DERIVATIVES AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2021

DERIVATIVES AND HEDGING ACTIVITIES

DERIVATIVES AND HEDGING ACTIVITIES

12. DERIVATIVES AND HEDGING ACTIVITIES

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. The Company engages in both cash flow hedges and freestanding derivatives.

Cash Flow Hedges

Cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  The Company uses these types of derivatives to hedge the variable cash flows associated with existing or forecasted issuances of short-term borrowings.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income (Loss) and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. During the next twelve months, the Company estimates that an additional $57 thousand will be reclassified as an increase to interest expense.

During the year ended December 31, 2021, the Company terminated 34 derivatives with notional values totaling $785.0 million, resulting in a termination value of $16.5 million which was recognized in loss on termination of derivatives in non-interest income. During the year ended December 31, 2020, the Company terminated two derivatives with notional values totaling $30.0 million, resulting in a termination value of $175 thousand, which was expected to be recognized in interest expense over the remaining term of the original derivative. Due to the terminations during the year ended December 31, 2021, the remaining termination value was recognized as part of the loss on terminations during the year ended December 31, 2021. Additionally, during the year ended December 31, 2020, the Company terminated six derivatives with notional values totaling $95.0 million, resulting in a termination value of $6.6 million, which was recognized as losses on termination of derivatives within non-interest income.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of financial condition as of the periods indicated.

	December 31, 2021							December 31, 2020
		Notional		Fair Value		Fair Value			Notional		Fair Value		Fair Value
(Dollars in thousands)	Count	Amount		Assets		Liabilities		Count	Amount		Assets		Liabilities
Included in derivative assets/(liabilities):
Interest rate swaps related to FHLBNY advances	4	$	150,000	$	4,358	$	—	—	$	—	$	—	$	—
Interest rate swaps related to FHLBNY advances	—	$	—	$	—	$	—	32	$	655,000	$	—	$	(18,442)

The table below presents the effect of the cash flow hedge accounting on accumulated other comprehensive loss as of December 31, 2021, 2020 and 2019.

	Year Ended December 31,
(In thousands)	2021		2020		2019
Gain (loss) recognized in other comprehensive income	$	5,277	$	(24,449)	$	(8,254)
Gain recognized on termination of derivatives		16,505		6,596		—
(Loss) gain reclassified from other comprehensive income into interest expense		(940)		(6,127)		955

All cash flow hedges are recorded gross on the balance sheet.

The cash flow hedges involve derivative agreements with third-party counterparties that contain provisions requiring the Bank to post cash collateral if the derivative exposure exceeds a threshold amount. As of December 31, 2021, the Bank did not post collateral to the third-party counterparties. As of December 31, 2020, posted collateral to the other third-party counterparties was $5.4 million.

Freestanding Derivatives

The Company maintains an interest-rate risk protection program for its loan portfolio in order to offer loan level derivatives with certain borrowers and to generate loan level derivative income. The Company enters into interest rate swap or interest rate floor agreements with borrowers. These interest rate derivatives are designed such that the borrower synthetically attains a fixed-rate loan, while the Company receives floating rate loan payments. The Company offsets the loan level interest rate swap exposure by entering into an offsetting interest rate swap or interest rate floor with an unaffiliated and reputable bank counterparty. These interest rate derivatives do not qualify as designated hedges, under ASU 815; therefore, each interest rate derivative is accounted for as a freestanding derivative. The notional amounts of the interest rate derivatives do not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate derivative agreements. The following tables reflect freestanding derivatives included in the consolidated statements of financial condition as of the dates indicated

	December 31, 2021
		Notional		Fair Value		Fair Value
(In thousands)	Count	Amount		Assets		Liabilities
Included in derivative assets/(liabilities):
Loan level interest rate swaps with borrower	111	$	604,529	$	28,291	$	—
Loan level interest rate swaps with borrower	74		620,459		—		(11,865)
Loan level interest rate floors with borrower	45		392,764		—		(5,644)
Loan level interest rate swaps with third-party counterparties	111		604,529		—		(28,291)
Loan level interest rate swaps with third-party counterparties	74		620,459		11,865		—
Loan level interest rate floors with third-party counterparties	45		392,764		5,644		—

	December 31, 2020
		Notional		Fair Value		Fair Value
(In thousands)	Count	Amount		Assets		Liabilities
Included in derivative assets/(liabilities):
Loan level interest rate swaps with borrower	65	$	570,277	$	24,764	$	—
Loan level interest rate floors with borrower	41		364,643		—		(5,832)
Loan level interest rate swaps with third-party counterparties	65		570,277		—		(24,764)
Loan level interest rate floors with third-party counterparties	41		364,643		5,832		—

Loan level derivative income is recognized on the mark-to-market of the interest rate swap as a fair value adjustment at the time the transaction is closed. Total loan level derivative income is included in non-interest income as follows:

	Year Ended December 31,
(In thousands)	2021		2020		2019
Loan level derivative income	$	2,909	$	8,872	$	910

The interest rate swap product with the borrower is cross collateralized with the underlying loan and, therefore, there is no posted collateral. Certain interest rate swap agreements with third-party counterparties contain provisions that require the Company to post collateral if the derivative exposure exceeds a threshold amount. As of December 31, 2021, posted collateral was $14.0 million.

Credit Risk Related Contingent Features

The Company’s agreements with each of its derivative counterparties state that if the Company defaults on any of its indebtedness, it could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty.

The Company’s agreements with certain of its derivative counterparties state that if the Bank fails to maintain its status as a well-capitalized institution, the Bank could be required to terminate its derivative positions with the counterparty.

As of December 31, 2021, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $16.5 million for those related to loan level derivatives. If the Company had breached any of the above provisions at December 31, 2021, it could have been required to settle its obligations under the agreements at the termination value with the respective counterparty. There were no provisions breached for the year ended December 31, 2021.