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DERIVATIVE FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2021
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:

 
2021
  
   
Notional
Amount
    
Average
Maturity
(years)
    
Fair
Value
  
   
(Dollars in thousands)
  
Fair value hedge designation
                  
Pay-fixed interest rate swap agreements - commercial
  
$
6,753
      
7.4
    
$
(384
)
Pay-fixed interest rate swap agreements - securities available for sale
    
148,895
      
5.8
      
4,413
  
Total
  
$
155,648
      
5.9
    
$
4,029
                         
No hedge designation
                        
Rate-lock mortgage loan commitments
  
$
129,846
      
0.1
    
$
2,140
  
Mandatory commitments to sell mortgage loans
    
97,737
      
0.1
      
(68
)
Interest rate swaption agreement
     10,000       0.2       186  
Pay-fixed interest rate swap agreements - commercial
    
207,080
      
5.7
      
(5,179
)
Pay-variable interest rate swap agreements - commercial
    
207,080
      
5.7
      
5,179
  
Interest rate cap agreements
    
90,000
      
1.3
      
35
  
Total
  
$
741,743
      
3.4
    
$
2,293
  

 
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 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 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 no hedge designation pay-fixed interest rate swap agreements, which all matured in 2021, as well as the no hedge designation interest rate cap agreements in the tables above were classified as a no hedge designation during 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.

 

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 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 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.



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 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 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. The written and purchased options in the table above relate to this Altitude CD product and matured during the fourth quarter of 2021.



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 table 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,
  
   
2021
    
2020
    
2021
    
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
    
$
4,413
    
Other assets
    
$
15
    
Other liabilities
    
$
384
    
Other liabilities
    
$
776
  
Derivatives not designated as hedging instruments
                                                                
Rate-lock mortgage loan commitments
  
Other assets
      $
2,140
    
Other assets
      $
7,020
    
Other liabilities
    
$
-
    
Other liabilities
     $
-
  
Mandatory commitments to sell mortgage loans
  
Other assets
      
-
    
Other assets
      
-
    
Other liabilities
      
68
    
Other liabilities
      
941
  
Interest rate swaption agreement
  
Other assets
       186    
Other assets
       -    
Other liabilities
       -    
Other liabilities
       -  
Pay-fixed interest rate swap agreements - commercial
  
Other assets
      
165
    
Other assets
      
-
    
Other liabilities
      
5,344
    
Other liabilities
      
9,700
  
Pay-variable interest rate swap agreements - commercial
  
Other assets
      
5,344
    
Other assets
      
9,700
    
Other liabilities
      
165
    
Other liabilities
      
-
  
Pay-fixed interest rate swap agreements
  
Other assets
      
-
    
Other assets
      
-
    
Other liabilities
      
-
    
Other liabilities
      
295
  
Interest rate cap agreements
  
Other assets
      
35
    
Other assets
      
5
    
Other liabilities
      
-
    
Other liabilities
      
-
  
Purchased options
  
Other assets
      
-
    
Other assets
      
42
    
Other liabilities
      
-
    
Other liabilities
      
-
  
Written options
  
Other assets
      
-
    
Other assets
      
-
    
Other liabilities
      
-
    
Other liabilities
      
42
  
             
7,870
              
16,767
              
5,577
              
10,978
  
Total derivatives
          
$
12,283
            
$
16,782
            
$
5,961
            
$
11,754
  


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 of
 Gain (Loss)
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
Income
 into Income
 (Effective
 Portion)
  
Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income into Income
(Effective Portion)
  
 Location of
 Gain (Loss)
Recognized
 in Income
  
Gain (Loss)
Recognized
in Income
  
   
2021
    
2020
    
2019
    
2021
    
2020
    
2019
    
2021
    
2020
    
2019
  
   
(In thousands)
  
Fair Value Hedges
                                                          
Pay-fixed interest rate swap agreement - commercial
                                      
Interest and fees on loans
  
$
392
    
$
(534
)
  
$
(242
)
Pay-fixed interest rate swap agreement - securities available for sale
                                      
Interest on securities available for sale - tax-exempt
    
4,398
      
15
      
-
  
Total
                                                                      
$
4,790
    
$
(519
)
  
$
(242
)
Cash Flow Hedges
                                                                
Interest rate cap agreements
  
$
-
    
$
125
    
$
(1,211
)
Interest expense
  
$
-
    
$
(1,885
)
  
$
363
  

                       
Pay-fixed interest rate swap agreements
    
-
      
(479
)
    
(392
)
Interest expense
    
-
      
(654
)
    
62
  

                       
Total
  
$
-
    
$
(354
)
  
$
(1,603
)
    
$
-
    
$
(2,539
)
  
$
425
                            
No hedge designation
                                                                            
Rate-lock mortgage loan commitments
    





















 
 Net gains on mortgage loans
   $ (4,880
 )
   $ 5,608
     $ 725
  
Mandatory commitments to sell mortgage loans
   





















 
 Net gains on mortgage loans
     873
       (791
 )
     233
  
Interest rate swaption agreement
    





















 
 Net gains on mortgage loans
     (2
 )
     -
       -
  
Pay-fixed interest rate swap agreements - commercial
    





















 
 Interest income
     4,521
       (6,059
 )
     (4,046
 )
Pay-variable interest rate swap agreements -commercial
    





















 
 Interest income
     (4,521
 )
     6,059
       4,046
  
Pay-fixed interest rate swap agreements
    





















 
 Interest expense
     295
       231
       -
  
Interest rate cap agreements
    





















 
 Interest expense
     30
       (57
 )
     -
  
Purchased options
    





















 
 Interest expense
     (42
 )
     (99
 )
     25
  
Written options
    





















 
 Interest expense
     42
       97
       (23
 )
Total
    





















      $ (3,684 )   $ 4,989     $ 960