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Derivative and Hedging Activities
 9 Months Ended
Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative and Hedging Activities Derivative and Hedging Activities
The Corporation is exposed to certain risk arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Corporation 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. The Corporation's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation's known or expected cash receipts and its known or expected cash payments principally related to the Corporation's assets.
The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. The Corporation is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. To mitigate the counterparty risk, contracts generally contain language outlining collateral pledging requirements for each counterparty. For non-centrally cleared derivatives, collateral must be posted when the market value exceeds certain mutually agreed upon threshold limits. Securities and cash are often pledged as collateral. The Corporation pledged $81 million and $71 million of investment securities as collateral at September 30, 2022 and December 31, 2021, respectively. The Corporation's required cash collateral was immaterial at September 30, 2022, compared to $11 million at December 31, 2021.
Federal regulations require the Corporation to clear all LIBOR and compound SOFR interest rate swaps through a clearing house, if possible. For derivatives cleared through central clearing houses, the variation margin payments are legally characterized as daily settlements of the derivative rather than collateral. The Corporation's clearing agent for interest rate derivative contracts that are centrally cleared through the Chicago Mercantile Exchange and the London Clearing House settles the variation margin daily. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. Depending on the net position, the fair value is reported in other assets or accrued expenses and other liabilities on the consolidated balance sheets. The daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument.
Fair Value Hedges of Interest Rate Risk
The Corporation is exposed to changes in the fair value of its fixed-rate debt due to changes in benchmark interest rates. The Corporation uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rates. Interest rate swaps designated as fair value hedges involve receiving payment of fixed-rate amounts from a counterparty in exchange for the Corporation paying 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, as allowed under U.S. GAAP, we applied the "shortcut" method of accounting, which permits the assumption of perfect effectiveness. 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 expense. These items, along with the net interest from the derivative, are reported in the same income statement line as the fixed-rate debt expense.
Derivatives to Accommodate Customer Needs
The Corporation facilitates customer borrowing activity by entering into various derivative contracts which are designated as free standing derivative contracts. Free standing derivative products are entered into primarily for the benefit of commercial customers seeking to manage their exposures to interest rate risk, foreign currency, and until early 2022, commodity prices. As of the end of the first quarter of 2022, the Corporation no longer had any outstanding commodity contracts. These derivative contracts are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and, therefore, do not qualify for hedge accounting treatment. Such derivative contracts are carried at fair value in other assets and accrued expenses and other liabilities on the consolidated balance sheets with changes in the fair value recorded as a component of capital markets, net, and typically include interest rate-related instruments (swaps and caps), foreign currency exchange forwards, and until the end of the first quarter of 2022, commodity contracts. See Note 11 for additional information and disclosures on balance sheet offsetting.
Interest rate-related and other instruments: The Corporation provides interest rate risk management services to commercial customers, primarily forward interest rate swaps and caps. The Corporation’s market risk from unfavorable movements in interest rates related to these derivative contracts is generally economically hedged by concurrently entering into offsetting derivative contracts. The offsetting derivative contracts have identical notional values, terms, and indices. The Corporation also enters into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in
which we are either a participant or a lead bank. The risk participation agreements entered into by the Corporation as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution.
Foreign currency exchange forwards: The Corporation provides foreign currency exchange services to customers, primarily forward contracts. The Corporation's customers enter into a foreign currency exchange forward with the Corporation as a means for them to mitigate exchange rate risk. The Corporation mitigates its risk by then entering into an offsetting foreign currency exchange derivative contract.
Commodity contracts: As of the end of the first quarter of 2022, the Corporation no longer had any outstanding commodity contracts. Historically, commodity contracts were entered into primarily for the benefit of commercial customers seeking to manage their exposure to fluctuating commodity prices. The Corporation mitigated its risk by then entering into an offsetting commodity derivative contract.
Mortgage Derivatives
Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments on residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded in other assets and accrued expenses and other liabilities on the consolidated balance sheets with the changes in fair value recorded as a component of mortgage banking, net on the consolidated statements of income.
Interest rate-related instruments for MSRs hedge: The fair value of the Corporation's MSRs asset changes in response to changes in primary mortgage loan rates and other assumptions. To mitigate the earnings volatility caused by changes in the fair value of MSRs, the Corporation designates certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs and are recorded in other assets and accrued expenses and other liabilities on the consolidated balance sheets with the changes in fair value recorded as a component of mortgage banking, net on the consolidated statements of income.
