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Derivative instruments and hedging activities | 12 Months Ended
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Dec. 31, 2022
Derivative Instruments and Hedging Activities Disclosure |
Derivative Instruments and Hedging Activities | Note 26 – Derivative instruments and hedging activities The use of derivatives is incorporated as part of the Corporation’s overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest income is not materially affected by movements in interest rates. The Corporation uses derivatives in its trading activities to facilitate customer transactions, and as a means of risk management. As a result of interest rate fluctuations, hedged fixed and variable interest rate assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. As a matter of policy, the Corporation does not use highly leveraged derivative instruments for interest rate risk management. The credit risk attributed to the counterparty’s nonperformance risk is incorporated in the fair value of the derivatives. Additionally, the fair value of the Corporation’s own credit standing is considered in the fair value of the derivative liabilities. During the year ended December 31, 2022, inclusion of the credit risk in the fair value of the derivatives resulted in a loss of $ 0.5 million from the Corporation’s credit standing adjustment. During the years ended December 31, 2021 and 2020, the Corporation recognized a loss of $ 0.3 million and a gain of $ 0.7 million, respectively, from the Corporation’s credit standing adjustment. The Corporation’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In an event of default, each party has a right of set-off against the other party for amounts owed in the related agreement and any other amount or obligation owed in respect of any other agreement or transaction between them. Pursuant to the Corporation’s accounting policy, the fair value of derivatives is not offset with the fair value of other derivatives held with the same counterparty even if these agreements allow a right of set-off. In addition, the fair value of derivatives is not offset with the amounts for the right to reclaim financial collateral or the obligation to return financial collateral. Financial instruments designated as cash flow hedges or non-hedging derivatives outstanding at December 31, 2022 and 2021 were as follows: Notional amount Derivative assets Derivative liabilities Statement of Fair value at Statement of Fair value at At December 31, condition December 31, condition December 31, (In thousands) 2022 2021 classification 2022 2021 classification 2022 2021 Derivatives designated as hedging instruments: Forward contracts $ 15,100 $ 87,900 Other assets $ 93 $ 18 Other liabilities $ 22 $ 125 Total derivatives designated as hedging instruments $ 15,100 $ 87,900 $ 93 $ 18 $ 22 $ 125 Derivatives not designated as hedging instruments: Interest rate caps $ 150,000 $ 27,866 Other assets $ 1,045 $ - Other liabilities $ 1,045 $ - Indexed options on deposits 85,414 79,114 Other assets 18,091 26,075 - - - Bifurcated embedded options 78,972 72,352 - - - Interest bearing deposits 15,933 22,753 Total derivatives not designated as hedging instruments $ 314,386 $ 179,332 $ 19,136 $ 26,075 $ 16,978 $ 22,753 Total derivative assets and liabilities $ 329,486 $ 267,232 $ 19,229 $ 26,093 $ 17,000 $ 22,878 Cash Flow Hedges The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forwards are contracts for the delayed delivery of securities, which the seller agrees to deliver on a specified future date at a specified price or yield. These forward contracts are hedging a forecasted transaction and thus qualify for cash flow hedge accounting. Changes in the fair value of the derivatives are recorded in other comprehensive (loss) income. The amount included in accumulated other comprehensive (loss) income corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. These contracts have a maximum remaining maturity of 72 days at December 31, 2022. For cash flow hedges, net gains (losses) on derivative contracts that are reclassified from accumulated other comprehensive (loss) income to current period earnings are included in the line item in which the hedged item is recorded and during the period in which the forecasted transaction impacts earnings, as presented in the tables below. Year ended December 31, 2022 (In thousands) Amount of net gain (loss) recognized in OCI on derivatives (effective portion) Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion and ineffective portion) Amount of net gain (loss) reclassified from AOCI into income (effective portion) Amount of net gain (loss) recognized in income on derivatives (ineffective portion) Forward contracts $ 1,636 Mortgage banking activities $ 1,458 $ - Total $ 1,636 $ 1,458 $ - Year ended December 31, 2021 (In thousands) Amount of net gain (loss) recognized in OCI on derivatives (effective portion) Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion and ineffective portion) Amount of net gain (loss) reclassified from AOCI into income (effective portion) Amount of net gain (loss) recognized in income on derivatives (ineffective portion) Forward contracts $ 456 Mortgage banking activities $ (704) $ - Total $ 456 $ (704) $ - Year ended December 31, 2020 (In thousands) Amount of net gain (loss) recognized in OCI on derivatives (effective portion) Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion and ineffective portion) Amount of net gain (loss) reclassified from AOCI into income (effective portion) Amount of net gain (loss) recognized in income on derivatives (ineffective portion) Forward contracts $ (6,594) Mortgage banking activities $ (5,559) $ - Total $ (6,594) $ (5,559) $ - Fair Value Hedges At December 31, 2022 and 2021, there were no derivatives designated as fair value hedges. Non-Hedging Activities For the year ended December 31, 2022, the Corporation recognized a gain of $ 7.7 million (2021 –gain of $ 2.3 million; 2020 – loss of $ 3.0 million) related to its non-hedging derivatives, as detailed in the table below. Amount of Net Gain (Loss) Recognized in Income on Derivatives Year ended Year ended Year ended Classification of Net Gain (Loss) December 31, December 31, December 31, (In thousands) Recognized in Income on Derivatives 2022 2021 2020 Forward contracts Mortgage banking activities $ 8,094 $ 2,027 $ (5,027) Indexed options on deposits Interest expense (5,290) 6,824 5,462 Bifurcated embedded options Interest expense 4,942 (6,538) (3,417) Total $ 7,746 $ 2,313 $ (2,982) Forward Contracts The Corporation has forward contracts to sell mortgage-backed securities, which are accounted for as trading derivatives. Changes in their fair value are recognized in mortgage banking activities. Interest Rate Caps The Corporation enters into interest rate caps as an intermediary on behalf of its customers and simultaneously takes offsetting positions under the same terms and conditions, thus minimizing its market and credit risks. Indexed and Embedded Options The Corporation offers certain customers’ deposits whose return are tied to the performance of the Standard and Poor’s (“S&P 500”) stock market indexes, and other deposits whose returns are tied to other stock market indexes or other equity securities performance. The Corporation bifurcated the related options embedded within these customers’ deposits from the host contract in accordance with ASC Subtopic 815-15. In order to limit the Corporation’s exposure to changes in these indexes, the Corporation purchases indexed options which returns are tied to the same indexes from major broker dealer companies in the over the counter market. Accordingly, the embedded options and the related indexed options are marked-to-market through earnings.

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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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