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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2020
Derivative Financial Instruments [Abstract]  
Derivative Financial Instruments
6.
Derivative Financial Instruments

We are required to record derivatives on our Condensed Consolidated Statements of Financial Condition as assets and liabilities measured at their fair value.  The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.


Our derivative financial instruments according to the type of hedge in which they are designated follows:

  
September 30, 2020
  
   
Notional
Amount
    
Average
Maturity
(years)
    
Fair
Value
  
   
(Dollars in thousands)
  
                   
Fair value hedge designation - Pay-fixed interest rate swap agreements
  
$
7,117
      
8.6
    
$
(860
)
                         
No hedge designation
                        
Rate-lock mortgage loan commitments
  
$
196,646
      
0.1
    
$
8,356
  
Mandatory commitments to sell mortgage loans
    
232,948
      
0.1
      
(580
)
Pay-fixed interest rate swap agreements - commercial
    
144,787
      
4.7
      
(10,811
)
Pay-variable interest rate swap agreements - commercial
    
144,787
      
4.7
      
10,811
  
Pay-fixed interest rate swap agreements
    
25,000
      
0.8
      
(409
)
Interest rate cap agreements
    
150,000
      
1.8
      
5
  
Purchased options
    
2,908
      
0.8
      
30
  
Written options
    
2,848
      
0.8
      
(30
)
Total
  
$
899,924
      
1.9
    
$
7,372
  

 
December 31, 2019
  
   
Notional
Amount
    
Average
Maturity
(years)
    
Fair
Value
  
   
(Dollars in thousands)
  
Fair value hedge designation - Pay-fixed interest rate swap agreements
  
$
7,117
      
9.4
    
$
(242
)
                         
Cash flow hedge designation
                        
Pay-fixed interest rate swap agreements
  
$
25,000
      
1.6
    
$
(174
)
Interest rate cap agreements
    
150,000
      
2.6
      
214
  
Total
  
$
175,000
      
2.5
    
$
40
  
                         
No hedge designation
                        
Rate-lock mortgage loan commitments
  
$
49,268
      
0.1
    
$
1,412
  
Mandatory commitments to sell mortgage loans
    
95,363
      
0.1
      
(150
)
Pay-fixed interest rate swap agreements - commercial
    
153,946
      
5.5
      
(3,641
)
Pay-variable interest rate swap agreements - commercial
    
153,946
      
5.5
      
3,641
  
Purchased options
    
2,908
      
1.5
      
141
  
Written options
    
2,848
      
1.5
      
(139
)
Total
  
$
458,279
      
3.7
    
$
1,264
  

We use variable-rate and short-term fixed-rate (less than 12 months) debt obligations to fund a portion of our Condensed Consolidated Statements of Financial Condition, which exposes us to variability in interest rates. To meet our asset/liability management objectives, we may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates (“Cash Flow Hedges”).  Cash Flow Hedges included certain pay-fixed interest rate swaps and interest rate cap agreements.  Pay-fixed interest rate swaps convert the variable-rate cash flows on debt obligations to fixed-rates.  Under interest-rate cap agreements, we will receive cash if interest rates rise above a predetermined level. As a result, we effectively have variable-rate debt with an established maximum rate. We paid an upfront premium on interest rate caps which was recognized in earnings in the same period in which the hedged item affected earnings. During the first and third quarters of 2020 we transferred all of our Cash Flow Hedge interest rate cap agreements and pay-fixed interest rate swaps, respectively to a no hedge designation. The $2.0 million and $0.5 million unrealized loss on our Cash Flow Hedge interest rate cap agreements and pay-fixed interest rate swaps, respectively which were included as a component of accumulated other comprehensive income (loss) at the time of the transfers will be reclassified into earnings over the remaining life of the interest rate cap agreements and pay-fixed interest rate swaps.  The interest rate cap agreements and pay-fixed interest rate swaps are classified as a no hedge designation at September 30, 2020 and any changes in fair value since the transfers to the no hedge designation are recorded in earnings.

 Prior to moving all of our Cash Flow Hedges to a no hedge designation as discussed above, we had recorded the fair value of these hedges in accrued income and other assets and accrued expenses and other liabilities on our Condensed Consolidated Statements of Financial Condition.  On an ongoing basis, we adjusted our Condensed Consolidated Statements of Financial Condition to reflect the then current fair value of Cash Flow Hedges.  The related gains or losses were reported in other comprehensive income or loss and were subsequently reclassified into earnings as a yield adjustment in the same period in which the related interest on the hedged items (variable-rate debt obligations) affected earnings.  It is anticipated that approximately $1.1 million, of unrealized losses from the previously classified Cash Flow Hedges (all a result of the unrealized losses discussed in the previous paragraph) at September 30, 2020 will be reclassified to earnings over the next twelve months.

