Derivative Financial Instruments

3 Months Ended

Mar. 31, 2014

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, 2014
			Average
	Notional		Maturity		Fair
	Amount		(years)		Value
	(Dollars in thousands)
No hedge designation
Mandatory commitments to sell mortgage loans	$	28,936		0.1	$	45
Rate-lock mortgage loan commitments		15,234		0.1		352
Total	$	44,170		0.1	$	397

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 during 2013 included certain pay-fixed interest-rate swaps which converted the variable-rate cash flows on debt obligations to fixed-rates.  During the second quarter of 2013 we terminated our last pay-fixed interest rate swap and paid a termination fee of $0.6 million.

We recorded the fair value of Cash Flow Hedges in accrued income and other assets and accrued expenses and other liabilities.  The related gains or losses were reported in other comprehensive income or loss and were 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) affected earnings.  To the extent that the Cash Flow Hedges were not effective, the ineffective portion of the Cash Flow Hedges were immediately recognized as interest expense.  The remaining unrealized loss on the terminated pay-fixed interest-rate swap which was equal to the termination fee discussed above is included in accumulated other comprehensive income and is being amortized into earnings over the remaining original life of the pay-fixed interest-rate swap.

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 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, it was not considered to have been 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 while it was accounted for as a derivative 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 totaled $1.5 million.  During the third quarter of 2013 we repurchased the Amended Warrant from the UST (see Note #15).

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,

2014

2013

2014

2013

Balance

Balance

Balance

Balance

Sheet

Fair

Sheet

Fair

Sheet

Fair

Sheet

Fair

Location

Value

Location

Value

Location

Value

Location

Value

(In thousands)

Derivatives not designated as hedging instruments

Rate-lock mortgage loan commitments

Other assets

$

352

Other  assets

$

366

Other liabilities

$

-

Other  liabilities

$

-

Mandatory commitments to sell mortgage loans

Other assets

45

Other assets

128

Other liabilities

-

Other liabilities

-

Total derivatives

$

397

$

494

$

-

$

-

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
	2014		2013			Portion)	2014			2013			in Income (1)	2014			2013
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	-	$	(3	)	Interest expense	$	(95	)	$	(94	)		$	-		$	-
Total	$	-	$	(3	)		$	(95	)	$	(94	)		$	-		$	-
No hedge designation
Rate-lock mortgage loan commitments													Net mortgage loan gains	$	(14	)	$	(209	)
Mandatory commitments to sell mortgage loans													Net mortgage loan gains		(83	)		(64	)
Amended warrant													Increase in fair value of U.S. Treasury warrant		-			(1,045	)
Total														$	(97	)	$	(1,318	)

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