Derivative Financial Instruments

3 Months Ended

Mar. 31, 2013

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

7.      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:

	March 31, 2013
			Average
	Notional		Maturity		Fair
	Amount		(years)		Value
	(Dollars in thousands)
Cash Flow Hedges - Pay fixed interest-rate swap agreements	$	10,000		1.8	$	(648	)
No hedge designation
Mandatory commitments to sell mortgage loans	$	76,941		0.1	$	(186	)
Rate-lock mortgage loan commitments		39,392		0.1		1,159	)
Amended Warrant		2,504		5.7		(1,504	)
Total	$	118,837		0.2	$	(531	)

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.

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 $0.4 million, of unrealized losses on Cash Flow Hedges at March 31, 2013 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 March 31, 2013 is 1.8 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 are 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 net gains on mortgage loans.  We obtain market prices on Mandatory Commitments and Rate Lock Commitments.  Net gains on mortgage loans, as well as net income 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 #15). Because of certain anti-dilution features included in the Amended Warrant (as defined in Note #15), it has not been considered to be indexed to our common stock and was therefore accounted for as a derivative instrument and recorded as a liability. Any change in value of the Amended Warrant was recorded in other income in our Condensed Consolidated Statements of Operations.  However, the anti-dilution features in the Amended Warrant which caused it to be accounted for as a derivative and included in accrued expenses and other liabilities expired on April 16, 2013.  As a result, the Amended Warrant was reclassified into shareholders' equity on that date at its then fair value (which was approximately equal to the fair value at March 31, 2013).

The following tables illustrate 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

March 31,

December 31,

March 31,

December 31,

2013

2012

2013

2012

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

Other

Other

swap agreements

liabilities

$

648

liabilities

$

739

Total

648

739

Derivatives not designated

as hedging instruments

Rate-lock mortgage

Other

Other

loan commitments

assets

$

1,159

assets

1,368

Mandatory commitments

Other

Other

to sell mortgage loans

-

-

liabilities

186

liabilities

122

Other

Other

Amended Warrant

-

-

liabilities

1,504

liabilities

459

Total

1,159

1,368

1,690

581

Total derivatives

$

1,159

$

1,368

$

2,338

$

1,320

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

Three Month Periods Ended March 31,
							Location of
							Gain (Loss)
							Reclassified
							from
	Gain (Loss)						Accumulated	Gain (Loss)
	Recognized in						Other	Reclassified from
	Other						Comprehensive	Accumulated Other
	Comprehensive						Income into	Comprehensive						Location of	Gain (Loss)
	Income (Loss)						Income	Loss into Income						Gain (Loss)	Recognized
	(Effective Portion)						(Effective	(Effective Portion)						Recognized	in Income
	2013			2012			Portion)	2013			2012			in Income (1)	2013			2012
	(In thousands)
Cash Flow Hedges
Pay-fixed interest
rate swap							Interest
agreements	$	(3	)	$	(51	)	expense	$	(94	)	$	(330	)		$	-		$	-
Interest-rate cap							Interest
agreements		-			-		expense		-			-				-			-
Total	$	(3	)	$	(51	)		$	(94	)	$	(330	)		$	-		$	-
No hedge designation
Rate-lock mortgage														Net mortgage
loan commitments														loan gains	$	(209	)	$	843
Mandatory
commitments to														Net mortgage
sell mortgage loans														loan gains		(64	)		614
														Increase in
														fair value of
														U.S. Treasury
Amended warrant														warrant		(1,045	)		(154	)
Total															$	(1,318	)	$	1,303

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