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Derivative Instruments and Hedging Activities | 3 Months Ended
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Mar. 31, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Risk Management Objectives of Using Derivatives Customers is exposed to certain risks arising from both its business operations and economic conditions. Customers manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and durations of its assets and liabilities. Specifically, Customers 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 values of which are determined by interest rates. Customers’ derivative financial instruments are used to manage differences in the amount, timing, and duration of Customers’ known or expected cash receipts and its known or expected cash payments principally related to certain borrowings and deposits. Customers also has interest-rate derivatives resulting from a service provided to certain qualifying customers, and therefore, they are not used to manage Customers’ interest-rate risk in assets or liabilities. Customers manages a matched book with respect to its derivative instruments used in this customer service in order to minimize its net risk exposure resulting from such transactions. Cash Flow Hedges of Interest-Rate Risk Customers’ objectives in using interest-rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, Customers primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for Customers making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The changes in the fair value of derivatives designated and qualifying as cash flow hedges are recorded in accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged item affects earnings. To date, such derivatives were used to hedge the variable cash flows associated with the forecasted issuances of debt and a certain variable-rate deposit relationship. At December 31, 2020, Customers had five outstanding interest rate derivatives with notional amounts totaling $1.1 billion that were designated as cash flow hedges of interest rate risk. Customers discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in accumulated other comprehensive income (loss) are reclassified immediately into earnings and any subsequent changes in the fair value of such derivatives are recognized directly in earnings. In March 2021, Customers terminated four interest rate derivatives with notional amounts totaling $850 million that were designated as cash flow hedges of interest-rate risk associated with 3-month FHLB advances, and reclassified $25.9 million of the realized losses and accrued interest from AOCI to current earnings because the hedged forecasted transactions were determined to be no longer probable of occurring. At March 31, 2021, Customers had one outstanding interest rate derivative with notional amount of $225.0 million that was designated as cash flow hedge of interest rate risk. Customers is hedging its exposure to the variability in future cash flows for a variable-rate deposit relationship over a maximum period of 24 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments). The outstanding cash flow hedge at March 31, 2021 expires in June 2021. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on Customers' variable-rate debt and a variable-rate deposit relationship. Customers expects to reclassify $1.1 million of losses from accumulated other comprehensive income (loss) to interest expense during the next 12 months. Fair Value Hedges of Benchmark Interest-Rate Risk Customers is exposed to changes in the fair value of certain of its fixed rate AFS debt securities due to changes in the benchmark interest rate. Customers uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate such as the Fed Funds Effective Swap Rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for Customers receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income. At March 31, 2021, Customers had 17 outstanding interest rate derivatives with notional amounts totaling $85.5 million that were designated as fair value hedges of certain available for sale debt securities. In March 2021, Customers terminated seven interest rate derivatives with notional amounts totaling $186.8 million that were designated as fair value hedges together with the sale of hedged available for sale debt securities. At December 31, 2020, Customers had 24 outstanding interest rate derivatives with notional amounts totaling $272.3 million designated as fair value hedges. As of March 31, 2021, the following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustments for fair value hedges.
