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DERIVATIVE FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2020
DERIVATIVE FINANCIAL INSTRUMENTS [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS
NOTE 16 – DERIVATIVE FINANCIAL INSTRUMENTS



We are required to record derivatives on our 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 at December 31 follow:

  
2020
  
   
Notional
Amount
    
Average
Maturity
(years)
    
Fair
Value
  
   
(Dollars in thousands)
  
Fair value hedge designation
                  
Pay-fixed interest rate swap agreements - commercial
  
$
7,088
      
8.4
    
$
(776
)
Pay-fixed interest rate swap agreements - securities available for sale
    
41,950
      
7.1
      
15
  
Total
  
$
49,038
      
7.3
    
$
(761
)
                         
No hedge designation
                        
Rate-lock mortgage loan commitments
  
$
168,816
      
0.1
    
$
7,020
  
Mandatory commitments to sell mortgage loans
    
186,092
      
0.1
      
(941
)
Pay-fixed interest rate swap agreements - commercial
    
147,456
      
4.5
      
(9,700
)
Pay-variable interest rate swap agreements - commercial
    
147,456
      
4.5
      
9,700
  
Pay-fixed interest rate swap agreements
    
25,000
      
0.6
      
(295
)
Interest rate cap agreements
    
135,000
      
1.8
      
5
  
Purchased options
    
2,908
      
0.5
      
42
  
Written options
    
2,848
      
0.5
      
(42
)
Total
  
$
815,576
      
2.0
    
$
5,789
  

 
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 have established management objectives and strategies that include interest-rate risk parameters for maximum fluctuations in net interest income and market value of portfolio equity. We monitor our interest rate risk position via simulation modeling reports. The goal of our asset/liability management efforts is to maintain profitable financial leverage within established risk parameters.



 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 were being reclassified into earnings over the remaining life of the interest rate cap agreements and pay-fixed interest rate swap agreements.  In the fourth quarter of 2020 it became probable that the forecasted transactions being hedged by these interest rate cap agreements and pay-fixed interest rate swap agreements would not occur by the end of the originally specified time period.  As a result, all remaining unrealized losses included as a component of accumulated other comprehensive income (loss) were reclassified into earnings.  The interest rate cap agreements and pay-fixed interest rate swaps are now classified as a no hedge designation at December 31, 2020 and any changes in fair value since the transfers to the no hedge designation are recorded in earnings.

 

We have entered into a pay-fixed interest rate swap to protect a portion of the fair value of a certain fixed rate commercial loan (‘‘Fair Value Hedge – Commercial Loan’’). 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 due to fluctuations in interest rates. We record the fair value of Fair Value Hedge – Commercial Loan in accrued income and other assets and accrued expenses and other liabilities on our Consolidated Statements of Financial Condition. The hedged item (fixed rate commercial loan) is also recorded at fair value which offsets the adjustment to the Fair Value Hedge –
Commercial Loan. On an ongoing basis, we adjust our Consolidated Statements of Financial Condition to reflect the then current fair value of both the Fair Value Hedge – Commercial Loan and the hedged item. The related gains or losses are reported in interest income – interest and fees on loans in our Consolidated Statements of Operations.

 

During 2020 we entered into pay-fixed interest rate swaps to protect a portion of the fair value of certain securities available for sale (‘‘Fair Value Hedge – AFS Securities’’). As a result, the change in the fair value of the pay-fixed interest rate swaps is expected to offset a portion of the change in the fair value of the fixed rate securities available for sale due to fluctuations in interest rates. We record the fair value of Fair Value Hedge – AFS Securities in accrued income and other assets and accrued expenses and other liabilities on our Consolidated Statements of Financial Condition. The hedged item (fixed rate securities available for sale) is also recorded at fair value which offsets the adjustment to the Fair Value Hedge – AFS Securities. On an ongoing basis, we adjust our Consolidated Statements of Financial Condition to reflect the then current fair value of both the Fair Value Hedge – AFS Securities and the hedged item. The related gains or losses are reported in interest income – interest on securities available for sale – tax-exempt in our Consolidated Statements of Operations.


Certain derivative financial instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our 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 earnings.



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 the 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 provided 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 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 Consolidated Statements of Operations. All of the interest rate swap agreements-commercial with no hedge designation in the table above relate to this program.