The following table presents the total notional amounts and gross fair values of the Corporation’s derivatives, as well as the balance sheet netting adjustments as of September 30, 2022 and December 31, 2021. The derivative assets and liabilities are presented on a gross basis prior to the application of bilateral collateral and master netting agreements, but after the variation margin payments with central clearing organizations have been applied as settlement, as applicable. Total derivative assets and liabilities are adjusted to take into consideration the effects of legally enforceable master netting agreements and cash collateral received or paid as of September 30, 2022 and December 31, 2021. The resulting net derivative asset and liability fair values are included in other assets and accrued expenses and other liabilities, respectively, on the consolidated balance sheets.
 Sep 30, 2022Dec 31, 2021
AssetLiabilityAssetLiability
($ in Thousands)Notional AmountFair ValueNotional AmountFair ValueNotional AmountFair ValueNotional AmountFair Value
Designated as hedging instruments
Interest rate-related instruments$— $— $850,000 $906 $— $— $— $— 
Not designated as hedging instruments
Interest rate-related and other instruments4,250,397 59,618 4,535,166 264,212 3,874,781 83,626 3,874,781 26,231 
Foreign currency exchange forwards482,983 10,109 458,140 9,524 490,057 5,490 478,745 5,441 
Commodity contracts— — — — 3,894 1,264 3,910 1,248 
Mortgage banking(a)(b)
41,327 3,492 88,000 403 133,990 2,647 245,016 — 
Total not designated as hedging instruments73,218 274,139 93,026 32,921 
Gross derivatives before netting73,218 275,045 93,026 32,921 
Less: Legally enforceable master netting agreements869 869 2,143 2,143 
Less: Cash collateral pledged/received63,699 — 1,313 11,357 
Total derivative instruments, after netting$8,650 $274,176 $89,570 $19,421 

(a) The notional amount of the mortgage derivative asset includes interest rate lock commitments, while the notional amount of the mortgage derivative liability includes forward commitments.
(b) At September 30, 2022, the mortgage derivative asset includes approximately $3 million of forward commitments fair value, while the mortgage derivative liability includes approximately $403,000 of interest rate lock commitments fair value. At December 31, 2021, the mortgage derivative asset included approximately $30,000 of forward commitments fair value.
The following table presents amounts that were recorded on the consolidated balance sheets related to cumulative basis adjustments for fair value hedges:
Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included
Carrying Amount of the Hedged Assets/(Liabilities)Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
($ in Thousands)September 30, 2022
Other long-term funding$(249,611)$389 
FHLB Advances(585,686)14,314 
Total$(835,297)$14,703 
The Corporation terminated its $500 million fair value hedge on loans and investment securities receivables during the fourth quarter of 2019. At September 30, 2022, the amortized cost basis of the closed portfolios which had previously been used in the terminated hedging relationship was $340 million and is included in loans on the consolidated balance sheets. This amount includes $2 million of hedging adjustments on the discontinued hedging relationships, which are not presented in the table above.
The table below identifies the effect of fair value hedge accounting on the Corporation's consolidated statements of income for the three and nine months ended September 30, 2022 and 2021:
Location and Amount Recognized on the Consolidated Statements of Income in
Fair Value and Cash Flow Hedging Relationships
Three months ended Sep 30,Nine Months Ended Sep 30,
2022202120222021
($ in Thousands)Interest Income Interest ExpenseInterest IncomeInterest IncomeInterest ExpenseInterest Income
Total amounts of income presented on the consolidated statements of income in which the effects of the fair value hedge are recorded$(120)$(380)$(292)$(428)$(380)$(1,128)
The effects of fair value hedging: Impact on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items (120)(14,703)(292)(428)(14,703)(1,128)
Derivatives designated as hedging instruments(a)
— 14,323 — — 14,323 — 
(a) Includes net settlements on the derivatives.
The table below identifies the effect of derivatives not designated as hedging instruments on the Corporation's consolidated statements of income for the three and nine months ended September 30, 2022 and 2021:
Consolidated Statements of Income Category of Gain / (Loss) 
Recognized in Income		Three Months Ended Sep 30,Nine Months Ended Sep 30,
($ in Thousands)2022202120222021
Derivative Instruments
Interest rate-related and other instruments — customer and mirror, netCapital markets, net$(33)$557 $548 $2,546 
Interest rate-related instruments — MSRs hedgeMortgage banking, net(3,547)— (12,559)— 
Foreign currency exchange forwardsCapital markets, net159 (8)536 109 
Commodity contractsCapital markets, net— (124)(16)(1,256)
Interest rate lock commitments (mortgage)Mortgage banking, net(1,389)(1,356)(3,020)(4,438)
Forward commitments (mortgage)Mortgage banking, net3,543 1,402 3,415 3,017