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Derivative Financial Instruments and Hedging Activities | 9 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Hedging Activities | Derivative Financial Instruments and Hedging Activities Our hedging policy allows the use of interest rate derivative instruments to manage our exposure to interest rate risk or hedge specified assets and liabilities. These instruments may include interest rate swaps and interest rate caps and floors. All derivative instruments are carried on the balance sheet at their estimated fair value and are recorded in other assets or other liabilities, as appropriate. Derivative instruments may be designated as cash flow hedges of variable rate assets or liabilities, cash flow hedges of forecasted transactions, fair value hedges of a recognized asset or liability or as non-hedging instruments. Cash Flow Hedges Gains and losses on derivative instruments designated as cash flow hedges are recorded in AOCI to the extent they are effective. If the hedge is effective, the amount recorded in other comprehensive income is reclassified to interest expense in the same periods that the hedged cash flows impact earnings. We have entered into certain interest rate swap contracts on specific variable rate agreements and fixed rate short-term pay agreements with third parties. These interest rate swap contracts were designated as hedging instruments in cash flow hedges under ASC Topic 815. The objective of the interest rate swap contracts is to manage the expected future cash flows on $790.0 million of Bank liabilities. The cash flows from the swap contracts are expected to be highly effective in hedging the variability in future cash flows attributable to fluctuations in the underlying SOFR rate. In accordance with ASC Topic 815, if a hedging item is terminated prior to maturity for a cash settlement, the existing gain or loss within AOCI will continue to be reclassified into earnings during the period or periods in which the hedged forecasted transaction affects earnings unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. These transactions are reevaluated on a monthly basis to determine if the hedged forecasted transactions are still probable of occurring. If at a subsequent evaluation, it is determined that the transactions are probable of not occurring, any related gains or losses recorded in AOCI are immediately recognized in earnings. During the third quarter of 2024, we terminated three interest rate swap contracts designated as a cash flow hedge, and during the second quarter of 2023, we terminated one interest rate swap contract designated as a cash flow hedge. At the time of termination, we determined the hedged forecasted transactions were still probable of occurring. The existing loss in AOCI will be reclassified into earnings in the same periods the hedged forecasted transaction affects earnings. Fair Value Hedges Gains and losses on derivative instruments designated as fair value hedges, as well as the change in fair value of the hedged item, are recorded in interest income in the consolidated statements of income. Gains and losses due to changes in fair value of the interest rate swap agreements offset changes in the fair value of the hedged portion of the hedged item. During 2022, we entered into partial term fair value hedges for certain of our fixed rate callable AFS municipal securities. During 2024, we entered into partial term fair value hedges of fixed rate AFS MBS and fixed rate loans using the portfolio layer method. This approach allows us to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and other factors affecting the timing and amount of cash flows. The fair value portfolio level hedging adjustment on our hedged MBS portfolio and hedged loan portfolio has not been attributed to the individual AFS securities or individual loans in our balance sheet. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for us making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. During 2024 and 2023, we terminated some of our securities fair value hedging relationships and sold the majority of the hedged items. As a result of the sale, the cumulative adjustments to the carrying amount was a fair value net gain of $3.5 million and $6.5 million recognized in earnings and recorded in noninterest income during the nine months ended September 30, 2024 and year ended December 31, 2023, respectively. The following table presents the amounts recorded in the consolidated balance sheets related to the cumulative adjustments for fair value hedges (in thousands):