Beginning in the second quarter of 2019 we entered into a pay-fixed interest rate swap to protect a portion of the fair value of a certain fixed rate commercial loan commitment (“Fair Value Hedge”).  As a result, changes in the fair value of the pay-fixed interest rate swap is expected to offset changes in the fair value of the fixed rate commercial loan commitment due to fluctuations in interest rates.  We record the fair value of Fair Value Hedges in accrued income and other assets and accrued expenses and other liabilities on our Condensed Consolidated Statements of Financial Condition.  The hedged item (fixed rate commercial loan commitment) is also recorded at fair value which offsets the adjustment to the Fair Value Hedge.  On an ongoing basis, we adjust our Condensed Consolidated Statements of Financial Condition to reflect the then current fair value of both the Fair Value Hedge and the hedged item.  The related gains or losses are reported in non-interest income – other in our Condensed Consolidated Statements of Operations.

Certain financial derivative instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our Condensed Consolidated Statements of Financial Condition and is adjusted on an ongoing basis to reflect their then current fair value. The changes in fair value of derivative financial instruments not designated as hedges are recognized in our Condensed Consolidated Statements of Operations.

In the ordinary course of business, we enter into rate-lock mortgage loan commitments with customers (“Rate-Lock Commitments”).  These commitments expose us to interest rate risk.  We also enter into mandatory commitments to sell mortgage loans (“Mandatory Commitments”) to reduce the impact of price fluctuations of mortgage loans held for sale and Rate-Lock Commitments.  Mandatory Commitments help protect our loan sale profit margin from fluctuations in interest rates. The changes in the fair value of Rate-Lock Commitments and Mandatory Commitments are recognized currently as part of net gains on mortgage loans in our Condensed Consolidated Statements of Operations.  We obtain market prices on Mandatory Commitments and Rate-Lock Commitments.  Net gains on mortgage loans, as well as net income may be more volatile as a result of these derivative instruments, which are not designated as hedges.

In prior periods we offered to our deposit customers an equity linked time deposit product (“Altitude CD”).  The Altitude CD was a time deposit that provides the customer a guaranteed return of principal at maturity plus a potential equity return (a written option), while we receive a like stream of funds based on the equity return (a purchased option).  The written and purchased options will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations.  All of the written and purchased options in the table above relate to this Altitude CD product.

We have a program that allows commercial loan customers to lock in a fixed rate for a longer period of time than we would normally offer for interest rate risk reasons.  We will enter into a variable rate commercial loan and an interest rate swap agreement with a customer and then enter into an offsetting interest rate swap agreement with an unrelated party.  The interest rate swap agreement fair values will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations.  All of the interest rate swap agreements noted as commercial in the table above with no hedge designation relate to this program.

The following tables illustrate the impact that the derivative financial instruments discussed above have on individual line items in the Condensed Consolidated Statements of Financial Condition for the periods presented:

Fair Values of Derivative Instruments

  
Asset Derivatives
    
Liability Derivatives
  
   
September 30,
2020
    
December 31,
2019
    
September 30,
2020
    
December 31,
2019
  
   
Balance
Sheet
Location
    
Fair
Value
    
Balance
Sheet
Location
    
Fair
Value
    
Balance
Sheet
Location
    
Fair
Value
    
Balance
Sheet
Location
    
Fair
Value
  
   
(In thousands)
  
Derivatives designated as hedging instruments
    
-
            
-
            
-
            
-
        
Pay-fixed interest rate swap agreements
  
Other assets
    
$
-
    
Other assets
    
$
-
    
Other liabilities
    
$
860
    
Other liabilities
    
$
416
  
Interest rate cap agreements
  
Other assets
      
-
    
Other assets
      
214
    
Other liabilities
      
-
    
Other liabilities
      
-
  
             
-
              
214
              
860
              
416
  
                                                                 
Derivatives not designated as hedging instruments
                                                                
Rate-lock mortgage loan commitments
  
Other assets
      
8,356
    
Other assets
      
1,412
    
Other liabilities
      
-
    
Other liabilities
      
-
  
Mandatory commitments to sell mortgage loans
  
Other assets
      
-
    
Other assets
      
-
    
Other liabilities
      
580
    
Other liabilities
      
150
  
Pay-fixed interest rate swap agreements - commercial
  
Other assets
      
-
    
Other assets
      
28
    
Other liabilities
      
10,811
    
Other liabilities
      
3,669
  
Pay-variable interest rate swap agreements - commercial
  
Other assets
      
10,811
    
Other assets
      
3,669
    
Other liabilities
      
-
    
Other liabilities
      
28
  
Pay-fixed interest rate swap agreements
  
Other assets
      
-
    
Other assets
      
-
    
Other liabilities
      
409
    
Other liabilities
      
-
  
Interest rate cap agreements
  
Other assets
      
5
    
Other assets
      
-
    
Other liabilities
      
-
    
Other liabilities
      
-
  
Purchased options
  
Other assets
      
30
    
Other assets
      
141
    
Other liabilities
      
-
    
Other liabilities
      
-
  
Written options
  
Other assets
      
-
    
Other assets
      
-
    
Other liabilities
      
30
    
Other liabilities
      
139
  
             
19,202
              
5,250
              
11,830
              
3,986
  
Total derivatives
          
$
19,202
            
$
5,464
            
$
12,690
            
$
4,402
  


The effect of derivative financial instruments on the Condensed Consolidated Statements of Operations follows:

