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, 2017
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)

Cash flow hedge - pay-fixed interest rate swap agreement	$	15,000		3.9	$	105

No hedge designation
Rate-lock mortgage loan commitments	$	36,580		0.1	$	769
Mandatory commitments to sell mortgage loans		74,750		0.1		26
Pay-fixed interest rate swap agreements		52,586		7.1		52
Pay-variable interest rate swap agreements		52,586		7.1		(52	)
Purchased options		3,119		3.8		277
Written options		3,119		3.8		(277	)
Total	$	222,740		3.5	$	795

	December 31, 2016
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
No hedge designation
Rate-lock mortgage loan commitments	$	26,658		0.1	$	646
Mandatory commitments to sell mortgage loans		61,954		0.1		630
Pay-fixed interest rate swap agreements		46,121		8.6		249
Pay-variable interest rate swap agreements		46,121		8.6		(249	)
Purchased options		3,119		4.5		238
Written options		3,119		4.5		(238	)
Total	$	187,092		4.4	$	1,276

We use variable-rate and short-term fixed-rate (less than 12 months) debt obligations to fund a portion of our balance sheet, 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”). The Cash Flow Hedge is a pay-fixed interest-rate swap that converts variable-rate cash flows on debt obligations to fixed-rates.

We record the fair value of Cash Flow 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 adjust our Condensed Consolidated Statements of Financial Condition to reflect the then current fair value of Cash Flow Hedges. The related gains or losses are reported in other comprehensive income or loss and are 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) affect earnings. It is anticipated that approximately $0.03 million, of unrealized losses on Cash Flow Hedges at September 30, 2017 will be reclassified to earnings over the next twelve months. To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges is immediately recognized in interest expense. The maximum term of the Cash Flow Hedge at September 30, 2017 is 3.9 years.

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 currently offer to our deposit customers an equity linked time deposit product (“Altitude CD”). The Altitude CD is 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 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, 2017		December 31, 2016		September 30, 2017		December 31, 2016

	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	$	105	Other assets	$	-	Other liabilities	$	-	Other liabilities	$	-
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets		769	Other assets		646	Other liabilities		-	Other liabilities		-
Mandatory commitments to sell mortgage loans	Other assets		26	Other assets		630	Other liabilities		-	Other liabilities		-
Pay-fixed interest rate swap agreements	Other assets		424	Other assets		493	Other liabilities		372	Other liabilities		244
Pay-variable interest rate swap agreements	Other assets		372	Other assets		244	Other liabilities		424	Other liabilities		493
Purchased options	Other assets		277	Other assets		238	Other liabilities		-	Other liabilities		-
Written options	Other assets		-	Other assets		-	Other liabilities		277	Other liabilities		238
Total			1,868			2,251			1,073			975
Total derivatives		$	1,973		$	2,251		$	1,073		$	975

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

Three Month Periods Ended September 30,
	Gain Recognized in Other Comprehensive Income (Effective Portion)						Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective	Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)							Location of Gain (Loss) Recognized	Gain (Loss) Recognized in Income (1)
	2017			2016			Portion)	2017				2016			in Income (1)	2017			2016
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements		$	95		$	-	Interest expense		$	(5	)		$	-		$	5			$	-
Total		$	95		$	-			$	(5	)		$	-		$	5			$	-

No hedge designation
Rate-lock mortgage loan commitments															Net gains on on mortage loans	$	(313	)		$	264
Mandatory commitments to sell mortgage loans															Net gains on on mortage loans		2				94
Pay-fixed interest rate swap agreements															Interest income		52				196
Pay-variable interest rate swap agreements															Interest income		(52	)			(196	)
Purchased options															Interest expense		5				13
Written options															Interest expense		(5	)			(13	)
Total																$	(311	)		$	358

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

Nine Month Periods Ended September 30,
	Gain Recognized in Other Comprehensive Income (Effective Portion)				Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective	Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)					Location of Gain (Loss) Recognized in Income (1)	Gain (Loss) Recognized in Income (1)
	2017		2016		Portion)	2017			2016		Location of Gain (Loss) Recognized in Income (1)	2017			2016
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	95	$	-	Interest expense	$	(5	)	$	-		$	5		$	-
Total	$	95	$	-		$	(5	)	$	-		$	5		$	-

No hedge designation
Rate-lock mortgage loan commitments											Net gains on on mortage loans	$	123		$	613
Mandatory commitments to sell mortgage loans											Net gains on on mortage loans		(604	)		(352	)
Pay-fixed interest rate swap agreements											Interest income		(197	)		(1,512	)
Pay-variable interest rate swap agreements											Interest income		197			1,512
Purchased options											Interest expense		39			94
Written options											Interest expense		(39	)		(94	)
Total												$	(481	)	$	261

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