DERIVATIVES AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2023

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 far value hedges, cash flow hedges and freestanding derivatives.

Fair Values of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Financial Condition

The tables below present the fair value of the Company’s derivative assets and liabilities as well as their classification on the consolidated statements of financial condition as of December 31, 2023 and December 31, 2022.

	December 31, 2023				December 31, 2022
	Notional		Fair Value		Notional		Fair Value
(Dollars in thousands)	Amount		Assets		Amount		Assets
Derivatives designated as hedging instruments
Cash flow hedges - interest rate products	$	150,000	$	12,492	$	150,000	$	17,874
Derivatives not designated as hedging instruments
Interest rate products		1,682,961		114,671		1,594,356		137,335

	December 31, 2023				December 31, 2022
	Notional		Fair Value		Notional		Fair Value
(Dollars in thousands)	Amount		Liabilities		Amount		Liabilities
Derivatives designated as hedging instruments
Fair value hedges - interest rate products	$	500,000	$	6,594	$	—	$	—
Cash flow hedges - interest rate products		200,000		5,031		—		—
Derivatives not designated as hedging instruments
Interest rate products		1,682,961		114,671		1,594,356		137,335
Other contracts		93,891		24		71,103		33

Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Operations

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations as of December 31, 2023 and December 31, 2022.

	December 31, 2023				December 31, 2022
	Interest		Interest		Interest		Interest
	Income		Expense		Income		Expense
Effects of fair value or cash flow hedges are recorded	$	561	$	2,275	$	—	$	—
The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships
Interest contracts
Hedged items		6,591		—		—		—
Derivatives designated as hedging instruments		(6,030)		—		—		—
Gain or (loss) on cash flow hedging relationships
Interest contracts
Gain (loss) reclassified from AOCI into income		—		2,275		—		1,134

Fair Value Hedges

The Company uses fair value hedges to protect against changes in fair value of certain interest rate sensitive assets. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

In October 2023, the Company entered into interest rate swaps with a notional amount totaling $500.0 million which was designated as a fair value hedge on a closed pool of certain fixed rate loans that are settled daily to market. As of December 31, 2023, the Company posted $6.5 million to the Chicago Mercantile Exchange ("CME") clearing house related to the

fair value derivatives settled daily to market. The Company pays an average fixed rate of 4.82% and receives a floating rate based on the US federal funds effective rate for the life of the agreement without an exchange of the underlying notional amount. For derivatives that are designated as fair value hedges, the gain or loss on the derivatives as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in earnings.

The amortized cost basis of the closed portfolio of the fixed rate mortgage loans on December 31, 2023 totaled $729.5 million. The amount identified as the last-of-layer in the open hedge relationship was $500.0 million, which is the amount of loans in the closed portfolio anticipated to be outstanding for the designated hedge period. The basis adjustment associated with the hedge was a $6.6 million asset as of December 31, 2023, which would be allocated across the entire remaining closed pool upon termination or maturity of the hedged relationship.

During the year ended December 31, 2023, the Company recorded a $561 thousand credit from the swap transaction as a component of interest income in the consolidated statements of operations.

As of December 31, 2023, the following amounts were recorded on the consolidated statements of financial condition related to cumulative basis adjustment for fair value hedges:

	Year Ended December 31,
	2023				2022
(Dollars in thousands)	Carrying Amount of the Hedged Assets		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets		Carrying Amount of the Hedged Assets		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
Fixed Rate Loans	$	506,591	$	6,591	$	—	$	—

Cash Flow Hedges

The Company uses cash flow hedges to protect against variability in cash flows associated with existing or forecasted issuances of short-term borrowing. Cash flow hedges on liabilities 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.

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 (loss) 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 $6.4 million will be reclassified as a decrease to interest expense.

During the years ended December 31, 2023 and 2022, the Company did not terminate any derivatives. 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.

The table below presents the effect of the cash flow hedge accounting on accumulated other comprehensive loss as of December 31, 2023, 2022 and 2021.

	Year Ended December 31,
(In thousands)	2023		2022		2021
(Loss) gain recognized in other comprehensive income (loss)	$	(11,782)	$	14,412	$	5,277
Gain recognized on termination of derivatives		—		—		16,505
(Loss) gain reclassified from other comprehensive income into interest expense		(2,092)		1,621		(940)

All cash flow hedges are recorded gross on the statement of financial condition.

Certain 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, 2023 and 2022, the Company received $13.5 million and $17.8 million, respectively, in collateral from its third-party counterparties under

the agreements in a net asset position. Additionally, the Bank entered certain cash flow hedges that are CME exchanged and settled daily to market. As of December 31, 2023, the Company posted $4.9 million to the CME clearing house that are accounted for as settlements of the derivative liabilities.

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 ASC 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, 2023
		Notional		Fair Value		Fair Value
(In thousands)	Count	Amount		Assets		Liabilities
Included in derivative assets/(liabilities):
Loan level interest rate swaps with borrower	49	$	491,394	$	10,985	$	—
Loan level interest rate swaps with borrower	178		1,121,085		—		103,570
Loan level interest rate floors with borrower	2		29,721		—		—
Loan level interest rate floors with borrower	7		40,761		—		116
Loan level interest rate swaps with third-party counterparties	49		491,394		—		10,985
Loan level interest rate swaps with third-party counterparties	178		1,121,085		103,570		—
Loan level interest rate floors with third-party counterparties	2		29,721		—		—
Loan level interest rate floors with third-party counterparties	7		40,761		116		—

	December 31, 2022
		Notional		Fair Value		Fair Value
(In thousands)	Count	Amount		Assets		Liabilities
Included in derivative assets/(liabilities):
Loan level interest rate swaps with borrower	3	$	53,311	$	1,524	$	—
Loan level interest rate swaps with borrower	185		1,214,736		—		126,751
Loan level interest rate floors with borrower	40		326,309		—		9,060
Loan level interest rate swaps with third-party counterparties	3		53,311		—		1,524
Loan level interest rate swaps with third-party counterparties	185		1,214,736		126,751		—
Loan level interest rate floors with third-party counterparties	40		326,309		9,060		—

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)	2023		2022		2021
Loan level derivative income	$	7,081	$	3,637	$	2,909

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 and receive collateral for agreements in a net asset position. As of December 31, 2023 and December 31, 2022, the Company did not post collateral to its third-party counterparties. As of December 31, 2021, posted collateral was $14.0 million. As of December 31, 2023, the Company received $94.7 million in collateral from its third-party counterparties under the agreements in a net asset position. As of December 31, 2022, the Company received $135.3 million in collateral from its third-party counterparties under the agreements in a net asset position.

Risk Participation Agreements

The Company enters into risk participation agreements to manage economic risks but does not designate the instruments in hedge relationships. As of December 31, 2023 and December 31, 2022, the notional amounts of risk participation agreements for derivative liabilities were $93.9 million and $71.1 million, respectively. The related fair values of the Company’s risk participation agreements were immaterial as of December 31, 2023 and December 31, 2022

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.

For derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, any breach of the above provisions by the Company may require settlement of its obligations under the agreements at the termination value with the respective counterparty. As of December 31, 2023, there were no derivatives in a net liability position, and therefore the termination value was zero. There were no provisions breached for the year ended December 31, 2023.