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, 2018
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
Cash flow hedge designation
Pay-fixed interest rate swap agreements	$	25,000		2.8	$	581
Interest rate cap agreements		130,000		3.6		3,391
	$	155,000		3.5	$	3,972


No hedge designation
Rate-lock mortgage loan commitments	$	44,609		0.1	$	884
Mandatory commitments to sell mortgage loans		65,633		0.1		182
Pay-fixed interest rate swap agreements - commercial		88,657		5.7		2,242
Pay-variable interest rate swap agreements - commercial		88,657		5.7		(2,242	)
Purchased options		3,119		2.8		178
Written options		3,119		2.8		(178	)
Total	$	293,794		3.5	$	1,066

	December 31, 2017
	Notional Amount		Average Maturity (years)		Fair Value


	(Dollars in thousands)
Cash flow hedge designation
Pay-fixed interest rate swap agreements	$	15,000		3.7	$	245
Interest rate cap agreements		45,000		3.5		976
	$	60,000		3.6	$	1,221

No hedge designation
Rate-lock mortgage loan commitments	$	25,032		0.1	$	530
Mandatory commitments to sell mortgage loans		56,127		0.1		37
Pay-fixed interest rate swap agreements - commercial		75,990		6.2		292
Pay-variable interest rate swap agreements - commercial		75,990		6.2		(292	)
Purchased options		3,119		3.5		322
Written options		3,119		3.5		(322	)
Total	$	239,377		4.1	$	567

We use 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 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”). 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 pay an upfront premium on interest rate caps which is recognized in earnings in the same period in which the hedged item affects earnings. Unrecognized premiums from interest rate caps aggregated to $2.3 million at September 30, 2018 and $0.9 million at December 31, 2017.

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 $0.66 million, of unrealized gains on Cash Flow Hedges at September 30, 2018 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, 2018 is 5.0 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.

In prior periods we offered 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 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, 2018			December 31, 2017			September 30, 2018			December 31, 2017
	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	$	581	Other assets	$	245	Other liabilities	$	-	Other liabilities	$	-
Interest rate cap agreements	Other assets		3,391	Other assets		976	Other liabilities		-	Other liabilities		-
			3,972			1,221			-			-
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets		884	Other assets		530	Other liabilities		-	Other liabilities		-

Mandatory commitments to sell mortgage loans	Other assets		182	Other assets		37	Other liabilities		-	Other liabilities		-

Pay-fixed interest rate swap agreements - commercial	Other assets		2,380	Other assets		631	Other liabilities		138	Other liabilities		339

Pay-variable interest rate swap agreements - commercial	Other assets		138	Other assets		339	Other liabilities		2,380	Other liabilities		631

Purchased options	Other assets		178	Other assets		322	Other liabilities		-	Other liabilities		-

Written options	Other assets		-	Other assets		-	Other liabilities		178	Otherliabilities		322
			3,762			1,859			2,696			1,292
Total derivatives		$	7,734		$	3,080		$	2,696		$	1,292

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 (Loss) (Effective Portion)				Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)	Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)					Location of Gain Recognized in Income (1)	Gain Recognized in Income (1)
	2018		2017			2018		2017			Location of Gain Recognized in Income (1)	2018			2017
	(In thousands)

Cash Flow Hedges
Interest rate cap agreements	$	297	$	-	Interest expense	$	67	$	-		Interest expense	$	-		$	-
Pay-fixed interest rate swap agreements		92		95	Interest expense		6		(5	)	Interest expense		16			5
Total	$	389	$	95		$	73	$	(5	)		$	16		$	5

No hedge designation
Rate-lock mortgage loan commitments											Net gains on mortgage loans	$	(318	)	$	(313	)
Mandatory commitments to sell mortgage loans											Net gains on mortgage loans		415			2
Pay-fixed interest rate swap agreements - commercial											Interest income		407			52
Pay-variable interest rate swap agreements - commercial											Interest income		(407	)		(52	)
Purchased options											Interest expense		(45	)		5
Written options											Interest expense		45			(5	)
Total												$	97		$	(311	)

(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 (Loss) (Effective Portion)				Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)	Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)					Location of Gain Recognized in Income (1)	Gain Recognized in Income (1)
	2018		2017			2018		2017			Location of Gain Recognized in Income (1)	2018			2017
	(In thousands)
Cash Flow Hedges
Interest rate cap agreements	$	1,054	$	-	Interest expense	$	119	$	-		Interest expense	$	-		$	-
Pay-fixed interest rate swap agreements		346		95	Interest expense		13		(5	)	Interest expense		4			5
Total	$	1,400	$	95		$	132	$	(5	)		$	4		$	5
No hedge designation
Rate-lock mortgage loan commitments											Net gains on mortgage loans	$	354		$	123
Mandatory commitments to sell mortgage loans											Net gains on mortgage loans		145			(604	)
Pay-fixed interest rate swap agreements - commercial											Interest income		1,950			(197	)
Pay-variable interest rate swap agreements - commercial											Interest income		(1,950	)		197
Purchased options											Interest expense		(144	)		39
Written options											Interest expense		144			(39	)
Total												$	499		$	(481	)

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