Derivative Financial Instruments

6 Months Ended

Jun. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

As part of our overall interest rate risk management, the Company enters into derivative instruments, including interest rate swaps, collars, caps, floors, foreign exchange contracts, risk participation agreements and mortgage banking derivatives. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

The tables below present the fair value of the Company’s derivative financial instruments at June 30, 2023 and December 31, 2022. The Company’s derivative assets and derivative liabilities are located within “Other assets” and “Other liabilities”, respectively, on the Company’s Consolidated Statements of Financial Condition.


	June 30, 2023
	Notional Amount		Fair Value(1)
			Other Assets		Other Liabilities
	(Dollars in thousands)
Derivatives designated as cash flow hedges
Interest rate swaps	$	925,000	$	—	$	—

Forward interest rate collars	500,000		—		4,812
Total	$	1,425,000	$	—	$	4,812

Derivatives not designated as hedges
Interest rate contracts with correspondent banks	$	1,589,746	$	70,165	$	351
Interest rate contracts with customers	1,263,725		351		72,489
Foreign exchange contracts with correspondent banks	5,691		90		24
Foreign exchange contracts with customers	5,691		30		81
Risk participation agreement	132,117		—		28
Mortgage banking derivatives	3,750		25		4
Total	$	3,000,720	$	70,661	$	72,977

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(1) The fair values of centrally-cleared derivative contracts are presented net of settled-to-market margin.


	December 31, 2022
	Notional Amount		Fair Value
			Other Assets		Other Liabilities
	(Dollars in thousands)
Derivatives designated as cash flow hedges
Interest rate swaps	$	614,000	$	19,773	$	1,227
Forward interest rate swaps	111,000		5,428		—
Forward interest rate collars	500,000		182		828
Total	$	1,225,000	$	25,383	$	2,055

Derivatives not designated as hedges
Interest rate contracts with correspondent banks	$	1,013,407	$	73,059	$	330
Interest rate contracts with customers	1,013,407		330		73,059
Foreign exchange contracts with correspondent banks	2,359		79		—
Foreign exchange contracts with customers	2,359		—		73
Risk participation agreement	134,282		—		32
Mortgage banking derivatives	2,801		29		23
Total	$	2,168,615	$	73,497	$	73,517

Derivatives designated as cash flow hedges

The Company had 19 interest rate contracts at June 30, 2023, with a total notional amount of $1.43 billion designated as cash flow hedges of liabilities tied to LIBOR and Federal Funds. The designated hedged interest rate swap agreements consisted of 17 non-forward starting interest rate swaps with a notional amount of $925.0 million and a weighted average term of 2.8 years, and two forward starting interest rate options with dealers (collars) with a notional amount of $500.0 million and an average weighted term of 3.5 years.

The Company had 17 interest rate contracts at December 31, 2022, with a total notional amount of $1.23 billion designated as cash flow hedges of liabilities tied to LIBOR and Federal Funds. The designated hedged interest rate swap contracts consisted of 13 non-forward starting interest rate swaps with a notional amount of $614.0 million and a weighted average term of 4.1 years, two forward starting interest rate swaps with a notional amount of $111.0 million and a weighted average term of 3.9 years, and two forward starting interest rate options with dealers (collars) with a notional amount of $500.0 million and an average weighted term of 3.0 years.

The Company’s interest rate contracts designated as cash flow hedges were determined to be fully effective during the periods presented. The aggregate fair value of the cash flow hedges are recorded in assets or liabilities with changes in fair value recorded in other comprehensive income. The gain or loss on derivatives is recorded in AOCI and is subsequently reclassified into interest income and interest expense in the period, during which the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to interest rate agreements will be reclassified to interest income and interest expense as interest payments are received or paid on the Company’s derivatives. The Company expects the hedges to remain fully effective throughout the remaining terms. The Company expects to reclassify approximately $16.8 million from AOCI as a decrease to interest expense during the next 12 months.

For the three and six months ended June 30, 2023, the Company reclassified gains of $4.1 million and gains of $6.9 million, respectively, from accumulated other comprehensive income to interest expense. For the three and six months ended June 30, 2022, the Company reclassified losses of $114 thousand and $50 thousand, respectively, from accumulated other comprehensive income to interest expense.

Derivatives not designated as hedges

The Company’s derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers.

The Company offers a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a correspondent bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer interest rate contracts are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. The change in fair value is recognized in the income statement as other income and fees. The Company is required to hold cash as collateral for the interest rate contracts that are not centrally cleared, which is recorded in other assets on the consolidated statement of financial condition. Total cash held as collateral for back-to-back interest rate contracts was $9.1 million at June 30, 2023, and $9.1 million at December 31, 2022.

The Company offers foreign exchange contracts to customers to purchase and/or sell foreign currencies at set rates in the future. The foreign exchange contracts allow customers to hedge the foreign exchange rate risk of their deposits and loans denominated in foreign currencies. In conjunction with this, the Company also enters into offsetting back-to-back contracts with institutional counterparties to hedge our foreign exchange rate risk. These back-to-back contracts are intended to offset each other and allow us to offer our customers foreign exchange products. These foreign exchange contracts are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. During the three and six months ended June 30, 2023, the changes in fair value on foreign exchange contracts were losses of $3 thousand and $9 thousand, respectively, and were recognized in the income statement as other income and fees. During the three and six months ended June 30, 2022, the changes in fair value on foreign exchange contracts were $0 and $0, respectively.

At June 30, 2023, the Company had risk participation agreements with an outside counterparty for an interest rate swap related to a loan in which it is a participant. The risk participation agreement provides credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract. Risk participation agreements are credit derivatives not designated as hedges. Credit derivatives are not speculative and are not used to manage interest rate risk in assets or liabilities. Changes in the fair value in credit derivatives are recognized directly in earnings. The fee received, less the estimate of the loss for credit exposure, was recognized in earnings at the time of the transaction. At June 30, 2023, the notional amount of the risk participation agreements sold was $132.1 million with a credit valuation adjustment of $28 thousand. At December 31, 2022, the notional amount of the risk participation agreements sold was $134.3 million with a credit valuation adjustment of $32 thousand.

The Company enters into various stand-alone mortgage-banking derivatives in order to hedge the risk associated with the fluctuation of interest rates. Changes in fair value are recorded as mortgage banking revenue. Residential mortgage loans funded with interest rate lock commitments and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. At June 30, 2023, the Company had approximately $3.8 million in interest rate lock commitments and total forward sales commitments for the future delivery of residential mortgage loans. At December 31, 2022, the Company had approximately $2.8 million in interest rate lock commitments and total forward sales commitments for the future delivery of residential mortgage loans.