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Derivative Instruments and Hedging Activities | 9 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities [Abstract] |
Derivative Instruments and Hedging Activities |
10. | 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, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Company may enter 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 in 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 statements 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 clears certain derivative transactions through the Chicago Mercantile Exchange Clearing House (“CME”). 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. In 2017, the U.K. Financial Conduct Authority announced its intention to stop compelling banks to submit rates for the calculation of London Interbank Offered Rate (“LIBOR”) after 2021. In 2022, the Federal Reserve adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on the Secured Overnight Financing Rate (“SOFR”) that replaced LIBOR in certain financial contracts after June 30, 2023. As of September 30, 2023, the Company has transitioned all of its financial instruments to an alternative benchmark rate. As of September 30, 2023 and December 31, 2022, the Company had twelve and fifteen 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. 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, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | 1,304,523 |  | Other assets |  | $ | 143,716 |  |  | $ | 1,304,523 |  | Other liabilities |  | $ | 143,596 |
Risk participation agreements |  |  | 62,467 |  | Other assets |  |  | 7 |  |  |  | 16,716 |  | Other liabilities |  |  | 3 |
Total derivatives not designated as hedging instruments |  |  |  |  |  |  | $ | 143,723 |  |  |  |  |  |  |  | $ | 143,599 |
Netting adjustments(1) |  |  |  |  |  |  |  | 30,583 |  |  |  |  |  |  |  |  | - |
Net derivatives in the balance sheet |  |  |  |  |  |  | $ | 113,140 |  |  |  |  |  |  |  | $ | 143,599 |
Derivatives not offset on the balance sheet |  |  |  |  |  |  | $ | 143 |  |  |  |  |  |  |  | $ | 143 |
Cash collateral(2) |  |  |  |  |  |  |  | - |  |  |  |  |  |  |  |  | - |
Net derivative amounts |  |  |  |  |  |  | $ | 112,997 |  |  |  |  |  |  |  | $ | 143,456 |
As of December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  | $ | 1,275,708 |  | Other assets |  | $ | 117,247 |  |  | $ | 1,275,708 |  | Other liabilities |  | $ | 117,247 |
Risk participation agreements |  |  | 88,963 |  | Other assets |  |  | 47 |  |  |  | 18,421 |  | Other liabilities |  |  | 10 |
Total derivatives not designated as hedging instruments |  |  |  |  |  |  | $ | 117,294 |  |  |  |  |  |  |  | $ | 117,257 |
Netting adjustments(1) |  |  |  |  |  |  |  | 24,109 |  |  |  |  |  |  |  |  | - |
Net derivatives in the balance sheet |  |  |  |  |  |  | $ | 93,185 |  |  |  |  |  |  |  | $ | 117,257 |
Derivatives not offset on the balance sheet |  |  |  |  |  |  | $ | 352 |  |  |  |  |  |  |  | $ | 352 |
Cash collateral(2) |  |  |  |  |  |  |  | - |  |  |  |  |  |  |  |  | - |
Net derivative amounts |  |  |  |  |  |  | $ | 92,833 |  |  |  |  |  |  |  | $ | 116,905 |
(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.
(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.
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) |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
(Decrease) in other income |  | $ | (65 | ) |  | $ | (33 | ) |  | $ | (65 | ) |  | $ | (152 | )

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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://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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