Derivative Financial Instruments

6 Months Ended

Jun. 30, 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:

	June 30, 2014
			Average
	Notional		Maturity		Fair
	Amount		(years)		Value
	(Dollars in thousands)
No hedge designation
Rate-lock mortgage loan commitments	$	21,138		0.1	$	590
Mandatory commitments to sell mortgage loans		42,308		0.1		(226	)
Pay-fixed interest rate swap agreements		2,359		9.7		(99	)
Pay-variable interest rate swap agreements		2,359		9.7		99
U.S. Treasury short position		13,000		0.6		52
Total	$	81,164		0.7	$	416
	December 31, 2013
			Average
	Notional		Maturity		Fair
	Amount		(years)		Value
	(Dollars in thousands)
No hedge designation
Rate-lock mortgage loan commitments	$	15,754		0.1	$	366
Mandatory commitments to sell mortgage loans		35,412		0.1		128
Total	$	51,166		0.1	$	494

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.

To meet our asset/liability management 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 Cash Flow Hedge 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 initially 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 the second quarter of 2014 we began a program that allows commercial loan customers to lock in a fixed rate for a longer period of time than we would normally offer for interest rate risk reasons.  We will enter into a variable rate commercial loan and an interest rate swap agreement with a customer and then enter into an offsetting interest rate swap agreement with an unrelated party.  The interest rates swap agreement fair values will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations. All of the interest rate swap agreements in the table above relate to this program.

Also during the second quarter of 2014 we completed a securities trade in which we shorted a $13 million U.S. Treasury security.  The change in the fair value of this short position has been recorded in gain on securities in our Condensed Consolidated Statements of Operations.

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
	June 30,			December 31,			June 30,			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	$	590	Other assets	$	366	Other liabilities	$	-	Other liabilities	$	-
Mandatory commitments to sell mortgage loans	Other assets		-	Other assets		128	Other liabilities		226	Other liabilities		-
Pay-fixed interest rate swap agreements	Other assets		-	Other assets		-	Other liabilities		99	Other liabilities		-
Pay-variable interest rate swap agreements	Other assets		99	Other assets		-	Other liabilities		-	Other liabilities		-
U.S. Treasury short position	Other assets		52	Other assets		-	Other liabilities		-	Other liabilities		-
Total derivatives		$	741		$	494		$	325		$	-

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

Three Month Periods Ended June 30,
						Location of
						Gain (Loss)
						Reclassified
						from
	Gain (Loss)					Accumulated	Gain (Loss)
	Recognized in					Other	Reclassified from
	Other					Comprehensive	Accumulated Other
	Comprehensive					Loss into	Comprehensive						Location of	Gain (Loss)
	Income (Loss)					Income	Loss into Income						Gain (Loss)	Recognized
	(Effective Portion)					(Effective	(Effective Portion)						Recognized	in Income (1)
	2014		2013			Portion)	2014			2013			in Income (1)	2014			2013
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	-	$	(35	)	Interest expense	$	(95	)	$	(114	)		$	-		$	-
Total	$	-	$	(35	)		$	(95	)	$	(114	)		$	-		$	-
No hedge designation
Rate-lock mortgage loan commitments													Net mortgage loan gains	$	238		$	(783	)
Mandatory commitments to sell mortgage loans													Net mortgage loan gains		(271	)		2,185
Pay-fixed interest rate swap agreements													Interest income		(99	)		-
Pay-variable interest rate swap agreements													Interest income		99			-
U.S. Treasury short position													Gain on securities		52			-
Amended warrant													Increase in fair value of U.S. Treasury warrant		-			20
Total														$	19		$	1,422

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

Six Month Periods Ended June 30,
						Location of
						Gain (Loss)
						Reclassified
						from
	Gain (Loss)					Accumulated	Gain (Loss)
	Recognized in					Other	Reclassified from
	Other					Comprehensive	Accumulated Other
	Comprehensive					Loss into	Comprehensive						Location of	Gain (Loss)
	Income (Loss)					Income	Loss into Income						Gain (Loss)	Recognized
	(Effective Portion)					(Effective	(Effective Portion)						Recognized	in Income (1)
	2014		2013			Portion)	2014			2013			in Income (1)	2014			2013
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	-	$	(38	)	Interest expense	$	(190	)	$	(208	)		$	-		$	-
Total	$	-	$	(38	)		$	(190	)	$	(208	)		$	-		$	-
No hedge designation
Rate-lock mortgage loan commitments													Net mortgage loan gains	$	224		$	(992	)
Mandatory commitments to sell mortgage loans													Net mortgage loan gains		(354	)		2,121
Pay-fixed interest rate swap agreements													Interest income		(99	)		-
Pay-variable interest rate swap agreements													Interest income		99			-
U.S. Treasury short position													Gain on securities		52			-
Amended warrant													Increase in fair value of U.S. Treasury warrant		-			(1,025	)
Total														$	(78	)	$	104

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