Derivative Financial Instruments

3 Months Ended

Mar. 31, 2022

Derivative Financial Instruments [Abstract]

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:

	March 31, 2022
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
Fair value hedge designation
Pay-fixed interest rate swap agreements - commercial	$	6,666		7.1	$	(7	)
Pay-fixed interest rate swap agreements - securities available for sale		148,895		5.6		11,959
Total	$	155,561		5.7	$	11,952

No hedge designation
Rate-lock mortgage loan commitments	$	140,135		0.1	$	(3,230	)
Mandatory commitments to sell mortgage loans		111,010		0.1		1,906
Pay-fixed interest rate swap agreements - mortgage		22,000		7.5		627
Pay-fixed interest rate swap agreements - commercial		216,001		5.5		4,398
Pay-variable interest rate swap agreements - commercial		216,001		5.5		(4,398	)
Interest rate cap agreements		90,000		1.0		257
Total	$	795,147		3.3	$	(440	)

	December 31, 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

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 interest rate cap agreements under which, 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 2020 we transferred all of our Cash Flow Hedge interest rate cap agreements to a no hedge designation. The unrealized losses on our Cash Flow Hedge interest rate cap agreements, 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. Also in 2020 it became probable that the forecasted transactions being hedged by these interest rate cap 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 interest rate cap agreements in the table 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 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 swaption and pay-fixed interest rate swap agreements in an attempt to reduce the impact of price fluctuations of certain mortgage construction loans held for sale. The pay-fixed interest rate swap agreements are presented as “Interest rate swap agreements – mortgage” in the table above. The swaption agreement terminated during the first quarter of 2022. The changes in the fair value of the swaption and pay fixed interest rate swap agreements are recognized currently as part of net gains on mortgage loans in our Condensed Consolidated Statements of Operations.

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
	March 31, 2022				December 31, 2021				March 31, 2022				December 31, 2021
	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		$	11,959	Other assets		$	4,413	Other liabilities		$	7	Other liabilities		$	384
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets			-	Other assets		$	2,140	Other liabilities			3,230	Other liabilities		$	-
Mandatory commitments to sell mortgage loans	Other assets			1,906	Other assets			-	Other liabilities			-	Other liabilities			68
Pay-fixed interest rate swap agreements - mortgage	Other assets			627	Other assets			-	Other liabilities			-	Other liabilities			-
Interest rate swaption agreement	Other assets			-	Other assets			186	Other liabilities			-	Other liabilities			-
Pay-fixed interest rate swap agreements - commercial	Other assets			5,103	Other assets			165	Other liabilities			705	Other liabilities			5,344
Pay-variable interest rate swap agreements - commercial	Other assets			705	Other assets			5,344	Other liabilities			5,103	Other liabilities			165
Interest rate cap agreements	Other assets			257	Other assets			35	Other liabilities			-	Other liabilities			-
				8,598				7,870				9,038				5,577
Total derivatives			$	20,557			$	12,283			$	9,045			$	5,961

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

		Gain (Loss) Recognized in Income
	Location of Gain (Loss) Recognized in Income	Three Month Periods Ended March 31,
	Location of Gain (Loss) Recognized in Income	2022			2021
		(In thousands)
Fair Value Hedges
Pay-fixed interest rate swap ageement - commercial	Interest and fees on loans	$	376		$	352
Pay-fixed interest rate swap ageement - securities available for sale	Interest on securities available for sale - tax- exempt		7,547			4,873
Total		$	7,923		$	5,225

No hedge designation
Rate-lock mortgage loan commitments	Net gains on mortgage loans	$	(5,370	)	$	(3,822	)
Mandatory commitments to sell mortgage loans	Net gains on mortgage loans		1,974			1,837
Pay-fixed interest rate swap agreements - mortgage	Net gains on mortgage loans		627			-
Interest rate swaption agreement	Net gains on mortgage loans		(186	)		-
Pay-fixed interest rate swap agreements - commercial	Interest income		9,577			3,275
Pay-variable interest rate swap agreements - commercial	Interest income		(9,577	)		(3,275	)
Pay-fixed interest rate swap agreements	Interest expense		-			118
Interest rate cap agreements	Interest expense		222			15

Purchased options	Interest expense		-			18

Written options	Interest expense		-			(18	)
Total		$	(2,733	)	$	(1,852	)