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Derivative Activities
 3 Months Ended
Mar. 31, 2014
Derivative Activities [Abstract]  
DERIVATIVE ACTIVITIES

NOTE 7 — DERIVATIVE ACTIVITIES

 

During the quarter ended March 31, 2014, losses of $478 thousand were recognized and reflected as “Derivative Activities” in the unaudited consolidated statements of operations, which were mainly related to the options tied to the Standard & Poor's 500 stock market index. During the quarter ended March 31, 2013, losses of $788 thousand were recognized and were mainly related to the options tied to the Standard & Poor's 500 stock market index

The following table details “Derivative Assets” and “Derivative Liabilities” as reflected in the unaudited consolidated statements of financial condition at March 31, 2014 and December 31, 2013:

 March 31, December 31,
 2014 2013
 (In thousands)
Derivative assets:     
Options tied to S&P 500 Index $ 12,555 $ 16,430
Interest rate swaps designated as cash flow hedges  166   850
Interest rate swaps not designated as hedges  2,755   2,861
Interest rate caps  374   319
Other  11   42
 $ 15,861 $ 20,502
Derivative liabilities:     
Interest rate swaps designated as cash flow hedges  10,695   11,757
Interest rate swaps not designated as hedges  2,755   2,861
Interest rate caps  374   319
Other  6   -
 $ 13,830 $ 14,937

Interest Rate Swaps

 

The Company enters into interest rate swap contracts to hedge the variability of future interest cash flows of forecasted wholesale borrowings, attributable to changes in a predetermined variable index rate. The interest rate swaps effectively fix the Company's interest payments on an amount of forecasted interest expense attributable to the variable index rate corresponding to the swap notional stated rate. These swaps are designated as cash flow hedges for the forecasted wholesale borrowing transactions and are properly documented as such, and therefore, qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of our cash flow hedges was recognized in other comprehensive income and is subsequently reclassified into earnings in the period during which the hedged forecasted transactions affect earnings. Changes in the fair value of these derivatives are recorded in accumulated other comprehensive income to the extent there is no significant ineffectiveness in the cash flow hedging relationships. Currently, the Company does not expect to reclassify any amount included in other comprehensive income related to these interest rate swaps to earnings in the next twelve months.

The following table shows a summary of these swaps and their terms at March 31, 2014:

  Notional Fixed Variable Trade Settlement Maturity
Type Amount Rate Rate Index Date Date Date
   (In thousands)          
Interest Rate Swaps $ 25,000 2.4365% 1-Month LIBOR  05/05/11 05/04/12 05/04/16
    25,000 2.6200% 1-Month LIBOR  05/05/11 07/24/12 07/24/16
    25,000 2.6350% 1-Month LIBOR  05/05/11 07/30/12 07/30/16
    50,000 2.6590% 1-Month LIBOR  05/05/11 08/10/12 08/10/16
    100,000 2.6750% 1-Month LIBOR  05/05/11 08/16/12 08/16/16
    40,277 2.4210% 1-Month LIBOR  07/03/13 07/03/13 08/01/23
  $ 265,277          

An unrealized loss of $10.5 million was recognized in accumulated other comprehensive income related to the valuation of these swaps at March 31, 2014, and the related asset and liability are being reflected in the accompanying unaudited consolidated statements of financial condition.

 

At March 31, 2014 and December 31, 2013, interest rate swaps not designated as hedging instruments that were offered to clients represented an asset of $2.8 million and $2.9 million, respectively, and were included as part of derivative assets in the unaudited consolidated statements of financial position. The credit risk to these clients stemming from these derivatives, if any, is not material. At March 31, 2014 and December 31, 2013, interest rate swaps not designated as hedging instruments that are the mirror-images of the derivatives offered to clients represented a liability of $2.8 million and $2.9 million, respectively, and were included as part of derivative liabilities in the unaudited consolidated statements of financial condition.

The following table shows a summary of these interest rate swaps not designated as hedging instruments and their terms at March 31, 2014:

  Notional Fixed Variable Settlement Maturity
Type Amount Rate Rate Index Date Date
   (In thousands)        
Interest Rate Swaps - Derivatives Offered to Clients $ 4,094 5.1300% 1-Month LIBOR 07/03/06 07/03/16
    12,500 5.5050% 1-Month LIBOR 04/11/09 04/11/19
  $ 16,594        
            
Interest Rate Swaps - Mirror Image Derivatives $ 4,094 5.1300% 1-Month LIBOR 07/03/06 07/03/16
    12,500 5.5050% 1-Month LIBOR 04/11/09 04/11/19
  $ 16,594        

Options Tied to Standard & Poor's 500 Stock Market Index

 

The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P 500 Index. The Company uses option agreements with major broker-dealers to manage its exposure to changes in this index. Under the terms of the option agreements, the Company receives the average increase in the month-end value of the index in exchange for a fixed premium. The changes in fair value of the option agreements used to manage the exposure in the stock market in the certificates of deposit are recorded in earnings. At March 31, 2014 and December 31, 2013, the purchased options used to manage exposure to the S&P 500 Index on stock indexed deposits represented an asset of $12.6 million (notional amount of $23.8 million) and $16.4 million (notional amount of $28.0 million), respectively, and the options sold to customers embedded in the certificates of deposit and recorded as deposits in the unaudited consolidated statements of financial condition, represented a liability of $12.1 million (notional amount of $22.9 million) and $15.7 million (notional amount of $26.9 million), respectively.

Interest rate caps

 

The Company has entered into interest rate cap transactions with various clients with floating-rate debt who wish to protect their financial results against increases in interest rates. In these cases, the Company simultaneously enters into mirror-image interest rate cap transactions with financial counterparties. None of these cap transactions qualify for hedge accounting; therefore, they are marked to market through earnings. The outstanding total notional amount of interest rate caps was $110.0 million at both March 31, 2014 and December 31, 2013. At March 31, 2014 and December 31, 2013, the interest rate caps sold to clients represented a liability of $374 thousand and $319 thousand, respectively, and were included as part of derivative liabilities in the unaudited consolidated statements of financial condition. At March 31, 2014 and December 31, 2013, the interest rate caps purchased as mirror-images represented an asset of $374 thousand and $319 thousand, respectively, and were included as part of derivative assets in the unaudited consolidated statements of financial condition.