Derivative instruments

12 Months Ended

Dec. 31, 2023

Derivative instruments

Derivative instruments

Note 15. Derivative instruments

The Company is exposed to changing interest rates and market conditions, which affect cash flows associated with borrowings. The Company uses derivative instruments to manage interest rate risk and conditions in the commercial mortgage market and, as such, views them as economic hedges. Interest rate swaps are used to mitigate the exposure to changes in interest rates and involve the receipt of variable-rate interest amounts from a counterparty in exchange for making payments based on a fixed interest rate over the life of the swap contract.

For derivative instruments where the Company has not elected hedge accounting, fair value adjustments are recorded in earnings. The fair value adjustments for interest rate swaps, along with the related interest income, interest expense and gains (losses) on termination of such instruments, are reported as a net realized gain on financial instruments in the consolidated statements of income.

As described in Note 3, for qualifying cash flow hedges, the change in the fair value of derivatives is recorded in OCI and not recognized in the consolidated statements of income. Derivative movements impacting earnings are recognized on a consistent basis with the classification of the hedged item, primarily interest expense. The ineffective portions of the cash flow hedges are immediately recognized in earnings.

The table below presents average notional derivative amounts, as this is the most relevant measure of volume, and derivative assets and liabilities by type.

		December 31, 2023						December 31, 2022
		Notional		Derivative		Derivative		Notional		Derivative		Derivative
(in thousands)	Primary Underlying Risk	Amount		Asset		Liability		Amount		Asset		Liability
Interest Rate Swaps - not designated as hedges(1)	Interest rate risk	$	183,081	$	12,349	$	—	$	216,381	$	19,366	$	—
Interest Rate Swaps - designated as hedges(1)	Interest rate risk		416,139		24,463		—		266,139		33,863		—
FX forwards	Foreign exchange rate risk		39,447		—		(212)		47,834		1,123		(1,319)
Total		$	638,667	$	36,812	$	(212)	$	530,354	$	54,352	$	(1,319)
(1) Refer to Note 22 - Offsetting Assets and Liabilities for further details.

The table below presents gains and losses on derivatives.

		Net Realized		Net Unrealized
(in thousands)		Gain (Loss)		Gain (Loss)
Year Ended December 31, 2023
Interest rate swaps	$	20,116	$	(17,482)
FX forwards		731		(16)
Total	$	20,847	$	(17,498)
Year Ended December 31, 2022
Interest rate swaps	$	9,701	$	50,982
FX forwards		3,548		(802)
Total	$	13,249	$	50,180

In the table above:

● Gains (losses) on interest rate swaps and FX forwards are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the consolidated statements of income.

● For qualifying hedges of interest rate risk on interest rate swaps, the effective portion relating to the unrealized gain (loss) on derivatives are recorded in AOCI.

The table below summarizes the gains and losses on derivatives which have qualified for hedge accounting.

(in thousands)	Derivatives - effective portion reclassified from AOCI to income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivatives - effective portion recorded in OCI		Total change in OCI for period
Interest rate swaps
Year Ended December 31, 2023	$	(1,168)	$	—	$	(1,168)	$	(11,701)	$	(10,533)
Year Ended December 31, 2022	$	(1,412)	$	—	$	(1,412)	$	(3,545)	$	(2,133)

In the table above:

● Forecasted transactions on interest rates consists of benchmark interest rate hedges of SOFR and LIBOR-indexed floating-rate liabilities.

● Hedge ineffectiveness is the amount by which the cumulative gain or loss on the designated derivative instrument exceeds the present value of the cumulative expected change in cash flows on the hedged item attributable to the hedged risk.

● Amounts recorded in OCI for the period represents after tax amounts.