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



Fair Values of Derivative Instruments

  
Asset Derivatives
    
Liability Derivatives
  
   
December 31,
    
December 31,
  
   
2020
    
2019
    
2020
    
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
    
$
15
    
Other assets
    
$
-
    
Other liabilities
    
$
776
    
Other liabilities
    
$
416
  
Interest rate cap agreements
  
Other assets
      
-
    
Other assets
      
214
    
Other liabilities
      
-
    
Other liabilities
      
-
  
             
15
              
214
              
776
              
416
  
Derivatives not designated as hedging instruments
                                                                
Rate-lock mortgage loan commitments
  
Other assets
      
7,020
    
Other assets
      
1,412
    
Other liabilities
    
$
-
    
Other liabilities
      
-
  
Mandatory commitments to sell mortgage loans
  
Other assets
      
-
    
Other assets
      
-
    
Other liabilities
      
941
    
Other liabilities
      
150
  
Pay-fixed interest rate swap agreements - commercial
  
Other assets
      
-
    
Other assets
      
28
    
Other liabilities
      
9,700
    
Other liabilities
      
3,669
  
Pay-variable interest rate swap agreements - commercial
  
Other assets
      
9,700
    
Other assets
      
3,669
    
Other liabilities
      
-
    
Other liabilities
      
28
  
Pay-fixed interest rate swap agreements
  
Other assets
      
-
    
Other assets
      
-
    
Other liabilities
      
295
    
Other liabilities
      
-
  
Interest rate cap agreements
  
Other assets
      
5
    
Other assets
      
-
    
Other liabilities
      
-
    
Other liabilities
      
-
  
Purchased options
  
Other assets
      
42
    
Other assets
      
141
    
Other liabilities
      
-
    
Other liabilities
      
-
  
Written options
  
Other assets
      
-
    
Other assets
      
-
    
Other liabilities
      
42
    
Other liabilities
      
139
  
             
16,767
              
5,250
              
10,978
              
3,986
  
Total derivatives
          
$
16,782
            
$
5,464
            
$
11,754
            
$
4,402
  



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

Year Ended December 31,
  
   
Gain (loss) Recognized
in Other
Comprehensive
Income (Loss)
(Effective Portion)
  
 Location
 Gain (Loss)
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
Income (Loss)
 into Income
 (Effective
 Portion)
  
Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income
(Effective Portion)
  
 Location of
 Gain (Loss)
Recognized
 in Income(1)
  
Gain (Loss)
Recognized
in Income(1)
  
   
2020
    
2019
    
2018
    
2020
    
2019
    
2018
    
2020
    
2019
    
2018
  
   
(In thousands)
  
Fair Value Hedges
                                                          
Pay-fixed interest rate swap
ageement - Commercial loan
                                      
Interest and fees on loans
  
$
(534
)
  
$
(242
)
  
$
-
  
Pay-fixed interest rate swap
agreements - Securities
available for sale
                                      
Interest on
securities
available for
sale - tax-exempt
    
15
      
-
      
-
  
Total
                                                 
$
(519
)
  
$
(242
)
  
$
-
  
Cash Flow Hedges
                                                                
Interest rate cap agreements
  
$
125
    
$
(1,211
)
  
$
(340
)
Interest expense
  
$
(1,885
)
  
$
363
    
$
206
  
Interest expense
  
$
-
    
$
-
    
$
-
  
Pay-fixed interest rate swap
agreements
    
(479
)
    
(392
)
    
78
  
Interest expense
    
(654
)
    
62
      
31
  
Interest expense
    
-
      
-
      
(12
)
Total
  
$
(354
)
  
$
(1,603
)
  
$
(262
)
    
$
(2,539
)
  
$
425
    
$
237
      
$
-
    
$
-
    
$
(12
)
                                                                             
No hedge designation
                                                                            
                                                                             
Rate-lock mortgage loan commitments
                        
Net gains on mortgage loans
  
$
5,608
    
$
725
    
$
157
  
Mandatory commitments to sell mortgage loans
                        
Net gains on mortgage loans
    
(791
)
    
233
      
(420
)
Pay-fixed interest rate swap agreements - commercial
                        
Interest income
    
(6,059
)
    
(4,046
)
    
113
  
Pay-variable interest rate swap agreements -commercial
                        
Interest income
    
6,059
      
4,046
      
(113
)
Pay-fixed interest rate swap agreements
                        
Interest expense
    
231
      
-
      
-
  
Interest rate cap agreements
                        
Interest expense
    
(57
)
    
-
      
-
  
Purchased options
                        
Interest expense
    
(99
)
    
25
      
(206
)
Written options
                        
Interest expense
    
97
      
(23
)
    
206
  
Total
                               
$
4,989
    
$
960
    
$
(263
)

(1)
For cash flow hedges, this location and amount refers to the ineffective portion.