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Derivative Instruments and Hedging Activities | 9 Months Ended
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Sep. 30, 2022
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 an accommodation 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 these objectives, 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 AOCI 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. 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 AOCI are reclassified immediately into earnings and any subsequent changes in the fair value of such derivatives are recognized directly in earnings. During the nine months ended September 30, 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. Customers hedged its exposure to the variability in future cash flows for a variable-rate deposit, which matured in June 2021. At September 30, 2022 and December 31, 2021, Customers had no interest rate derivative designated as cash flow hedges of interest rate risk. 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 September 30, 2022, Customers had three outstanding interest rate derivatives with notional amounts totaling $22.5 million that were designated as fair value hedges of certain AFS debt securities. During the three and nine months ended September 30, 2022, Customers terminated four and thirteen interest rate derivatives with notional amounts totaling $10.0 million and $58.0 million, respectively, that were designated as fair value hedges together with the sale of hedged AFS debt securities. During the nine months ended September 30, 2021, Customers terminated eight interest rate derivatives with notional amounts totaling $191.8 million that were designated as fair value hedges together with the sale of hedged AFS debt securities. At December 31, 2021, Customers had 16 outstanding interest rate derivatives with notional amounts totaling $80.5 million designated as fair value hedges. As of September 30, 2022, 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) |  | September 30, 2022 |  | December 31, 2021 |  | September 30, 2022 |  | December 31, 2021
AFS debt securities |  | $ | 22,500 |  |  | $ | 80,500 |  |  | $ | 1,885 |  |  | $ | 1,750 |
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 September 30, 2022, Customers had 147 interest rate swaps with an aggregate notional amount of $1.3 billion and 12 interest rate caps with an aggregated notional amount of $242.3 million related to this program. At December 31, 2021, Customers had 153 interest rate swaps with an aggregate notional amount of $1.4 billion and 14 interest rate caps with an aggregate notional amount of $264.7 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 September 30, 2022 and December 31, 2021, Customers had an aggregate notional amount of residential mortgage loan commitments of $1.8 million and $8.2 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 recorded directly in earnings. At September 30, 2022 and December 31, 2021, Customers had an aggregate notional amount of credit derivatives of $143.1 million and $129.9 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 consolidated balance sheets as of September 30, 2022 and December 31, 2021.
|  | September 30, 2022
|  | Derivative Assets |  | Derivative Liabilities
(amounts in thousands) |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivatives designated as fair value hedges: |  |  |  |  |  |  |  |
Interest rate swaps |  | Other assets |  | $ | 1,885 |  |  | Other liabilities |  | $ | — |
Total |  |  |  | $ | 1,885 |  |  |  |  | $ | — |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Interest rate swaps and caps |  | Other assets |  | $ | 44,492 |  |  | Other liabilities |  | $ | 43,727 |
Credit contracts |  | Other assets |  | 33 |  |  | Other liabilities |  | — |
Residential mortgage loan commitments |  | Other assets |  | 41 |  |  | Other liabilities |  | — |
Total |  |  |  | $ | 44,566 |  |  |  |  | $ | 43,727 |
|  | December 31, 2021
|  | Derivative Assets |  | Derivative Liabilities
(amounts in thousands) |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivatives designated as fair value hedges: |  |  |  |  |  |  |  |
Interest rate swaps |  | Other assets |  | $ | 1,750 |  |  | Other liabilities |  | $ | — |
Total |  |  |  | $ | 1,750 |  |  |  |  | $ | — |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Interest rate swaps and caps |  | Other assets |  | $ | 25,235 |  |  | Other liabilities |  | $ | 26,343 |
Credit contracts |  | Other assets |  | 131 |  |  | Other liabilities |  | 201 |
Residential mortgage loan commitments |  | Other assets |  | 179 |  |  | Other liabilities |  | — |
Total |  |  |  | $ | 25,545 |  |  |  |  | $ | 26,544 |
Effect of Derivative Instruments on Net Income The following table presents 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 and nine months ended September 30, 2022 and 2021.
