Derivative Financial Instruments

9 Months Ended

Sep. 30, 2024

Derivative Financial Instruments

Derivative Financial Instruments

Note 8: Derivative Financial Instruments

The Company uses non-hedging designated, derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities.

Internal Interest Rate Risk Management

The Company enters into forward contracts for the future delivery of mortgage loans to third party investors and enters into interest rate lock commitments with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.

Interest rate swaps are also used by the Company to reduce the risk that significant increases in interest rates may have on the value of certain fixed rate loans held for sale and the respective loan payments received from borrowers.  All changes in the fair market value of these interest rate swaps and associated loans held for sale have been included in gain on sale of loans. Any difference between the fixed and floating interest rate components of these transactions have also been included in gain on sale.

The Company entered into a contract containing put options and interest rate floors on securities it acquired from a warehouse customer. These provide protection and prevent losses in value of certain securities available for sale. The Company also entered into interest rate floor contracts with two warehouse loan customers to minimize interest rate risk. All changes in the fair market value of these options and floors have been included in other noninterest income.

Credit Risk Management

In March 2024, the Company entered into a contract as the buyer of credit protection through the credit derivative market. A credit default swap was purchased to manage credit risk associated with specific multifamily mortgage loans. Under the terms of the contract, the Company will be compensated for certain credit-related losses on a pool of multifamily mortgage loans. The protection seller has posted aggregate collateral of $76.1 million related to their obligations under the contract. The collateral is not included in the Company’s unaudited condensed consolidated balance sheets. There was no gain or loss associated with the credit default swap valuation as of September 30, 2024. Any future changes in the fair market value of this instrument will be included in other noninterest expense.

All of these items are considered derivatives, but are not designated as accounting hedges, and are recorded at fair value, with changes in fair value reflected in noninterest expense on the unaudited condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in other assets in the unaudited condensed consolidated balance sheets while derivative instruments with a negative fair value are reported in other liabilities in the unaudited condensed consolidated balance sheets.

The following table presents the notional amount and fair value of interest rate locks, forward contracts, interest rate swaps, put options, interest rate floors, and credit derivatives utilized by the Company at September 30, 2024 and December 31, 2023. This table excludes the fair market value adjustment on loans associated with these derivatives.

		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability
		(In thousands)
September 30, 2024
Interest rate lock commitments	$	37,586	Other assets/liabilities	$	141	$	51
Forward contracts		46,475	Other assets/liabilities		46		143
Interest rate swaps		57,466	Other assets/liabilities		1,779		—
Put options		703,853	Other assets		20,878		—
Interest rate floors		1,235,788	Other assets		1,431		—
Credit derivatives		75,474	Other liabilities		—		—
				$	24,275	$	194

		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability
		(In thousands)
December 31, 2023
Interest rate lock commitments	$	16,526	Other assets/liabilities	$	140	$	4
Forward contracts		25,500	Other assets/liabilities		4		391
Interest rate swaps		57,540	Other assets/liabilities		2,610		—
Put options		748,374	Other assets		25,877		—
Interest rate floors		748,374	Other assets		6,576		—
				$	35,207	$	395

The following table summarizes the periodic changes in the fair value of the derivative financial instruments on the condensed consolidated statements of income for the three and nine months ended September 30, 2024 and 2023.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
	(In thousands)
Derivative (loss) gain included in gain on sale of loans:
Interest rate lock commitments	$	47	$	(123)	$	(46)	$	(102)
Forward contracts (includes pair-off settlements)		(1,161)		595		(782)		875
Interest rates swaps		(2,082)		2,501		(460)		2,762
Net (loss) gain	$	(3,196)	$	2,973	$	(1,288)	$	3,535
Derivative loss included in other income:
Put options	$	(16,078)	$	—	$	(4,998)	$	—
Interest rate floors		(7,693)		—		(5,145)		—
Net loss	$	(23,771)	$	—	$	(10,143)	$	—

Derivatives on Behalf of Customers

The Company offers derivative contracts to some customers in connection with their risk management needs. These derivatives include interest rate swap, cap, and floor arrangements. The Company manages the risk associated with these contracts by entering into an equal and offsetting back-to-back derivative with a third-party dealer. These derivatives generally work together as an offsetting economic interest rate hedge, but the Company does not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability would be recorded to current earnings during the period in which the changes occurred, typically resulting in no material net earnings impact.

The fair values of derivative assets and liabilities related to back-to-back derivatives on behalf of customers were recorded in the unaudited condensed consolidated balance sheets as follows:

		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability
		(In thousands)
September 30, 2024	$	723,966	Other assets/liabilities	$	677	$	677
December 31, 2023	$	607,169	Other assets/liabilities	$	12,426	$	12,426

The gross gains and losses on these derivative assets and liabilities were recorded in other noninterest income and other noninterest expense in the unaudited condensed consolidated statements of income as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
	(In thousands)
Gross swap gains	$	9,211	$	2,111	$	11,749	$	8,547
Gross swap losses		9,211		2,111		11,749		8,547
Net swap gains (losses)	$	—	$	—	$	—	$	—

The Company pledged $260,000 in collateral to secure its obligations under swap contracts at both September 30, 2024 and December 31, 2023.