Derivative Financial Instruments

6 Months Ended

Jun. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Positions and Offsetting

Derivatives Designated as Hedging Instruments. Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. Certain pay fixed/receive variable interest rate swaps are designated as cash flow hedges to effectively convert variable-rate debt into fixed-rate debt, whereas certain receive fixed/pay variable interest rate swaps are designated as fair value hedges to effectively convert fixed-rate long-term debt into variable-rate debt. Certain purchased options are also designated as cash flow hedges. Purchased options allow the Company to limit the potential adverse impact of variable interest rates by establishing a cap rate or floor rate in exchange for an upfront premium. The purchased options designated as cash flow hedges represent interest rate caps where payment is received from the counterparty if interest rates rise above the cap rate, and interest rate floors where payment is received from the counterparty when interest rates fall below the floor rate.

Derivatives Not Designated as Hedging Instruments. The Company also enters into other derivative transactions to manage economic risks, but does not designate the instruments in hedge relationships. In addition, the Company enters into derivative contracts to accommodate customer needs. Derivative contracts with customers are offset with dealer counterparty transactions structured with matching terms to ensure minimal impact on earnings.

The following tables present the notional amounts and fair values, including accrued interest, of derivative positions:


	At June 30, 2023
	Asset Derivatives				Liability Derivatives
(In thousands)	Notional Amounts		Fair Value		Notional Amounts		Fair Value
Designated as hedging instruments:
Interest rate derivatives (1)	$	1,000,000	$	453	$	4,750,000	$	46,087
Not designated as hedging instruments:
Interest rate derivatives (1)	7,322,980		375,350		7,329,236		387,261
Mortgage banking derivatives (2)	798		5		—		—
Other (3)	230,315		153		683,669		348
Total not designated as hedging instruments	7,554,093		375,508		8,012,905		387,609
Gross derivative instruments, before netting	$	8,554,093	375,961		$	12,762,905	433,696
Less: Master netting agreements			52,273				52,273
Cash collateral			311,774				—
Total derivative instruments, after netting			$	11,914			$	381,423

	At December 31, 2022
	Asset Derivatives				Liability Derivatives
(In thousands)	Notional Amounts		Fair Value		Notional Amounts		Fair Value
Designated as hedging instruments:
Interest rate derivatives (1)	$	1,350,000	$	1,515	$	1,750,000	$	9,632
Not designated as hedging instruments:
Interest rate derivatives (1)	7,024,507		221,225		7,022,844		403,952
Mortgage banking derivatives (2)	3,283		32		—		—
Other (3)	161,934		134		606,478		915
Total not designated as hedging instruments	7,189,724		221,391		7,629,322		404,867
Gross derivative instruments, before netting	$	8,539,724	222,906		$	9,379,322	414,499
Less: Master netting agreements			16,129				16,129
Cash collateral			184,095				—
Total derivative instruments, after netting			$	22,682			$	398,370

(1)Balances related to clearing houses are presented as a single unit of account. In accordance with their rule books, clearing houses legally characterize variation margin payments as settlement of derivatives rather than collateral against derivative positions. At June 30, 2023, and December 31, 2022, notional amounts of interest rate swaps cleared through clearing houses include $0.6 billion and $2.7 billion for asset derivatives, respectively, and $0.1 billion and zero for liability derivatives, respectively. The related fair values approximate zero.

(2)Notional amounts related to residential loans exclude approved floating rate commitments of $4.1 million and $2.4 million at June 30, 2023, and December 31, 2022, respectively.

(3)Other derivatives include foreign currency forward contracts related to lending arrangements, a Visa equity swap transaction, and risk participation agreements. Notional amounts of risk participation agreements include $201.7 million and $125.6 million for asset derivatives and $648.2 million and $559.2 million for liability derivatives at June 30, 2023, and December 31, 2022, respectively, which have insignificant related fair values.