|  |  | Amount of Income (Loss) Recognized in Earnings
|  |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(amounts in thousands) | Income Statement Location |  | 2022 |  | 2021 |  | 2022 |  | 2021
Derivatives designated as fair value hedges: |  |  |  |  |  |  |  |
Recognized on interest rate swaps | Net interest income |  | $ | 510 |  |  | $ | — |  |  | $ | 3,530 |  |  | $ | 4,777 |
Recognized on hedged AFS debt securities | Net interest income |  | (510) |  |  | — |  |  | (3,530) |  |  | (4,777) |
Total |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Interest rate swaps and caps | Non-interest income (1) |  | $ | 503 |  |  | $ | 517 |  |  | $ | 2,244 |  |  | $ | 2,540 |
Credit contracts | Non-interest income (1) |  | 60 |  |  | 7 |  |  | 104 |  |  | 81 |
Residential mortgage loan commitments | Non-interest income (2) |  | (57) |  |  | (138) |  |  | (139) |  |  | (37) |
Total |  |  | $ | 506 |  |  | $ | 386 |  |  | $ | 2,209 |  |  | $ | 2,584 |
(1) Included in unrealized gain (loss) on derivatives. (2) Included in mortgage banking income. Effect of Derivative Instruments on Comprehensive Income The following tables present the effect of Customers' derivative financial instruments on comprehensive income for the three and nine months ended September 30, 2022 and 2021.
| 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 September 30, |  |  |  | Three Months Ended September 30,
(amounts in thousands) | 2022 |  | 2021 |  |  |  | 2022 |  | 2021
Derivatives in cash flow hedging relationships: |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | — |  |  | $ | — |  |  | Interest expense |  | $ | — |  |  | $ | — |
|  |  |  |  | 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
|  |  |  |  | Nine Months Ended September 30, |  |  |  |  |  |  |  | Nine Months Ended September 30,
(amounts in thousands) |  |  |  |  | 2022 |  | 2021 |  |  |  |  |  |  |  | 2022 |  | 2021
Derivatives in cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  |  |  | $ | — |  |  | $ | 9,117 |  |  | Interest expense |  |  |  |  |  | $ | — |  |  | $ | (2,505) |
|  |  |  |  |  |  |  |  | Non-interest income (2) |  |  |  |  |  | — |  |  | (24,467) |
|  |  |  |  |  |  |  |  | Total |  |  |  |  |  | $ | — |  |  | $ | (26,972) |
(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. (2) Included in loss on cash flow hedge derivative terminations. 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 September 30, 2022, the fair value of derivatives in a net asset position (which includes accrued interest but excludes any adjustment for nonperformance-risk) related to these agreements was $31.5 million. In addition, Customers, which has collateral posting thresholds with certain of these counterparties, had received $29.8 million of cash as collateral at September 30, 2022. Customers records cash posted or received as collateral with these counterparties, except with a central clearing entity, as a reduction or an increase in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets or other liabilities. 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 tables 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 tables 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 |  | Net Amount
(amounts in thousands) | Financial Instruments |  | Cash Collateral Received/Posted |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |
Interest rate derivative assets with institutional counterparties | $ | 31,495 |  |  |  |  |  |  | $ | — |  |  | $ | (31,495) |  |  | $ | — |
Interest rate derivative liabilities with institutional counterparties | $ | — |  |  |  |  |  |  | $ | — |  |  | $ | — |  |  | $ | — |
| Gross Amounts Recognized on the Consolidated Balance Sheets |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheet |  | Net Amount
(amounts in thousands) | Financial Instruments |  | Cash Collateral Received/Posted |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |
Interest rate derivative assets with institutional counterparties | $ | — |  |  |  |  |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Interest rate derivative liabilities with institutional counterparties | $ | 23,348 |  |  |  |  |  |  | $ | — |  |  | $ | (23,348) |  |  | $ | — |

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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 https://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 https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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