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Derivative Instruments and Hedging Activities | 9 Months Ended
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Sep. 30, 2022
Derivative Instruments and Hedging Activities [Abstract] |
Derivative Instruments and Hedging Activities |
9. | Derivative Instruments and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Company 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 value of which are determined by interest rates. Generally, the Company may use derivative financial instruments to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments. Currently, the Company has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions. Derivatives Not Designated as Hedging Instruments The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated as hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the consolidated balance sheet at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of income. The Company is subject to over-the-counter derivative clearing requirements, which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company began to clear certain derivative transactions through the Chicago Mercantile Exchange Clearing House (“CME”) in January 2021. The CME requires the Company to post initial and variation margin payments to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company’s financial statements are not equal and offsetting. As of September 30, 2022 and December 31, 2021, the Company had fifteen and eighteen risk participation agreements, respectively, with financial institution counterparties for interest rate swaps related to participated loans. Risk participation agreements provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions. Derivatives Designated as Hedging Instruments The Company has previously entered into interest rate swaps to modify the interest rate characteristics of certain short-term Federal Home Loan Bank (“FHLB”) advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges with currently none outstanding. The following table summarizes the derivatives outstanding:
(In thousands) |  | Notional Amount |  | Balance Sheet Location |  | Fair Value |  |  | Notional Amount |  | Balance Sheet Location |  | Fair Value |
As of September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | 1,380,347 |  | Other assets |  | $ | 124,892 |  |  | $ | 1,380,347 |  | Other liabilities |  | $ | 124,892 |
Risk participation agreements |  |  | 89,472 |  | Other assets |  |  | 51 |  |  |  | 18,982 |  | Other liabilities |  |  | 11 |
Total derivatives not designated as hedging instruments |  |  |  |  |  |  | $ | 124,943 |  |  |  |  |  |  |  | $ | 124,903 |
Netting adjustments(1) |  |  |  |  |  |  |  | 26,369 |  |  |  |  |  |  |  |  | (41 | )
Net derivatives in the balance sheet |  |  |  |  |  |  | $ | 98,574 |  |  |  |  |  |  |  | $ | 124,944 |
Derivatives not offset on the balance sheet |  |  |  |  |  |  | $ | 9 |  |  |  |  |  |  |  | $ | 9 |
Cash collateral(2) |  |  |  |  |  |  |  | - |  |  |  |  |  |  |  |  | - |
Net derivative amounts |  |  |  |  |  |  | $ | 98,565 |  |  |  |  |  |  |  | $ | 124,935 |
As of December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | 1,342,187 |  | Other assets |  | $ | 60,203 |  |  | $ | 1,342,187 |  | Other liabilities |  | $ | 60,203 |
Risk participation agreements |  |  | 90,938 |  | Other assets |  |  | 252 |  |  |  | 37,193 |  | Other liabilities |  |  | 60 |
Total derivatives not designated as hedging instruments |  |  |  |  |  |  | $ | 60,455 |  |  |  |  |  |  |  | $ | 60,263 |
Netting adjustments(1) |  |  |  |  |  |  |  | (170 | ) |  |  |  |  |  |  |  | 5,482 |
Net derivatives in the balance sheet |  |  |  |  |  |  | $ | 60,625 |  |  |  |  |  |  |  | $ | 54,781 |
Derivatives not offset on the balance sheet |  |  |  |  |  |  | $ | 5,455 |  |  |  |  |  |  |  | $ | 5,455 |
Cash collateral(2) |  |  |  |  |  |  |  | - |  |  |  |  |  |  |  |  | 43,420 |
Net derivative amounts |  |  |  |  |  |  | $ | 55,170 |  |  |  |  |  |  |  | $ | 5,906 |
(1) | Netting adjustments represents the amounts recorded to convert derivatives assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance on the settle-to-market rules for cleared derivatives. The CME legally characterizes the variation margin posted between counterparties as settlements of the outstanding derivative contracts instead of cash collateral. The Company began to clear certain derivative transactions through the CME in 2021.
(2) | Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s short-term rate borrowings. During the three months ended March 31, 2021 the Company’s final cash flow hedge of interest rate risk matured and the remaining balance was reclassified from AOCI as a reduction to interest expense. There is no additional amount that will be reclassified from AOCI as a reduction to interest expense. The following table indicates the effect of cash flow hedge accounting on AOCI and on the unaudited interim consolidated statement of income:
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
(In thousands) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives - included component |  |  |  |  |  |  |  |  |  |  |  |
Amount of loss reclassified from AOCI into interest expense |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 21 |
The following table indicates the gain or loss recognized in income on derivatives not designated as a hedging relationship:
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
(In thousands) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
(Decrease) in other income |  | $ | (33 | ) |  | $ | (307 | ) |  | $ | (152 | ) |  | $ | (382 | )

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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 https://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 https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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