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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 12 Months Ended
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.