|  | Amortized Cost |  | Cumulative Amount of Fair Value Hedging Adjustment to Hedged Items
(amounts in thousands) |  | March 31, |  | December 31, |  | March 31, |  | December 31,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Available for sale debt securities |  | $ | 85,500 |  |  | $ | 272,159 |  |  | $ | 976 |  |  | $ | 741 |
Derivatives Not Designated as Hedging Instruments Customers executes interest rate swaps (typically the loan customers will swap a floating-rate loan for a fixed-rate loan) and interest rate caps with commercial banking customers to facilitate their respective risk management strategies. The customer interest rate swaps and interest rate caps are simultaneously offset by interest rate swaps and interest rate caps that Customers executes with a third party in order to minimize interest-rate risk exposure resulting from such transactions. As the interest rate swaps and interest rate caps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and caps and the offsetting third-party market swaps and caps are recognized directly in earnings. At March 31, 2021, Customers had 161 interest rate swaps with an aggregate notional amount of $1.5 billion and twelve interest rate caps with an aggregated notional amount of $206.1 million related to this program. At December 31, 2020, Customers had 155 interest rate swaps with an aggregate notional amount of $1.4 billion and twelve interest rate caps with an aggregate notional amount of $204.9 million related to this program. Customers enters into residential mortgage loan commitments in connection with its consumer mortgage banking activities to fund mortgage loans at specified rates and times in the future. These commitments are short-term in nature and generally expire in 30 to 60 days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held for sale are considered derivative instruments under applicable accounting guidance and are reported at fair value, with changes in fair value recorded directly in earnings. At March 31, 2021 and December 31, 2020, Customers had an outstanding notional balance of residential mortgage loan commitments of $8.8 million and $11.9 million, respectively. Customers has also purchased and sold credit derivatives to either hedge or participate in the performance risk associated with some of its counterparties. These derivatives are not designated as hedging instruments and are reported at fair value, with changes in fair value reported directly in earnings. At March 31, 2021 and December 31, 2020, Customers had outstanding notional balances of credit derivatives of $173.6 million and $177.2 million, respectively. Fair Value of Derivative Instruments on the Balance Sheet The following tables present the fair value of Customers' derivative financial instruments as well as their presentation on the balance sheet as of March 31, 2021 and December 31, 2020.
|  | March 31, 2021
|  | Derivative Assets |  | Derivative Liabilities
(amounts in thousands) |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |  |
Interest rate swaps |  | Other assets |  | $ | — |  |  | Other liabilities |  | $ | 1,034 |
Total |  |  |  | $ | — |  |  |  |  | $ | 1,034 |
Derivatives designated as fair value hedges: |  |  |  |  |  |  |  |
Interest rate swaps |  | Other assets |  | $ | 976 |  |  | Other liabilities |  | $ | — |
Total |  |  |  | $ | 976 |  |  |  |  | $ | — |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Interest rate swaps |  | Other assets |  | $ | 34,962 |  |  | Other liabilities |  | $ | 36,154 |
Interest rate caps |  | Other assets |  | 166 |  |  | Other liabilities |  | 166 |
Credit contracts |  | Other assets |  | 202 |  |  | Other liabilities |  | 182 |
Residential mortgage loan commitments |  | Other assets |  | 196 |  |  | Other liabilities |  | — |
Total |  |  |  | $ | 35,526 |  |  |  |  | $ | 36,502 |
|  | December 31, 2020
|  | Derivative Assets |  | Derivative Liabilities
(amounts in thousands) |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |  |
Interest rate swaps |  | Other assets |  | $ | 196 |  |  | Other liabilities |  | $ | 40,765 |
Total |  |  |  | $ | 196 |  |  |  |  | $ | 40,765 |
Derivatives designated as fair value hedges: |  |  |  |  |  |  |  |
Interest rate swaps |  | Other assets |  | $ | — |  |  | Other liabilities |  | $ | 741 |
Total |  |  |  | $ | — |  |  |  |  | $ | 741 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Interest rate swaps |  | Other assets |  | $ | 53,455 |  |  | Other liabilities |  | $ | 56,209 |
Interest rate caps |  | Other assets |  | 46 |  |  | Other liabilities |  | 46 |
Credit contracts |  | Other assets |  | 326 |  |  | Other liabilities |  | 403 |
Residential mortgage loan commitments |  | Other assets |  | 200 |  |  | Other liabilities |  | — |
Total |  |  |  | $ | 54,027 |  |  |  |  | $ | 56,658 |
Effect of Derivative Instruments on Net Income The following tables present amounts included in the consolidated statements of income related to derivatives designated as fair value hedges and derivatives not designated as hedges for the three months ended March 31, 2021 and 2020.
