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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Derivative Financial Instruments The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued interest payable and other liabilities in the accompanying consolidated balance sheets and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows. Interest Rate Derivatives. We utilize interest rate swaps, caps, swaptions and floors to mitigate exposure to interest rate risk and to facilitate the needs of our customers. Our objectives for utilizing these derivative instruments are described in our 2021 Form 10-K. The notional amounts and estimated fair values of interest rate derivative contracts are presented in the following table. The fair values of interest rate derivative contracts are estimated utilizing internal valuation methods with observable market data inputs, or as determined by the Chicago Mercantile Exchange (“CME”) for centrally cleared derivative contracts. CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives' exposure rather than collateral. 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. 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 as of September 30, 2022 and December 31, 2021.
| September 30, 2022 |  | December 31, 2021
| Notional Amount |  | Estimated Fair Value |  | Notional Amount |  | Estimated Fair Value
Derivatives designated as hedges of fair value: |  |  |  |  |  |  |
Financial institution counterparties: |  |  |  |  |  |  |
Loan/lease interest rate swaps – assets | $ | 1,679 |  |  | $ | 25 |  |  | $ | — |  |  | $ | — |
Loan/lease interest rate swaps – liabilities | — |  |  | — |  |  | 2,426 |  |  | (34) |
Non-hedging interest rate derivatives: |  |  |  |  |  |  |
Financial institution counterparties: |  |  |  |  |  |  |
Loan/lease interest rate swaps – assets | 1,229,040 |  |  | 61,992 |  |  | 247,592 |  |  | 1,207 |
Loan/lease interest rate swaps – liabilities | 126,112 |  |  | (1,088) |  |  | 928,756 |  |  | (19,142) |
Loan/lease interest rate caps – assets | 243,840 |  |  | 15,777 |  |  | 270,431 |  |  | 3,239 |
Customer counterparties: |  |  |  |  |  |  |
Loan/lease interest rate swaps – assets | 67,780 |  |  | 1,104 |  |  | 928,756 |  |  | 39,864 |
Loan/lease interest rate swaps – liabilities | 1,185,815 |  |  | (82,228) |  |  | 247,592 |  |  | (2,846) |
Loan/lease interest rate caps – liabilities | 243,840 |  |  | (15,777) |  |  | 270,431 |  |  | (3,239) |
The weighted-average rates paid and received for interest rate swaps outstanding at September 30, 2022 were as follows:
| Weighted-Average
| Interest Rate Paid |  | Interest Rate Received
Interest rate swaps: |  |  |
Fair value hedge loan/lease interest rate swaps | 1.58 | % |  | 2.56 | %
Non-hedging interest rate swaps – financial institution counterparties | 3.74 |  |  | 4.23 |
Non-hedging interest rate swaps – customer counterparties | 4.21 |  |  | 3.73 |
The weighted-average strike rate for outstanding interest rate caps was 3.29% at September 30, 2022. Commodity Derivatives. We enter into commodity swaps and option contracts that are not designated as hedging instruments primarily to accommodate the business needs of our customers. Upon the origination of a commodity swap or option contract with a customer, we simultaneously enter into an offsetting contract with a third party financial institution to mitigate the exposure to fluctuations in commodity prices. The notional amounts and estimated fair values of non-hedging commodity swap and option derivative positions outstanding are presented in the following table. We obtain dealer quotations and use internal valuation methods with observable market data inputs to value our commodity derivative positions.