The following tables present fair value positions transitioned from gross to net upon applying counterparty netting agreements:


	At June 30, 2023
(In thousands)	Gross Amount Recognized		Derivative Offset Amount		Cash Collateral Received/Pledged		Net Amount Presented		Amounts Not Offset
Asset derivatives	$	370,140	$	52,273	$	311,774	$	6,093	$	6,112
Liability derivatives	52,273		52,273		—		—		3,386

	At December 31, 2022
(In thousands)	Gross Amount Recognized		Derivative Offset Amount		Cash Collateral Received/Pledged		Net Amount Presented		Amounts Not Offset
Asset derivatives	$	217,246	$	16,129	$	184,095	$	17,022	$	17,392
Liability derivatives	16,129		16,129		—		—		1,545

Derivative Activity

The following table summarizes the income statement effect of derivatives designated as hedging instruments:


	Recognized In	Three months ended June 30,				Six months ended June 30,
(In thousands)	Net Interest Income	2023		2022		2023		2022
Fair value hedges:
Interest rate derivatives	Deposits interest expense	$	10,928	$	—	$	693	$	—
Hedged item	Deposits interest expense	(10,152)		—		275		—
Net recognized on fair value hedges		$	(776)	$	—	$	(968)	$	—
Cash flow hedges:
Interest rate derivatives	Long-term debt interest expense	$	99	$	77	$	175	$	153
Interest rate derivatives	Interest and fees on loans and leases	(724)		1,244		(1,460)		3,803
Net recognized on cash flow hedges		$	(823)	$	1,167	$	(1,635)	$	3,650

The following table summarizes information related to fair value hedging adjustments:


Condensed Consolidated Balance Sheet Line Item in Which Hedged Item is Located	Carrying Amount of Hedged Item				Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount
(In thousands)	At June 30, 2023		At December 31, 2022		At June 30, 2023		At December 31, 2022
Deposits	$	400,275	$	—	$	275	$	—
Long-term debt (1)	330,781		333,458		30,781		33,458

(1)The Company de-designated its fair value hedging relationship on its long-term debt in 2020. The basis adjustment included in the carrying amount is being amortized into interest expense over the remaining life of the long-term debt.

The following table summarizes the income statement effect of derivatives not designated as hedging instruments:


	Recognized In	Three months ended June 30,				Six months ended June 30,
(In thousands)	Non-interest Income	2023		2022		2023		2022
Interest rate derivatives	Other income	$	(194)	$	12,814	$	(3,881)	$	19,259
Mortgage banking derivatives	Mortgage banking activities	(12)		(29)		(28)		(78)
Other	Other income	(921)		1,027		(1,656)		1,424
Total not designated as hedging instruments		$	(1,127)	$	13,812	$	(5,565)	$	20,605

Time-value premiums, which are amortized on a straight-line basis, are excluded from the assessment of hedge effectiveness for purchased options designated as cash flow hedges. At June 30, 2023, the remaining unamortized balance of time-value premiums was $1.4 million. Over the next twelve months, an estimated decrease to interest income of $34.4 million will be reclassified from AOCI relating to cash flow hedge gain/loss, and an estimated increase to interest expense of $0.2 million will be reclassified from AOCI relating to cash flow hedge terminations. At June 30, 2023, the remaining unamortized loss on terminated cash flow hedges was $0.2 million. The maximum length of time over which forecasted transactions are hedged is 4.7 years. Additional information regarding cash flow hedge activity impacting AOCI and the related amounts reclassified to net income can be found within Note 9: Accumulated Other Comprehensive (Loss) Income, Net of Tax.

Derivative Exposure. At June 30, 2023, the Company had $4.6 million in initial margin collateral posted at clearing houses. In addition, $315.2 million of cash collateral received is included in Cash and due from banks on the accompanying Condensed Consolidated Balance Sheets. The Company regularly evaluates the credit risk of its derivative customers, taking into account the likelihood of default, net exposures, and remaining contractual life, among other related factors. Credit risk exposure is mitigated as transactions with customers are generally secured by the same collateral of the underlying transactions. Current net credit exposure relating to derivatives with the Bank's customers was $5.8 million at June 30, 2023. In addition, the Company monitors potential future exposure, representing its best estimate of exposure to remaining contractual maturity. The potential future exposure relating to derivatives with the Bank's customers totaled $101.8 million at June 30, 2023. The Company has incorporated a valuation adjustment to reflect non-performance risk in the fair value measurement of its derivatives, which totaled $6.6 million and $8.4 million at June 30, 2023, and December 31, 2022, respectively. Various factors impact changes in the valuation adjustment over time, such as changes in the credit spreads of the contracted parties, and changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.