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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 12 Months Ended
Dec. 31, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES [Text Block]
NOTE 34 – 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.
The Corporation designates
 
a derivative as a
 
fair value hedge, cash
 
flow hedge or economic
 
undesignated hedge when
 
it enters into
the
 
derivative
 
contract.
 
As
 
of
 
December
 
31,
 
2021
 
and
 
2020,
 
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 recogni
 
zed
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 maxim
 
um 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 the notional amounts of all derivative instruments as of the
 
indicated dates:
 
Notional Amounts
(1)
As of December 31,
 
2021
2020
(In thousands)
Undesignated economic hedges:
Interest rate contracts:
 
Interest rate swap agreements
 
$
12,588
$
15,864
 
Written interest rate cap agreements
14,500
14,500
 
Purchased interest rate cap agreements
14,500
14,500
 
Interest rate lock commitments
12,097
19,931
Forward Contracts:
 
Sale of TBA GNMA MBS pools
27,000
42,000
 
Forward loan sales commitments
12,668
19,998
$
93,353
$
126,793
(1) Notional amounts are presented on a gross basis with no netting of offsetting
 
exposure positions.
The following table summarizes for derivative instruments their fair values and
 
location in the consolidated statements of financial
condition as of the indicated dates:
Asset Derivatives
Liability Derivatives
Statements of
December 31,
 
December 31,
 
December 31,
 
December 31,
 
Financial Condition
2021
2020
Statements of
2021
2020
Location
Fair Value
Fair Value
Financial Condition Location
 
Fair Value
Fair Value
(In thousands)
Undesignated economic hedges:
Interest rate contracts:
 
Interest rate swap agreements
 
Other assets
$
1,098
$
1,622
Accounts payable and other liabilities
$
1,092
$
1,639
 
Written interest rate cap agreements
Other assets
-
-
Accounts payable and other liabilities
8
1
 
Purchased interest rate cap agreements
Other assets
8
1
Accounts payable and other liabilities
-
-
 
Interest rate lock commitments
Other assets
379
737
Accounts payable and other liabilities
-
-
Forward Contracts:
 
Sales of TBA GNMA MBS pools
Other assets
-
102
Accounts payable and other liabilities
78
280
 
Forward loan sales commitments
Other assets
20
20
Accounts payable and other liabilities
-
-
$
1,505
$
2,482
$
1,178
$
1,920
The following table summarizes the effect of derivative instruments
 
on the consolidated statements of income for the indicated
periods:
Gain (or Loss)
Location of Unrealized Gain (Loss)
Year ended
on Derivative Recognized in
December 31,
Statements of Income
2021
2020
2019
(In thousands)
Undesignated economic hedges:
 
Interest rate contracts:
 
Interest rate swap agreements
 
Interest income - Loans
$
23
$
27
$
-
 
Written and purchased interest rate cap agreements
Interest income - Loans
-
-
(6)
 
Interest rate lock commitments
Mortgage Banking Activities
(687)
576
224
 
Forward contracts:
 
Sales of TBA GNMA MBS pools
Mortgage Banking Activities
114
(54)
245
 
Forward loan sales commitments
Mortgage Banking Activities
-
(37)
8
 
Total (loss) gain on derivatives
$
(550)
$
512
$
471
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,
 
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
 
and, therefore,
 
it has
 
no credit risk.
 
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
 
Corporation
 
had
 
credit
 
risk
 
of
 
$
1.5
 
million
 
as
 
of
 
December
 
31,
 
2021
 
(2020 - $
2.5
 
million)
 
related
 
to
 
derivative
 
instruments
with
 
positive
 
fair
 
values.
 
The
 
credit
 
risk
 
does
 
not
 
consider
 
the
 
value
 
of
 
any
 
collateral
 
and
 
the
 
effects
 
of
 
legally
 
enforceable
 
master
netting agreements. There were
no
 
credit losses associated with derivative instruments recognized in 2021,
 
2020, or 2019.
 
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.
The
 
MIALCO
 
monitors
 
the
 
Corporation’s
 
derivative
 
activities
 
as
 
part
 
of
 
its
 
risk-management
 
oversight
 
of
 
the
 
Corporation’s
treasury functions.