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Derivative instruments and hedging activities
 12 Months Ended
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.