XML 25 R14.htm IDEA: XBRL DOCUMENT v3.21.2
Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2021
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, 2021
  
   
Notional
Amount
    
Average
Maturity
(years)
    
Fair
Value
  
   
(Dollars in thousands)
  
Fair value hedge designation
                  
Pay-fixed interest rate swap agreements - commercial
  
$
6,839
      
7.6
    
$
(453
)
Pay-fixed interest rate swap agreements - securities available for sale
    
148,895
      
6.1
      
3,271
  
Total
  
$
155,734
      
6.2
    
$
2,818
  
                         
No hedge designation
                        
Rate-lock mortgage loan commitments
  
$
184,611
      
0.1
    
$
3,535
  
Mandatory commitments to sell mortgage loans
    
158,546
      
0.1
      
448
  
Interest rate swaption agreement
    
10,000
      
0.5
      
164
  
Pay-fixed interest rate swap agreements - commercial
    
167,203
      
4.7
      
(5,965
)
Pay-variable interest rate swap agreements - commercial
    
167,203
      
4.7
      
5,965
  
Interest rate cap agreements
    
120,000
      
1.2
      
11
  
Purchased options
    
393
      
0.2
      
1
  
Written options
    
393
      
0.2
      
(1
)
Total
  
$
808,349
      
2.2
    
$
4,158
  

 
December 31, 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
  

We have used 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 exposed 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 had included certain pay-fixed interest rate swap and interest rate cap agreements.  Pay-fixed interest rate swap agreements 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 and pay-fixed interest rate swap agreements, respectively to a no hedge designation. The $2.0 million and $0.5 million unrealized loss on our Cash Flow Hedge interest rate cap and pay-fixed interest rate swap agreements, respectively, which were included as a component of accumulated other comprehensive income 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 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 were reclassified into earnings at that time. The interest rate cap and pay-fixed interest rate swap agreements are now classified as a no hedge designation at September 30, 2021 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 Condensed 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 Condensed 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 Condensed Consolidated Statements of Operations.

We have 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 Condensed Consolidated Statements of Financial Condition. The hedged items (fixed rate securities available for sale) are also recorded at fair value which offsets the adjustment to the Fair Value Hedge – AFS Securities. 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 – 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 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.

We have purchased a swaption agreement, whereby we have the right but not the obligation to pay fixed on an interest rate swap at a future date, in an attempt to reduce the impact of price fluctuations of certain mortgage construction loans held for sale. The changes in the fair value of the swaption agreement is recognized currently as part of net gains on mortgage loans in our Condensed Consolidated Statements of Operations.

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,
2021
  
December 31,
2020
  
September 30,
2021
  
December 31,
2020
  
 
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
    
$
3,271
  
Other assets
    
$
15
  
Other liabilities
    
$
453
  
Other liabilities
    
$
776
  
                                                                 
Derivatives not designated as hedging instruments
                                                                
Rate-lock mortgage loan commitments
Other assets
      
3,535
  
Other assets
      
7,020
  
Other liabilities
      
-
  
Other liabilities
      
-
  
Mandatory commitments to sell mortgage loans
Other assets
      
448
  
Other assets
      
-
  
Other liabilities
      
-
  
Other liabilities
      
941
  
Interest rate swaption agreement
Other assets
      
164
  
Other assets
      
-
  
Other liabilities
      
-
  
Other liabilities
      
-
  
Pay-fixed interest rate swap agreements - commercial
Other assets
      
82
  
Other assets
      
-
  
Other liabilities
      
6,047
  
Other liabilities
      
9,700
  
Pay-variable interest rate swap agreements - commercial
Other assets
      
6,047
  
Other assets
      
9,700
  
Other liabilities
      
82
  
Other liabilities
      
-
  
Pay-fixed interest rate swap agreements
Other assets
      
-
  
Other assets
      
-
  
Other liabilities
      
-
  
Other liabilities
      
295
  
Interest rate cap agreements
Other assets
      
11
  
Other assets
      
5
  
Other liabilities
      
-
  
Other liabilities
      
-
  
Purchased options
Other assets
      
1
  
Other assets
      
42
  
Other liabilities
      
-
  
Other liabilities
      
-
  
Written options
Other assets
      
-
  
Other assets
      
-
  
Other liabilities
      
1
  
Other liabilities
      
42
  
             
10,288
              
16,767
              
6,130
              
10,978
  
Total derivatives
          
$
13,559
            
$
16,782
            
$
6,583
            
$
11,754
  

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 (Loss)
(Effective Portion)
  
