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Derivative instruments and hedging activities | 12 Months Ended
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Dec. 31, 2024
Derivative Instruments and Hedging Activities Disclosure |
Derivative Instruments and Hedging Activities | Note 25 – 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, 2024, inclusion of the credit risk in the fair value of the derivatives resulted in a gain of $ 0.1 million from the Corporation’s credit standing adjustment. During the years ended December 31, 2023 and 2022, the Corporation recognized a gain of $ 0.4 million and a loss of $ 0.5 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 non-hedging derivatives outstanding at December 31, 2024 and 2023 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) 2024 2023 classification 2024 2023 classification 2024 2023 Derivatives not designated as hedging instruments: Forward contracts $ 11,150 $ 14,930 Trading account debt securities $ 48 $ - Other liabilities $ 1 $ 138 Interest rate caps 95,625 528,125 Other assets 26 2,195 Other liabilities 26 2,213 Indexed options on deposits 93,510 89,730 Other assets 25,949 22,224 - - - Bifurcated embedded options 86,278 82,118 - - - Interest bearing deposits 22,805 18,752 Total derivatives not designated as hedging instruments $ 286,563 $ 714,903 $ 26,023 $ 24,419 $ 22,832 $ 21,103 Total derivative assets and liabilities $ 286,563 $ 714,903 $ 26,023 $ 24,419 $ 22,832 $ 21,103 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 these forward contracts designated as cash flow hedges are recorded in other comprehensive income (loss). Effective on January 1, 2023, the Corporation discontinued the hedge accounting treatment of certain forward contracts for which the changes in fair value were recorded, net of taxes, in accumulated other comprehensive income (loss) and subsequently reclassified to net income (loss) in the same period that the hedged transaction impacted earnings. As a result of this change, the changes in the fair value of these forward contracts are being recorded through net income. At December 31, 2024 and 2023, there were no derivatives designated as cash flow hedges. For cash flow hedges, net gains (losses) on derivative contracts that are reclassified from accumulated other comprehensive income (loss) 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, 2023 (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 $ (30) Mortgage banking activities $ 41 $ - Total $ (30) $ 41 $ - 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 $ - Fair Value Hedges At December 31, 2024 and 2023, there were no derivatives designated as fair value hedges. Non-Hedging Activities For the year ended December 31, 2024, the Corporation recognized a gain of $ 0.6 million (2023 –gain of $ 1.5 million; 2022 – gain of $ 7.7 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 2024 2023 2022 Forward contracts Mortgage banking activities $ 34 $ 655 $ 8,094 Interest rate caps Other operating income 18 (18) - Indexed options on deposits Interest expense 7,423 6,201 (5,290) Bifurcated embedded options Interest expense (6,842) (5,326) 4,942 Total $ 633 $ 1,512 $ 7,746 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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