Derivative Financial Instruments

9 Months Ended

Sep. 30, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

8.  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:

	September 30, 2011
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
Cash Flow Hedges - Pay fixed interest-rate swap agreements	$	20,000		2.0	$	(1,294	)
No hedge designation
Mandatory commitments to sell mortgage loans	$	75,377		0.1	$	(260	)
Rate-lock mortgage loan commitments		48,940		0.1		868
Amended Warrant		2,504		7.2		(286	)
Total	$	126,821		0.2	$	322

We have established management objectives and strategies that include interest-rate risk parameters for maximum fluctuations in net interest income and market value of portfolio equity. We monitor our interest rate risk position via simulation modeling reports. The goal of our asset/liability management efforts is to maintain profitable financial leverage within established risk parameters.

We use variable-rate and short-term fixed-rate (less than 12 months) debt obligations to fund a portion of our balance sheet, which exposes us to variability in interest rates. To meet our 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 currently include certain pay-fixed interest-rate swaps.

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 zero and $0.02 million at September 30, 2011 and December 31, 2010, respectively.  Our last interest rate cap expired in July, 2011.

We record the fair value of Cash Flow Hedges in accrued income and other assets and accrued expenses and other liabilities.  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 (primarily variable-rate debt obligations) affect earnings.  It is anticipated that approximately $0.6 million, of unrealized losses on Cash Flow Hedges at September 30, 2011 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 as interest expense.  The maximum term of any Cash Flow Hedge at September 30, 2011 is 3.3 years.

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 earnings.

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 gains on the sale of mortgage loans.  We obtain market prices on Mandatory Commitments and Rate Lock Commitments.  Net gains on the sale of mortgage loans, as well as net income (loss) may be more volatile as a result of these derivative instruments, which are not designated as hedges.

During 2010, we entered into an amended and restated warrant with the U.S. Department of the Treasury (“UST”) that would allow them to purchase our common stock at a fixed price (see note #16). Because of certain anti-dilution features included in the Amended Warrant (as defined in note #16), it is not considered to be indexed to our common stock and is therefore accounted for as a derivative instrument and recorded as a liability. Any change in value of the Amended Warrant is recorded in other income in our Condensed Consolidated Statements of Operations.

The following table illustrates 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
	September 30,			December 31,			September 30,			December 31,
	2011			2010			2011			2010
	Balance			Balance			Balance			Balance
	Sheet	Fair		Sheet	Fair		Sheet	Fair		Sheet	Fair
	Location	Value		Location	Value		Location	Value		Location	Value
	(In thousands)
Derivatives designated as hedging instruments
Pay-fixed interest rate swap agreements							Other liabilities	$	1,294	Other liabilities	$	1,405
Total									1,294			1,405
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets	$	868	Other assets	$	400
Mandatory commitments to sell mortgage loans				Other assets		1,375	Other liabilities		260
Amended Warrant							Other liabilities		286	Other liabilities		1,311
Total			868			1,775			546			1,311
Total derivatives		$	868		$	1,775		$	1,840		$	2,716

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

Three Month Periods Ended September 30,
	Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)				Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective	Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)						Location of Gain (Loss) Recognized in	Gain (Loss) Recognized in Income(1)
	2011		2010		Portion)	2011			2010			Income (1)	2011			2010
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	477	$	773	Interest expense	$	(345	)	$	(583	)	Interest expense	$	3		$	-
Interest-rate cap agreements		-		24	Interest expense		-			(12	)	Interest expense		-			-
Total	$	477	$	797		$	(345	)	$	(595	)		$	3		$	-
No hedge designation
Rate-lock mortgage loan commitments												Mortgage loan gains	$	369		$	593
Mandatory commitments to sell mortgage loans												Mortgage loan gains		(339	)		195
Amended warrant												Other income		29			-
Total													$	59		$	788

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

Nine Month Periods Ended September 30,
	Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)				Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective	Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)						Location of Gain (Loss) Recognized in	Gain (Loss) Recognized in Income(1)
	2011		2010		Portion)	2011			2010			Income (1)	2011			2010
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	1,726	$	2,744	Interest expense	$	(1,102	)	$	(2,084	)	Interest expense	$	-		$	-
Interest-rate cap agreements		30		164	Interest   expense		(15	)		(82	)	Interest expense		-			2
Total	$	1,756	$	2,908		$	(1,117	)	$	(2,166	)		$	-		$	2
No hedge designation
Pay-fixed interest rate swap agreements												Interest expense	$	-		$	409
Rate-lock mortgage loan commitments												Mortgage loan gains		468			1,367
Mandatory commitments to sell mortgage loans												Mortgage loan gains		(1,635	)		(1,175	)
Amended warrant												Other income		1,025			-
Total													$	(142	)	$	601

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