Derivative Financial Instruments

6 Months Ended

Jun. 30, 2017

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

6. 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, 2017
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
No hedge designation
Rate-lock mortgage loan commitments	$	44,985		0.1	$	1,082
Mandatory commitments to sell mortgage loans		80,760		0.1		24
Pay-fixed interest rate swap agreements		54,127		8.0		-
Pay-variable interest rate swap agreements		54,127		8.0		-
Purchased options		3,119		4.3		272
Written options		3,119		4.3		(272	)
Total	$	240,237		3.8	$	1,106

	December 31, 2016
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
No hedge designation
Rate-lock mortgage loan commitments	$	26,658		0.1	$	646
Mandatory commitments to sell mortgage loans		61,954		0.1		630
Pay-fixed interest rate swap agreements		46,121		8.6		249
Pay-variable interest rate swap agreements		46,121		8.6		(249	)
Purchased options		3,119		4.5		238
Written options		3,119		4.5		(238	)
Total	$	187,092		4.4	$	1,276

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 our Condensed Consolidated Statements of Operations.

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 in our Condensed Consolidated Statements of Operations.  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.

We currently offer to our deposit customers an equity linked time deposit product (“Altitude CD”).  The Altitude CD is a time deposit that provides the customer a guaranteed return of principal at maturity plus a potential equity return (a written option), while we receive a like stream of funds based on the equity return (a purchased option).  The written and purchased options will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations.  All of the written and purchased options in the table above relate to this Altitude CD product.

We have 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 rate 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.

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, 2017			December 31, 2016			June 30, 2017			December 31, 2016
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets	$	1,082	Other assets	$	646	Other liabilities	$	-	Other liabilities	$	-
Mandatory commitments to sell mortgage loans	Other assets		24	Other assets		630	Other liabilities		-	Other liabilities		-
Pay-fixed interest rate swap agreements	Other assets		422	Other assets		493	Other liabilities		422	Other liabilities		244
Pay-variable interest rate swap agreements	Other assets		422	Other assets		244	Other liabilities		422	Other liabilities		493
Purchased options	Other assets		272	Other assets		238	Other  liabilities		-	Other liabilities		-
Written options	Other assets		-	Other assets		-	Other liabilities		272	Other liabilities		238
Total derivatives		$	2,222		$	2,251		$	1,116		$	975

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

		Gain (Loss) Recognized in Income
	Location of Gain (Loss)	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
	Recognized in Income	2017			2016			2017			2016
		(In thousands)						(In thousands)
No hedge designation
Rate-lock mortgage loan commitments	Net gains on mortgage loans	$	65		$	130		$	436		$	349
Mandatory  commitments to sell mortgage loans	Net gains on mortgage loans		190			(240	)		(606	)		(446	)
Pay-fixed interest rate  swap agreements	Interest income		(359	)		(590	)		(249	)		(1,708	)
Pay-variable interest rate swap agreements	Interest income		359			590			249			1,708
Purchased options	Interest expense		(35	)		3			34			81
Written options	Interest expense		35			(3	)		(34	)		(81	)
Total		$	255		$	(110	)	$	(170	)	$	(97	)