|  |  | September 30, 2022 |  | December 31, 2021
| Notional Units |  | Notional Amount |  | Estimated Fair Value |  | Notional Amount |  | Estimated Fair Value
Financial institution counterparties: |  |  |  |  |  |  |  |  |
Oil – assets | Barrels |  | 4,467 |  |  | $ | 45,381 |  |  | 4,809 |  |  | $ | 14,721 |
Oil – liabilities | Barrels |  | 6,987 |  |  | (55,645) |  |  | 7,032 |  |  | (73,594) |
Natural gas – assets | MMBTUs |  | 13,406 |  |  | 4,033 |  |  | 15,947 |  |  | 4,143 |
Natural gas – liabilities | MMBTUs |  | 20,489 |  |  | (40,049) |  |  | 29,446 |  |  | (21,249) |
Customer counterparties: |  |  |  |  |  |  |  |  |
Oil – assets | Barrels |  | 7,006 |  |  | 56,366 |  |  | 7,046 |  |  | 74,437 |
Oil – liabilities | Barrels |  | 4,448 |  |  | (44,674) |  |  | 4,796 |  |  | (14,294) |
Natural gas – assets | MMBTUs |  | 20,489 |  |  | 40,153 |  |  | 29,446 |  |  | 21,456 |
Natural gas – liabilities | MMBTUs |  | 13,406 |  |  | (4,017) |  |  | 15,947 |  |  | (4,124) |
Foreign Currency Derivatives. We enter into foreign currency forward and option contracts that are not designated as hedging instruments primarily to accommodate the business needs of our customers. Upon the origination of a foreign currency denominated transaction with a customer, we simultaneously enter into an offsetting contract with a third party financial institution to negate the exposure to fluctuations in foreign currency exchange rates. We also utilize foreign currency forward contracts and options that are not designated as hedging instruments to mitigate the economic effect of fluctuations in foreign currency exchange rates on foreign currency holdings and certain short-term, non-U.S. dollar denominated loans. The notional amounts and fair values of open foreign currency forward and option contracts were as follows:
|  |  | September 30, 2022 |  | December 31, 2021
| Notional Currency |  | Notional Amount |  | Estimated Fair Value |  | Notional Amount |  | Estimated Fair Value
Financial institution counterparties: |  |  |  |  |  |  |  |  |
Forward and option contracts – assets | EUR |  | 2,925 |  |  | $ | 1 |  |  | 1,900 |  |  | $ | 29 |
Forward and option contracts – assets | CAD |  | — |  |  | — |  |  | 658 |  |  | — |
Forward and option contracts – liabilities | EUR |  | 2,925 |  |  | (251) |  |  | — |  |  | — |
Customer counterparties: |  |  |  |  |  |  |  |  |
Forward and option contracts – assets | EUR |  | 2,925 |  |  | 251 |  |  | — |  |  | — |
Forward and option contracts – assets | CAD |  | — |  |  | — |  |  | 658 |  |  | 4 |
Forward and option contracts – liabilities | EUR |  | 2,925 |  |  | (1) |  |  | 1,900 |  |  | (55) |
Gains, Losses and Derivative Cash Flows. For fair value hedges, the changes in the fair value of both the derivative hedging instrument and the hedged item are included in other non-interest income or other non-interest expense. The extent that such changes in fair value do not offset represents hedge ineffectiveness. Net cash flows from interest rate swaps on commercial loans/leases designated as hedging instruments in effective hedges of fair value are included in interest income on loans. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other non-interest income and other non-interest expense. Amounts included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Commercial loan/lease interest rate swaps: |  |  |  |  |  |  |
Amount of gain (loss) included in interest income on loans | $ | 2 |  |  | $ | (21) |  |  | $ | (16) |  |  | $ | (74) |
Amount of (gain) loss included in other non-interest expense | 1 |  |  | 3 |  |  | 6 |  |  | 8 |
As stated above, we enter into non-hedge related derivative positions primarily to accommodate the business needs of our customers. Upon the origination of a derivative contract with a customer, we simultaneously enter into an offsetting derivative contract with a third party financial institution. We recognize immediate income based upon the difference in the bid/ask spread of the underlying transactions with our customers and the third party. Because we act only as an intermediary for our customer, subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact our results of operations. Amounts included in the consolidated statements of income related to non-hedge related derivative instruments are presented in the table below.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Non-hedging interest rate derivatives: |  |  |  |  |  |  |
Other non-interest income | $ | 140 |  |  | $ | 946 |  |  | $ | 1,171 |  |  | $ | 2,674 |
Other non-interest expense | — |  |  | — |  |  | — |  |  | (1) |
Non-hedging commodity derivatives: |  |  |  |  |  |  |
Other non-interest income | 485 |  |  | 1,143 |  |  | 2,063 |  |  | 3,266 |
Non-hedging foreign currency derivatives: |  |  |  |  |  |  |
Other non-interest income | — |  |  | 4 |  |  | 63 |  |  | 34 |
Counterparty Credit Risk. Our credit exposure relating to interest rate swaps, commodity swaps/options and foreign currency forward and option contracts with bank customers was approximately $58.4 million at September 30, 2022. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. Our credit exposure, net of collateral pledged, relating to interest rate swaps, commodity swaps/options and foreign currency forward/option contracts with upstream financial institution counterparties was approximately $20.2 million at September 30, 2022. This amount was primarily related to initial margin payments to the CME and excess collateral we posted to counterparties. Excess collateral is generally cleared on the next business day. Collateral levels for upstream financial institution counterparties are monitored and adjusted as necessary. See Note 9 – Balance Sheet Offsetting and Repurchase Agreements for additional information regarding our credit exposure with upstream financial institution counterparties. At September 30, 2022, the aggregate fair value of securities we posted as collateral related to derivative contracts totaled $10.9 million. We also had $12.9 million in cash collateral related to derivative contracts on deposit with other financial institution counterparties at September 30, 2022.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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