|  | Amortized Cost of Hedged Assets (2) |  | Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of the Hedged Items
|  | September 30, 2024 |  | December 31, 2023 |  | September 30, 2024 |  | December 31, 2023
Securities AFS (1) (3) |  | $ | 991,699 |  |  |  | $ | 487,486 |  |  | $ | 3,581 |  |  | $ | 13,642 |
Loans (1) (3) |  | 271,383 |  |  |  | — |  |  | (385) |  |  | — |
1) Amounts include the amortized cost basis of closed portfolios used to designate hedging relationships under the portfolio layer method. The hedged item is a layer of the closed portfolio which is expected to be remaining at the end of the hedging relationship. As of September 30, 2024, the amortized cost basis of the closed MBS portfolio used in these hedging relationships was $625.9 million, the amount of the designated hedged items were $201.0 million and the cumulative amount of fair value hedging adjustments associated with these MBS hedging relationships was a loss of $1.2 million. As of September 30, 2024, the amortized cost basis of the closed loan portfolio used in these hedging relationships was $271.4 million, the amount of the designated hedged items were $155.0 million and the cumulative amount of fair value hedging adjustments associated with these loan hedging relationships was a loss of $385,000. 2) Excludes fair value hedging adjustments. 3) Excluded from the table above are the cumulative amount of fair value hedging adjustments for securities AFS and loans for which hedge accounting has been discontinued in the amounts of a loss of $4.6 million and a loss of $4.2 million, respectively, at September 30, 2024. There were no discontinued hedges as of December 31, 2023. Derivatives Designated as Non-Hedging Instruments From time to time, we may enter into certain interest rate swaps, cap and floor contracts that are not designated as hedging instruments. These interest rate derivative contracts relate to transactions in which we enter into an interest rate swap, cap or floor with a customer while concurrently entering into an offsetting interest rate swap, cap or floor with a third-party financial institution. We agree to pay interest to the customer on a notional amount at a variable rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay a third-party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These interest rate derivative contracts allow our customers to effectively convert a variable rate loan to a fixed rate loan. The changes in the fair value of the underlying derivative contracts primarily offset each other and do not significantly impact our results of operations. We recognized swap fee income associated with these derivative contracts immediately based upon the difference in the bid/ask spread of the underlying transactions with the customer and the third-party financial institution. The swap fee income is included in other noninterest income in our consolidated statements of income. At September 30, 2024 and December 31, 2023, net derivative assets included $22.3 million and $46.8 million, respectively, of cash collateral received from counterparties under master netting agreements. The notional amounts of the derivative instruments represent the contractual cash flows pertaining to the underlying agreements. These amounts are not exchanged and are not reflected in the consolidated balance sheets. The fair value of the interest rate swaps are presented at net in other assets and other liabilities and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows when a right of offset exists, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement. The following tables present the notional and estimated fair value amount of derivative positions outstanding (in thousands):
|  | September 30, 2024 |  | December 31, 2023 |  |  |
|  |  |  | Estimated Fair Value |  |  |  | Estimated Fair Value |  |  |
|  | Notional Amount (1) |  | Asset Derivative |  | Liability Derivative |  | Notional Amount (1) |  | Asset Derivative |  | Liability Derivative |  |  |
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swaps-Cash Flow Hedge-Financial institution counterparties |  | $ | 790,000 |  |  | $ | 12,880 |  |  | $ | 6,054 |  |  | $ | 1,010,000 |  |  | $ | 24,223 |  |  | $ | 6,910 |  |  |  |
Swaps-Fair Value Hedge-Financial institution counterparties |  | 675,875 |  |  | 5,781 |  |  | 2,748 |  |  | 453,440 |  |  | 13,658 |  |  | 16 |  |  |  |
Derivatives designated as non-hedging instruments |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swaps-Financial institution counterparties |  | 241,446 |  |  | 14,355 |  |  | 649 |  |  | 248,073 |  |  | 18,249 |  |  | 509 |  |  |  |
