Rate Swap Agreements		162,060		162,516		45,831		167,960
Foreign Exchange Contracts		1		—		1,812		67
Total	$	162,753	$	162,517	$	47,717	$	168,037

Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the consolidated statements of condition. The Company’s free-standing derivative financial instruments are required to be carried at their fair value on the Company’s consolidated statements of condition.

The following table presents the Company’s derivative financial instruments and the amount and location of the net gains or losses recognized in the consolidated statements of income for the three and six months ended June 30, 2023, and June 30, 2022:


	Location of
	Net Gains (Losses)	Three Months Ended					Six Months Ended
	Recognized in the	June 30,					June 30,
(dollars in thousands)	Statements of Income	2023			2022		2023			2022
Derivatives designated as hedging instruments
Recognized on Interest Rate Swap Agreements	Interest and Fees on Loans and Leases	$	434		$	—	$	434		$	—
Recognized on Hedged Item	Interest and Fees on Loans and Leases		(435	)	$	—		(435	)	$	—
Derivatives not designated as hedging instruments
Interest Rate Lock Commitments	Mortgage Banking		274			66		478			(1,013	)
Forward Commitments	Mortgage Banking		92			314		61			2,221
Interest Rate Swap Agreements	Other Noninterest Income		(2	)		23		(18	)		17
Foreign Exchange Contracts	Other Noninterest Income		802			232		1,643			506
Total		$	1,165		$	635	$	2,163		$	1,731

The following amounts were recorded on the consolidated statement of financial condition related to the cumulative basis adjustment for fair value hedges as of June 30, 2023:


Derivative Financial Instruments
Designated as Hedging Instruments
Line Item in the Consolidated Statement of Condition	Carrying Amount of the Hedged Assets			Cumulative Amount of Fair Value Hedging Adjustment Included In the Carrying Amount of the Hedged Assets
(dollars in thousands)	June 30, 2023			June 30, 2023
Loans and Leases1	$	(435	)	$	(435	)

1 These amounts were included in the amortized cost basis of closed portfolios of loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolios anticipated to be outstanding for the designated hedge period. At June 30, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $3.3 billion.

Derivatives Not Designated as Hedging Instruments
Interest Rate Swap Agreements

The Company enters into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking customers. The Company mitigates the risk of entering into these agreements by entering into equal and offsetting interest rate swap agreements with highly rated third party financial institutions. The interest rate swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated statements of condition (asset positions are included in other assets and liability positions are included in other liabilities). 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 master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of marketable securities, is posted by the party (i.e., the Company or the financial institution counterparty) with net liability positions in accordance with contract thresholds. The Company had net asset positions with its financial institution counterparties totaling $153.7 million and $38.8 million as of June 30, 2023, and December 31, 2022, respectively.

Conversion Rate Swap Agreements

As certain sales of Visa Class B restricted shares were completed, the Company entered into a conversion rate swap agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio of Class B into Class A unrestricted common shares. In the event of Visa increasing the conversion ratio, the buyer would be required to make payment to the Company. As of June 30, 2023, and December 31, 2022, the conversion rate swap agreement was valued at zero (i.e., no contingent liability recorded) as further reductions to the conversion ratio were deemed neither probable nor reasonably estimable by management.

Derivatives Designated as Hedging Instruments
Fair Value Hedges

The Company is exposed to changes in the fair value of fixed-rate assets due to changes in benchmark interest rates. The Company entered into pay-fixed and receive-floating interest rate swaps to manage its exposure to changes in fair value of its fixed rate loans. These interest rate swaps are designated as fair value hedges using the portfolio layer method. The Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts. The fair value hedges are recorded as components of other assets and other liabilities in the Company’s consolidated statements of financial condition. The gain or loss on these derivatives, as well as the offsetting loss or gain on the hedged items attributable to the hedged risk are recognized in interest income in the Company’s consolidated statements of income.