Derivative Financial Instruments

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Derivative Financial Instruments

11.     Derivative Financial Instruments

At September 30, 2023 and December 31, 2022, the Company’s derivative financial instruments consisted of interest rate swaps. The Company’s interest rate swaps are used for three purposes: 1) to mitigate the Company’s exposure to rising interest rates on certain fixed rate loans and securities with $946.8 million and $273.6 million of swaps outstanding at September 30, 2023 and December 31, 2022, respectively; 2) to facilitate risk management strategies for our loan customers with $480.0 million of swaps outstanding, which include $240.0 million each with customers and bank counterparties at September 30, 2023 and $221.2 million of swaps outstanding, which include $110.6 million each with customers and bank counterparties at December 31, 2022; and 3) to mitigate exposure to rising interest rates on certain short-term advances, brokered deposits and municipal deposits with $826.8 million of swaps outstanding at September 30, 2023, and $871.5 million of swaps outstanding at December 31, 2022.

The Company adopted ASU No. 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method” in the first quarter of 2023. During the nine months ended September 30, 2023, the Company entered into portfolio layer hedges on a closed portfolio of AFS securities with a notional amount of $200.0 million and a closed portfolio of loans with a notional amount of $500.0 million. See Note 14 (“New Authoritative Accounting Pronouncements”) of the Notes to the Consolidated Financial Statements.

For non-portfolio layer method fair value hedges, the hedge basis (the amount of the change in fair value) is added to (or subtracted from) the carrying amount of the hedged item. For portfolio layer method hedges, the hedge basis does not adjust the carrying value of the hedged item and is instead maintained on a closed portfolio basis. These basis adjustments would be allocated to the amortized cost of specific loans or AFS securities within the pools if either of the hedges were de-designated. The Company did not have any portfolio layer hedges prior to the first quarter of 2023.

At September 30, 2023 and December 31, 2022, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not designated as hedges.

The Company’s derivative instruments are carried at fair value in the Company’s financial statements as part of Other Assets for derivatives with positive fair values and Other Liabilities for derivatives with negative fair values. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.

At September 30, 2023 and December 31, 2022, derivatives with a combined notional amount of $480.9 million and $221.2 million, respectively, were not designated as hedges. At September 30, 2023 and December 31, 2022, derivatives with a combined notional amount of $946.8 million and $273.6 million, respectively, were designated as fair value hedges. At September 30, 2023 and December 31, 2022, derivatives with a combined notional amount of $825.8 million and $871.5 million, respectively, were designated as cash flow hedges.

For cash flow hedges, the changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss), net of tax. Amounts in accumulated other comprehensive loss are reclassified into earnings in the same period during which the hedged forecasted transaction effected earnings. During the three months ended September 30, 2023 and 2022, $7.1 million in reduced expense and $1.0 million in additional expense, respectively, was reclassified from accumulated other comprehensive loss to interest expense. During the nine months ended September 30, 2023 and 2022, $18.2 million in reduced expense and $6.1 million in additional expense was reclassified from accumulated other comprehensive loss to interest expense. The estimated amount to be reclassified in the next 12 months out of accumulated other comprehensive loss is $25.0 million in reduced expense.

Changes in the fair value of interest rate swaps not designated as hedges are reflected in “Net (loss) gain from fair value adjustments” in the Consolidated Statements of Income.

The following table sets forth information regarding the Company’s derivative financial instruments at the periods indicated:

	Assets				Liabilities
	Notional				Notional
	Amount		Fair Value (1)		Amount		Fair Value (1)
September 30, 2023	(In thousands)
Cash flow hedges:
Interest rate swaps (borrowings and deposits)	$	825,750	$	37,211	$	-	$	-
Fair value hedges:
Interest rate swaps (loans and securities)		946,825		45,346		-		-
Non hedge:
Interest rate swaps (loans and deposits)		240,974		22,019		239,974		22,016
Total	$	2,013,549	$	104,576	$	239,974	$	22,016
December 31, 2022
Cash flow hedges:
Interest rate swaps (borrowings and deposits)	$	700,750	$	31,716	$	170,750	$	210
Fair value hedges:
Interest rate swaps (loans)		273,607		24,673		-		-
Non hedge:
Interest rate swaps (loans)		110,598		18,197		110,598		18,197
Total	$	1,084,955	$	74,586	$	281,348	$	18,407

(1) Derivatives in a positive position are recorded as “Other assets” and derivatives in a negative position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition.

The following table presents information regarding the Company’s fair value hedged items for the periods indicated:

						Cumulative Amount
						of the Fair Hedging Adjustment
Line Item in the Consolidated Statement		Carrying Amount of the				Included in the Carrying Amount of
of Financial Condition in Which		Hedged				the Hedged
the Hedged Item Is Included		Assets/(Liabilities)				Assets/(Liabilities)
(In thousands)		September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Loans
Multi-family residential	$	77,216	$	82,613	$	(13,979)	$	(10,480)
Commercial real estate		143,327		167,353		(14,358)		(15,442)
Total	$	220,543	$	249,966	$	(28,337)	$	(25,922)
Portfolio Layer
Loans held for Investment (1)	$	2,615,651	$	—	$	(10,639)	$	—
Securities available for sale (2)		273,313		—		(7,721)		—
Total	$	2,888,964	$	—	$	(18,360)	$	—

(1) Carrying amount represents the amortized cost. At September 30, 2023, the amortized cost of the portfolio layer method closed portfolio was $2.6 billion, of which $500 million was designated as hedged. The cumulative amount of basis adjustments was $10.6 million.

(2) Carrying amount represents the fair value. At September 30, 2023, the fair value of the portfolio layer method closed portfolio was $273 million, of which $200 million was designated as hedged. The cumulative amount of  basis adjustments was $7.7 million.

The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income for the periods indicated:

		For the three months ended				For the nine months ended
	Affected Line Item in the Statements	September 30,				September 30,
(In thousands)	Where Net Income is Presented	2023		2022		2023		2022
Financial Derivatives:
Interest rate swaps - fair value hedge (loans)	Interest and fees on loans	$	5,335	$	253	$	9,901	$	(2,068)
Interest rate swaps - fair value hedge (securities)	Interest and dividends on securities		942		—		1,787		—
Interest rate swaps - non hedge (municipal deposits)	Deposits		1		—		4		—
Interest rate swaps - cash flow hedge (short-term advances)	Other interest expense		994		64		4,336		(3,890)
Interest rate swaps - cash flow hedge (brokered deposits)	Deposits		6,060		793		13,886		842
Total net income (expense) from the effects of derivative instruments		$	13,332	$	1,110	$	29,914	$	(5,116)

The Company’s interest rate swaps are subject to master netting arrangements between the Company and its designated counterparties. The Company has not made a policy election to offset its derivative positions.

The following tables present the effect of the master netting arrangements on the presentation of the derivative assets and liabilities in the Consolidated Statements of Financial Condition as of the dates indicated:

			Gross Amount		Net Amount
	Gross Amounts		Offset in Statement of		Presented in Statement of		Financial		Cash
(In thousands)	Recognized		Financial Condition		Financial Condition		Instruments		Collateral		Net Amount
September 30, 2023
Assets:
Interest rate swaps	$	104,576	$	—	$	104,576	$	—	$	(110,755)	$	(6,179)
Liabilities:
Interest rate swaps		22,016		—		22,016		—		—		22,016
December 31, 2022
Assets:
Interest rate swaps	$	74,586	$	—	$	74,586	$	—	$	(72,185)	$	2,401
Liabilities:
Interest rate swaps		18,407		—		18,407		—		—		18,407