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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | 12 Months Ended
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Dec. 31, 2022
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES [Abstract] |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES [Text Block] | NOTE 24 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation’s assets or liabilities and will adversely affect the Corporation’s net interest income from its loan and investment portfolios. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates. As of December 31, 2022 and 2021, all derivatives held by the Corporation were considered economic undesignated hedges. The Corporation records these undesignated hedges at fair value with the resulting gain or loss recognized in current earnings. The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk: Interest Rate Cap Agreements – Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value of the interest rate cap increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates. Forward Contracts – Forward contracts are primarily sales of to-be-announced (“TBA”) MBS that will settle over the standard delivery date and do not qualify as “regular way” security trades. Regular-way security trades are contracts that have no net settlement provision and no market mechanism to facilitate net settlement and that provide for delivery of a security within the time frame generally established by regulations or conventions in the marketplace or exchange in which the transaction is being executed. The forward sales are considered derivative instruments that need to be marked to market. The Corporation uses these securities to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage banking operations. The Corporation also reports as forward contracts the mandatory mortgage loan sales commitments that it enters into with GSEs that require or permit net settlement via a pair-off transaction or the payment of a pair-off fee. Unrealized gains (losses) are recognized as part of mortgage banking activities in the consolidated statements of income . Interest Rate Lock Commitments – Interest rate lock commitments are agreements under which the Corporation agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under the agreement, the Corporation commits to lend funds to a potential borrower, generally on a fixed rate basis, regardless of whether interest rates change in the market. Interest Rate Swaps – The Corporation acquired interest rate swaps as a result of the acquisition of BSPR. An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreements acquired from BSPR consist of the Corporation offering borrower-facing derivative products using a “back-to-back” structure in which the borrower-facing derivative transaction is paired with an identical, offsetting transaction with an approved dealer-counterparty. By using a back-to-back trading structure, both the commercial borrower and the Corporation are largely insulated from market risk and volatility. The agreements set the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. The fair values of these swaps are recorded as components of other assets or accounts payable and other liabilities in the Corporation’s consolidated statements of financial condition. Changes in the fair values of interest rate swaps, which occur due to changes in interest rates, are recorded in the consolidated statements of income as a component of interest income on loans. To satisfy the needs of its customers, the Corporation may enter into non-hedging transactions. In these transactions, the Corporation generally participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and conditions. In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument. The following table summarizes for derivative instruments their notional amounts, fair values and location in the consolidated statements of financial condition as of the indicated dates: Asset Derivatives Liability Derivatives Notional Amounts (1) Statements of Financial Condition Location Fair Value Statements of Financial Condition Location Fair Value December 31, December 31, December 31, 2022 2021 2022 2021 2022 2021 (In thousands) Undesignated economic hedges: Interest rate contracts: Interest rate swap agreements $ 9,290 $ 12,588 Other assets $ 313 $ 1,098 Accounts payable and other liabilities $ 278 $ 1,092 Written interest rate cap agreements 14,500 14,500 Other assets - - Accounts payable and other liabilities 197 8 Purchased interest rate cap agreements 14,500 14,500 Other assets 199 8 Accounts payable and other liabilities - - Interest rate lock commitments 3,225 12,097 Other assets 63 379 Accounts payable and other liabilities - - Forward Contracts: Sales of TBA GNMA MBS pools 11,000 27,000 Other assets 58 - Accounts payable and other liabilities 1 78 Forward loan sales commitments - 12,668 Other assets - 20 Accounts payable and other liabilities - - $ 52,515 $ 93,353 $ 633 $ 1,505 $ 476 $ 1,178 (1) Notional amounts are presented on a gross basis with no netting of offsetting exposure positions. The following table summarizes the effect of derivative instruments on the consolidated statements of income for the indicated periods: Gain (or Loss) Location of Gain (Loss) Year ended on Derivative Recognized in December 31, Statements of Income 2022 2021 2020 (In thousands) Undesignated economic hedges: Interest rate contracts: Interest rate swap agreements Interest income - loans $ 28 $ 24 $ 27 Written and purchased interest rate cap agreements Interest income - loans 2 - - Interest rate lock commitments Mortgage banking activities (322) (687) 576 Forward contracts: Sales of TBA GNMA MBS pools Mortgage banking activities 135 114 (54) Forward loan sales commitments Mortgage banking activities (20) - (37) Total (loss) gain on derivatives $ (177) $ (549) $ 512 Derivative instruments are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, and the level of interest rates, as well as the expectations for rates in the future. As of December 31, 2022 and 2021, the Corporation had not entered into any derivative instrument containing credit -risk-related contingent features. Credit and Market Risk of Derivatives The Corporation uses derivative instruments to manage interest rate risk. By using derivative instruments, the Corporation is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the Corporation’s fair value gain on the derivative. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty owes the Corporation which, therefore, creates a credit risk for the Corporation. When the fair value of a derivative instrument contract is negative, the Corporation owes the counterparty. The Corporation minimizes its credit risk in derivative instruments by entering into transactions with reputable broker dealers ( i.e., financial institutions) that are reviewed periodically by the Management Investment and Asset Liability Committee of the Corporation (the “MIALCO”) and by the Board of Directors. The Corporation also has a policy of requiring that all derivative instrument contracts be governed by an International Swaps and Derivatives Association Master Agreement, which includes a provision for netting. The Corporation has a policy of diversifying derivatives counterparties to reduce the consequences of counterparty default. The cumulative mark -to-market effect of credit risk in the valuation of derivative instruments in 2022, 2021 and 2020 was immaterial. Market risk is the adverse effect that a change in interest rates or implied volatility rates has on the value of a financial instrument. The Corporation manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. In accordance with the master agreements, in the event of default, each party has a right of set-off against the other party for amounts owed under the related agreement and any other amount or obligation owed with respect to any other agreement or transaction between them. As of December 31, 2022 and 2021, derivatives were overcollateralized. See Note 12 – Securities Sold Under Agreements to Repurchase for information on rights of set-off associated to assets sold under agreements to repurchase.

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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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