Three Month Periods Ended September 30,
  
   
Loss
Recognized in
Other
Comprehensive
Income
(Effective Portion)
  
Location of
Gain (Loss)
Reclassified
from
Accumulated
Other
Comprehensive
 Income (Loss) into
Income
(Effective
  
Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss)
into Income
(Effective Portion)
  
Location of
Gain (Loss)
Recognized
  
Gain (Loss)
Recognized
in Income
  
   
2020
    
2019
  
Portion)
  
2020
    
2019
  
 in Income
  
2020
    
2019
  
   
(In thousands)
  
Fair Value Hedges
                                        
Pay-fixed interest rate swap agreements
                          
Non-interest income-other
  
$
6
    
$
(188
)
Cash Flow Hedges
                                            
Interest rate cap agreements
  
$
-
    
$
(37
)
Interest expense
  
$
(180
)
  
$
88
                    
Pay-fixed interest rate swap agreements
    
(26
)
    
(35
)
Interest expense
    
(130
)
    
14
                    
Total
  
$
(26
)
  
$
(72
)
    
$
(310
)
  
$
102
                    
                                                     
No hedge designation
                                                    
Rate-lock mortgage loan commitments
                                  
Net gains on mortgage loans
  
$
1,096
    
$
(96
)
Mandatory commitments to sell mortgage loans
                                  
Net gains on mortgage loans
    
52
      
307
  
Pay-fixed interest rate swap agreements -  commercial
                                  
Interest income
    
688
      
(1,670
)
Pay-variable interest rate swap agreements - commercial
                                  
Interest income
    
(688
)
    
1,670
  
Pay-fixed interest rate swap agreements
                                  
Interest expense
    
117
      
-
  
Interest rate cap agreements
                                  
Interest expense
    
(14
)
    
-
  
Purchased options
                                  
Interest expense
    
(10
)
    
(46
)
Written options
                                  
Interest expense
    
10
      
46
  
Total
                                           
$
1,251
    
$
211
  


Nine Month Periods Ended September 30,
  
 
  
Gain (Loss)
Recognized in
Other
Comprehensive
Income
(Effective Portion)
  
 Location of
 Gain (Loss)
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
Income (Loss)
 into
 Income
 (Effective
  
Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss)
into Income
(Effective Portion)
  
 Location of
 Gain (Loss)
 Recognized
  
Gain (Loss)
Recognized
in Income
  
 
  
2020
    
2019
  
 Portion)
  
2020
    
2019
  
 in Income
  
2020
    
2019
  
 
  
(In thousands)
  
Fair Value Hedges
            
 
            
 
            
Pay-fixed interest rate swap agreements
            
 
            
Non-interest income-other
  
$
(618
)
  
$
(391
)
Cash Flow Hedges
Interest rate cap agreements
  
$
126
    
$
(1,311
)
Interest expense
  
$
(413
)
  
$
321
                    
Pay-fixed interest rate swap agreements
    
(480
)
    
(429
)
Interest expense
    
(233
)
    
72
                    
Total
  
$
(354
)
  
$
(1,740
)
 
  
$
(646
)
  
$
393
  
 
                
 
                
 
                
 
                
No hedge designation
                
 
                
 
                
Rate-lock mortgage loan commitments
                
 
                
Net gains on mortgage loans
  
$
6,944
    
$
1,364
  
Mandatory commitments to sell mortgage loans
                
 
                
Net gains on mortgage loans
    
(430
)
    
356
  
Pay-fixed interest rate swap agreements - commercial
                
 
                
Interest income
    
(7,170
)
    
(5,254
)
Pay-variable interest rate swap agreements - commercial
                
 
                
Interest income
    
7,170
      
5,254
  
Pay-fixed interest rate swap agreements
                                  
Interest expense
    
117
      
-
  
Interest rate cap agreements
                                  
Interest expense
    
(56
)
    
-
  
Purchased options
                
 
                
Interest expense
    
(111
)
    
9
  
Written options
                
 
                
Interest expense
    
109
      
(8
)
Total
                
 
                
           
  
$
6,573
    
$
1,721