|  |  | Amount of Income (Loss) Recognized in Earnings
|  |  | Three Months Ended March 31, |  |
(amounts in thousands) | Income Statement Location |  | 2021 |  | 2020 |  |  |  |
Derivatives designated as fair value hedges: |  |  |  |  |  |  |  |
Recognized on interest rate swaps | Net interest income |  | $ | 4,907 |  |  | $ | — |  |  |  |  |
Recognized on hedged available for sale debt securities | Net interest income |  | (4,907) |  |  | — |  |  |  |  |
Total |  |  | $ | — |  |  | $ | — |  |  |  |  |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Interest rate swaps | Other non-interest income |  | $ | 2,399 |  |  | $ | (1,015) |  |  |  |  |
Interest rate caps | Other non-interest income |  | — |  |  | — |  |  |  |  |
Credit contracts | Other non-interest income |  | 137 |  |  | (132) |  |  |  |  |
Residential mortgage loan commitments | Mortgage banking income |  | (4) |  |  | 137 |  |  |  |  |
Total |  |  | $ | 2,532 |  |  | $ | (1,010) |  |  |  |  |
Effect of Derivative Instruments on Comprehensive Income The following table presents the effect of Customers' derivative financial instruments on comprehensive income for the three months ended March 31, 2021 and 2020.
| Amount of Gain (Loss) Recognized in OCI on Derivatives (1) |  | Location of Gain (Loss) Reclassified from Accumulated OCI into Income |  | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
| Three Months Ended March 31, |  |  |  | Three Months Ended March 31,
(amounts in thousands) | 2021 |  | 2020 |  |  |  | 2021 |  | 2020
Derivatives in cash flow hedging relationships: |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 9,113 |  |  | $ | (20,346) |  |  | Interest expense |  | $ | (1,459) |  |  | $ | (1,478) |
| — |  |  | — |  |  | Other non-interest income |  | (24,467) |  |  | — |
Total | $ | 9,113 |  |  | $ | (20,346) |  |  |  |  | $ | (25,926) |  |  | $ | (1,478) |
(1) Amounts presented are net of taxes. See NOTE 5 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) for the total effect on other comprehensive income (loss) from derivatives designated as cash flow hedges for the periods presented.
Credit-risk-related Contingent Features By entering into derivative contracts, Customers is exposed to credit risk. The credit risk associated with derivatives executed with customers is the same as that involved in extending the related loans and is subject to the same standard credit policies. To mitigate the credit-risk exposure to major derivative dealer counterparties, Customers only enters into agreements with those counterparties that maintain credit ratings of high quality or with central clearing parties. Agreements with major derivative dealer counterparties contain provisions whereby default on any of Customers' indebtedness would be considered a default on its derivative obligations. Customers also has entered into agreements that contain provisions under which the counterparty could require Customers to settle its obligations if Customers fails to maintain its status as a well/adequately capitalized institution. As of March 31, 2021, the fair value of derivatives in a net liability position (which includes accrued interest but excludes any adjustment for nonperformance-risk) related to these agreements was $36.4 million. In addition, Customers, which has collateral posting thresholds with certain of these counterparties, had posted $35.0 million of cash as collateral at March 31, 2021. Customers records cash posted as collateral with these counterparties, except with a central clearing party, as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets. Disclosures about Offsetting Assets and Liabilities The following tables present derivative instruments that are subject to enforceable master netting arrangements. Customers' interest rate swaps and interest rate caps with institutional counterparties are subject to master netting arrangements and are included in the table below. Interest rate swaps and interest rate caps with commercial banking customers and residential mortgage loan commitments are not subject to master netting arrangements and are excluded from the table below. Customers has not made a policy election to offset its derivative positions.
| Gross Amounts Recognized on the Consolidated Balance Sheets |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheet |  |
(amounts in thousands) | Financial Instruments |  | Cash Collateral Received/(Posted) |  | Net Amount
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |
Interest rate derivative assets with institutional counterparties | $ | 98 |  |  |  |  |  |  | $ | — |  |  | $ | — |  |  | $ | 98 |
Interest rate derivative liabilities with institutional counterparties | $ | 35,017 |  |  |  |  |  |  | $ | — |  |  | $ | (35,017) |  |  | $ | — |
| Gross Amounts Recognized on the Consolidated Balance Sheets |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheet |  |
(amounts in thousands) | Financial Instruments |  | Cash Collateral Received/(Posted) |  | Net Amount
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |
Interest rate derivative assets with institutional counterparties | $ | 199 |  |  |  |  |  |  | $ | — |  |  | $ | — |  |  | $ | 199 |
Interest rate derivative liabilities with institutional counterparties | $ | 97,641 |  |  |  |  |  |  | $ | — |  |  | $ | (97,641) |  |  | $ | — |

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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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