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:

	June 30, 2019
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)

Fair value hedge designation - Pay-fixed interest rate swap agreements	$	7,117		9.9	$	(203	)

Cash flow hedge designation
Pay-fixed interest rate swap agreements	$	25,000		2.1	$	(171	)
Interest rate cap agreements		150,000		3.1		576
Total	$	175,000		3.0	$	405

No hedge designation
Rate-lock mortgage loan commitments	$	81,784		0.1	$	2,147
Mandatory commitments to sell mortgage loans		141,434		0.1		(334	)
Pay-fixed interest rate swap agreements - commercial		108,895		5.3		(3,179	)
Pay-variable interest rate swap agreements - commercial		108,895		5.3		3,179
Purchased options		3,095		2.0		171
Written options		3,035		2.0		(170	)
Total	$	447,138		2.7	$	1,814

	December 31, 2018
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
Cash flow hedge designation
Pay-fixed interest rate swap agreements	$	25,000		2.6	$	280
Interest rate cap agreements		150,000		3.6		2,245
Total	$	175,000		3.5	$	2,525

No hedge designation
Rate-lock mortgage loan commitments	$	32,473		0.1	$	687
Mandatory commitments to sell mortgage loans		57,583		0.1		(383	)
Pay-fixed interest rate swap agreements - commercial		94,451		5.5		405
Pay-variable interest rate swap agreements - commercial		94,451		5.5		(405	)
Purchased options		3,095		2.5		116
Written options		3,095		2.5		(116	)
Total	$	285,148		3.7	$	304

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 $2.5 million at June 30, 2019 and $2.7 million at December 31, 2018.

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 $0.12 million, of unrealized gains on Cash Flow Hedges at June 30, 2019 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 June 30, 2019 is 4.3 years.

Beginning in the second quarter of 2019 we 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”). 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 Hedges 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. 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 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.

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 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
	June 30, 2019			December 31, 2018			June 30, 2019			December 31, 2018
	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	$	-	Other assets	$	280	Other liabilities	$	374	Other liabilities	$	-
Interest rate cap agreements	Other assets		576	Other assets		2,245	Other liabilities		-	Other liabilities		-
			576			2,525			374			-

Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets		2,147	Other assets		687	Other liabilities		-	Other liabilities		-
Mandatory commitments to sell mortgage loans	Other assets		-	Other assets		-	Other liabilities		334	Other liabilities		383
Pay-fixed interest rate swap agreements -commercial	Other assets		80	Other assets		1,116	Other liabilities		3,259	Other liabilities		711
Pay-variable interest rate swap agreements -commercial	Other assets		3,259	Other assets		711	Other liabilities		80	Other liabilities		1,116
Purchased options	Other assets		171	Other assets		116	Other liabilities		-	Other liabilities		-

Written options	Other assets		-	Other assets		-	Other liabilities		170	Other liabilities		116
			5,657			2,630			3,843			2,326
Total derivatives		$	6,233		$	5,155		$	4,217		$	2,326

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

Three Month Periods Ended June 30,
	Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)					Location of Gain Reclassified from Accumulated Other Comprehensive Loss into Income (Effective	Gain Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)				Location of Gain (Loss) Recognized	Gain (Loss) Recognized in Income (1)
	2019			2018		Portion)	2019		2018		in Income (1)	2019			2018
							(In thousands)
Fair Value Hedges
Pay-fixed interest rate swap agreements											Interest income	$	(203	)	$	-
Cash Flow Hedges
Interest rate cap agreements	$	(489	)	$	244	Interest expense	$	115	$	45	Interest expense	$	-		$	-
Pay-fixed interest rate swap agreements		(267	)		83	Interest expense		27		8	Interest expense		-			(24	)
Total	$	(756	)	$	327		$	142	$	53		$	-		$	(24	)

No hedge designation
Rate-lock mortgage loan commitments											Net gains on mortgage loans	$	831		$	244
Mandatory commitments to sell mortgage loans											Net gains on mortgage loans		(125	)		(110	)
Pay-fixed interest rate swap agreements -commercial											Interest income		(2,437	)		487
Pay-variable interest rate swap agreements -commercial											Interest income		2,437			(487	)
Pay-variable interest rate swap agreements											Interest expense		-			36
Purchased options											Interest expense		(31	)		(6	)
Written options											Interest expense		30			6
Total												$	705		$	170

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

Six Month Periods Ended June 30,
	Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)					Location of Gain Reclassified from Accumulated Other Comprehensive Loss into Income (Effective	Gain Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)				Location of Gain (Loss) Recognized	Gain (Loss) Recognized in Income (1)
	2019			2018		Portion)	2019		2018		in Income (1)	2019			2018
							(In thousands)

Fair Value Hedges
Pay-fixed interest rate swap agreements											Interest income	$	(203	)	$	-
Cash Flow Hedges
Interest rate cap agreements	$	(1,274	)	$	757	Interest expense	$	233	$	52	Interest expense	$	-		$	-
Pay-fixed interest rate swap agreements		(394	)		254	Interest expense		58		7	Interest expense		-			(12	)
Total	$	(1,668	)	$	1,011		$	291	$	59		$	-		$	(12	)

No hedge designation
Rate-lock mortgage loan commitments											Net gains on mortgage loans	$	1,460		$	672
Mandatory commitments to sell mortgage loans											Net gains on mortgage loans		49			(270	)
Pay-fixed interest rate swap agreements -commercial											Interest income		(3,584	)		1,543
Pay-variable interest rate swap agreements -commercial											Interest income		3,584			(1,543	)
Pay-variable interest rate swap agreements											Interest expense		-			36
Purchased options											Interest expense		55			(99	)
Written options											Interest expense		(54	)		99
Total												$	1,510		$	438

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