Location of
Loss
Reclassified
from
Accumulated
Other
Comprehensive
 Income
into Income
(Effective
Loss
Reclassified from
Accumulated Other
Comprehensive
Income
into Income
(Effective Portion)
  
Location of
Gain (Loss)
Recognized
  
Gain (Loss)
Recognized
in Income
  
 
2021
  
2020
  
Portion)
2021
  
2020
  
 in Income
  
2021
    
2020
  
 
(In thousands)
  
Fair Value Hedges
                                
Pay-fixed interest rate swap agreement - Commercial loan
                  
Interest and fees on loans
  
$
63
    
$
6
  
Pay-fixed interest rate swap agreement - Securities available for sale
                  
Interest on securities available for sale - tax - exempt
    
617
      
-
  
Total
                                
$
680
    
$
6
  
Cash Flow Hedges
                                    
Interest rate cap agreements
  
$
-
    
$
-
  
Interest expense
  
$
-
    
$
(180
)
                  
Pay-fixed interest rate swap agreements
    
-
      
(26
)
Interest expense
    
-
      
(130
)
                  
Total
  
$
-
    
$
(26
)
    
$
-
    
$
(310
)
                  
No hedge designation
                                                    
Rate-lock mortgage loan commitments
                                  
Net gains on mortgage loans
  
$
(821
)
  
$
1,096
  
Mandatory commitments to sell mortgage loans
                                  
Net gains on mortgage loans
    
579
      
52
  
Interest rate swaption agreement
                                  
Net gains on mortgage loans
    
2
      
-
  
Pay-fixed interest rate swap agreements -  commercial
                                  
Interest income
    
908
      
688
  
Pay-variable interest rate swap agreements - commercial
                                  
Interest income
    
(908
)
    
(688
)
Pay-fixed interest rate swap agreements
                                  
Interest expense
    
57
      
117
  
Interest rate cap agreements
                                  
Interest expense
    
(5
)
    
(14
)
Purchased options
                                  
Interest expense
    
(70
)
    
(10
)
Written options
                                  
Interest expense
    
70
      
10
  
Total
                                                    
$
(188
)
  
$
1,251
  


Nine Month Periods Ended September 30,
  
 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
(Effective Portion)
  
 Location of
 Loss
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
Income
 into  Income
 (Effective
Loss
Reclassified from
Accumulated Other
Comprehensive
Income
into Income
(Effective Portion)
  
 Location of
 Gain (Loss)
 Recognized
  
Gain (Loss)
Recognized
in Income
  
 
2021
  
2020
  
 Portion)
2021
  
2020
  
 in Income
  
2021
    
2020
  
 
(In thousands)
  
Fair Value Hedges
        
 
        
 
            
Pay-fixed interest rate swap agreement - Commercial loan
                  
Interest and fees on loans
  
$
323
    
$
(618
)
Pay-fixed interest rate swap agreement - Securities available for sale
        
 
        
Interest on securities available for sale - tax - exempt
    
3,256
      
-
  
Total
                                          
$
3,579
    
$
(618
)
Cash Flow Hedges
                                    
Interest rate cap agreements
  
$
-
    
$
126
  
Interest expense
  
$
-
    
$
(413
)
                  
Pay-fixed interest rate swap agreements
    
-
      
(480
)
Interest expense
    
-
      
(233
)
                  
       Total
  
$
-
    
$
(354
)
 
  
$
-
    
$
(646
)
 
                
No hedge designation
                
 
                
 
                
Rate-lock mortgage loan commitments
                
 
                
Net gains on mortgage loans
  
$
(3,485
)
  
$
6,944
  
Mandatory commitments to sell mortgage loans
                
 
                
Net gains on mortgage loans
    
1,389
      
(430
)
Interest rate swaption agreement
                                  
Net gains on mortgage loans
    
(25
)
    
-
  
Pay-fixed interest rate swap agreements - commercial
                
 
                
Interest income
    
3,735
      
(7,170
)
Pay-variable interest rate swap agreements - commercial
                
 
                
Interest income
    
(3,735
)
    
7,170
  
Pay-fixed interest rate swap agreements
                                  
Interest expense
    
295
      
117
  
Interest rate cap agreements
                                  
Interest expense
    
6
      
(56
)
Purchased options
                
 
                
Interest expense
    
(41
)
    
(111
)
Written options
                
 
                
Interest expense
    
41
      
109
  
Total
                
 
                
                                              
  
$
(1,820
)
  
$
6,573