Derivatives and Hedging Activities

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

Derivatives and Hedging Activities

The table below presents the fair value of derivative financial instruments as of the dates indicated as well as their classification on the consolidated balance sheets (in thousands):

	December 31, 2022						December 31, 2021
	Notional Amount		Fair Value				Notional Amount		Fair Value
			Derivative Assets		Derivative Liabilities				Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments:
Cash flow hedge of subordinated debt	$	100,000	$	16,191	$	—	$	100,000	$	6,389	$	—
Cash flow hedge of trust preferred securities	20,000		—		—		20,000		—		—
Fair value hedge of brokered CDs	—		—		—		10,000		—		—
Total	120,000		16,191		—		130,000		6,389		—
Derivatives not designated as hedging instruments:
Customer derivative positions	1,097,578		341		86,358		1,206,145		28,656		10,663
Dealer offsets to customer derivative positions	1,097,578		22,393		274		1,230,885		974		9,232
Risk participations	88,586		15		1		69,385		16		7
Mortgage banking - loan commitment	19,685		394		—		110,897		3,450		—
Mortgage banking - forward sales commitment	49,750		198		71		201,419		67		202
Bifurcated embedded derivatives	51,935		11,104		—		51,935		2,928		—
Dealer offsets to bifurcated embedded derivatives	51,935		—		12,839		51,935		—		5,041
Total	2,457,047		34,445		99,543		2,922,601		36,091		25,145
Total derivatives	$	2,577,047	$	50,636	$	99,543	$	3,052,601	$	42,480	$	25,145
Total gross derivative instruments			$	50,636	$	99,543			$	42,480	$	25,145
Less: Amounts subject to master netting agreements			(346)		(346)				(694)		(694)
Less: Cash collateral received/pledged			(38,386)		(13,089)				(6,620)		(14,148)
Net amount			$	11,904	$	86,108			$	35,166	$	10,303

United clears certain derivatives centrally through the CME. CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives’ exposure rather than as collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting purposes. Variation margin, as determined by the CME, is settled daily. As a result, derivative contracts that clear through the CME have an estimated fair value of zero.

Hedging Derivatives

Cash Flow Hedges of Interest Rate Risk

United enters into cash flow hedges to mitigate exposure to the variability of future cash flows or other forecasted transactions. At December 31, 2022 and 2021, United utilized interest rate caps and swaps to hedge the variability of cash flows due to changes in interest rates on certain of its variable-rate subordinated debt and trust preferred securities. United considers these derivatives to be highly effective at achieving offsetting changes in cash flows attributable to changes in interest rates. Therefore, changes in the fair value of these derivative instruments are recognized in OCI. Gains and losses related to changes in fair value are reclassified into earnings in the periods the hedged forecasted transactions occur. Losses representing amortization of the premium recorded on cash flow hedges, which is a component excluded from the assessment of effectiveness, are recognized in earnings on a straight-line basis in the same financial statement line as the hedged item over the term of the hedge. Over the next twelve months, United expects to reclassify $4.51 million of gains from AOCI into earnings related to these agreements.

Fair Value Hedges of Interest Rate Risk

United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. 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 earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives.

At December 31, 2021, United had an interest rate swap that was designated as a fair value hedge of fixed-rate brokered time deposits. During the first quarter of 2022, the hedged brokered deposit and the associated swap matured. The swap involved the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreement. As of December 31, 2021, the carrying amount of the hedged fixed-rate brokered time deposit and the positive cumulative fair value hedging adjustment included in the carrying amount of the hedged liability were $10.0 million and $28,000, respectively.

The table below presents the effect of derivatives in hedging relationships on the consolidated statements of income (in thousands).

	Year Ended December 31,
	2022		2021		2020
Total interest expense presented in the consolidated statements of income	$	(60,798)	$	(29,760)	$	(56,237)
Effect of hedging relationships on interest expense:
Net income recognized on fair value hedges	28		210		281
Net expense recognized on cash flow hedges (1)	(269)		(608)		(359)

(1) Includes $472,000, $472,000 and $329,000 of premium amortization expense excluded from the assessment of hedge effectiveness for the years ended December 31, 2022, 2021 and 2020, respectively.

Derivatives Not Designated as Hedging Instruments

Customer derivative positions include swaps, caps, and collars between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back program. In addition, United occasionally enters into credit risk participation agreements with counterparty banks to accept or transfer a portion of the credit risk related to interest rate swaps. The agreements, which are typically executed in conjunction with a participation in a loan with the same customer, allow customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members.

United also has three interest rate swap contracts that are economic hedges of market-linked brokered certificates of deposit, but are not designated as hedging instruments. The market-linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and marked to market through earnings. The fair value marks on the market linked swaps and the bifurcated embedded derivatives tend to move in opposite directions and therefore provide an economic hedge.

In addition, United originates certain residential mortgage loans with the intention of selling these loans. Between the time United enters into an interest-rate lock commitment to originate a residential mortgage loan that is to be held for sale and the time the loan is funded and eventually sold, United is subject to the risk of variability in market prices. United also enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. Fair value adjustments on these derivative instruments are recorded within mortgage loan gains and related fees in the consolidated statements of income.

The table below presents the gains and losses recognized in income on derivatives not designated as hedging instruments for the periods indicated (in thousands). 

	Income Statement Location	Year Ended December 31,
		2022		2021		2020
Customer derivatives and dealer offsets	Other noninterest income	$	2,063	$	3,302	$	6,732
Bifurcated embedded derivatives and dealer offsets	Other noninterest income	90		433		(63)
Mortgage banking derivatives	Mortgage loan revenue	8,144		(1,805)		(7,873)
Risk participations	Other noninterest income	104		(90)		(340)
Total gains and losses		$	10,401	$	1,840	$	(1,544)

Credit-risk-related Contingent Features

United manages its credit exposure on derivative transactions by entering into a bilateral credit support agreement with each non-customer counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty.

United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivative counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that provide that if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements. Derivatives that are centrally cleared do not have credit-risk-related features that require additional collateral if United’s credit rating were downgraded.