Swaps-Customer counterparties |  | 241,446 |  |  | 649 |  |  | 14,355 |  |  | 248,073 |  |  | 509 |  |  | 18,249 |  |  |  |
Gross derivatives |  |  |  | 33,665 |  |  | 23,806 |  |  |  |  | 56,639 |  |  | 25,684 |  |  |  |
Offsetting derivative assets/liabilities |  |  |  | (9,451) |  |  | (9,451) |  |  |  |  | (7,435) |  |  | (7,435) |  |  |  |
Cash collateral received/posted |  |  |  | (22,300) |  |  | — |  |  |  |  | (46,760) |  |  | — |  |  |  |
Net derivatives included in the consolidated balance sheets (2) |  |  |  | $ | 1,914 |  |  | $ | 14,355 |  |  |  |  | $ | 2,444 |  |  | $ | 18,249 |  |  |  |
(1) Notional amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets. (2) Net derivative assets are included in other assets and net derivative liabilities are included in other liabilities on the consolidated balance sheets. Included in the fair value of net derivative assets and net derivative liabilities are credit valuation adjustments reflecting counterparty credit risk and our credit risk. At September 30, 2024, we had $1.3 million credit exposure related to interest rate swaps with financial institutions and $649,000 related to interest rate swaps with customers. At December 31, 2023, we had $1.9 million credit exposure related to interest rate swaps with financial institutions and $509,000 related to interest rate swaps with customers. The credit risk associated with customer transactions is partially mitigated as these are generally secured by the non-cash collateral securing the underlying transaction being hedged. The summarized expected weighted average remaining maturity of the notional amount of interest rate swaps and the weighted average interest rates associated with the amounts expected to be received or paid on interest rate swap agreements are presented below (dollars in thousands). Variable rates received on fixed pay swaps are based on overnight SOFR rates in effect at September 30, 2024 and December 31, 2023:
|  | September 30, 2024 |  | December 31, 2023
|  |  |  | Weighted Average |  |  |  | Weighted Average
|  | Notional Amount |  | Remaining Maturity (in years) |  | Receive Rate |  | Pay Rate |  | Notional Amount |  | Remaining Maturity (in years) |  | Receive Rate |  | Pay Rate
Swaps-Cash Flow hedge |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial institution counterparties |  | $ | 790,000 |  |  | 1.8 |  | 5.21 | % |  | 2.62 | % |  | $ | 1,010,000 |  |  | 2.3 |  | 5.44 | % |  | 2.65 | %
Swaps-Fair Value hedge |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial institution counterparties |  | 675,875 |  |  | 3.1 |  | 5.16 | % |  | 3.47 | % |  | 453,440 |  |  | 5.4 |  | 5.37 | % |  | 3.13 | %
Swaps-Non-hedging |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial institution counterparties |  | 241,446 |  |  | 6.7 |  | 5.48 | % |  | 2.86 | % |  | 248,073 |  |  | 7.4 |  | 5.84 | % |  | 2.88 | %
Customer counterparties |  | 241,446 |  |  | 6.7 |  | 2.86 | % |  | 5.48 | % |  | 248,073 |  |  | 7.4 |  | 2.88 | % |  | 5.84 | %
The following table presents amounts included in the consolidated statements of income related to interest rate swap agreements (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30,
| 2024 |  | 2023 | 2024 |  | 2023
Derivatives designated as hedging instruments |  |  |  |  |  |
Swaps-Cash Flow hedge |  |  |  |  |  |
Gain (loss) included in interest expense on deposits | $ | 3,587 |  |  | $ | 4,254 |  | $ | 11,436 |  |  | $ | 10,715 |
Gain (loss) included in interest expense on FHLB borrowings | 2,101 |  |  | 2,200 |  | 6,676 |  |  | 5,969 |
Gain (loss) included in interest expense on other borrowings | — |  |  | (46) |  | — |  |  | 886 |
| 5,688 |  |  | 6,408 |  | 18,112 |  |  | 17,570 |
Swaps-Fair Value hedge |  |  |  |  |  |
Gain (loss) included in interest income on tax-exempt investment securities | 2,142 |  |  | 3,651 |  | 7,245 |  |  | 9,329 |
Gain (loss) included in interest income on MBS | 488 |  |  | — |  | 754 |  |  | — |
Gain (loss) included in interest income on loans | 504 |  |  | — |  | 591 |  |  | — |
Derivatives designated as non-hedging instruments |  |  |  |  |  |
Swaps-Non-hedging |  |  |  |  |  |
Other noninterest income | — |  |  | — |  | 53 |  |  | 160 |

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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://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/815/tableOfContent + Details
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