DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

3 Months Ended

Mar. 31, 2015

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 11–DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation's assets or liabilities and the risk that net interest income from its loan and investment portfolios will be adversely affected by changes in interest rates. The overall objective of the Corporation's interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

The Corporation designates a derivative as a fair value hedge, cash flow hedge or economic undesignated hedge when it enters into the derivative contract. As of March 31, 2015 and December 31, 2014, all derivatives held by the Corporation were considered economic undesignated hedges. These undesignated hedges are recorded at fair value with the resulting gain or loss recognized in current earnings.

The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk:

Interest rate cap agreements - Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates.

Interest rate swaps - Interest rate swap agreements generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying notional principal amount. As of March 31, 2015 and December 31, 2014, most of the interest rate swaps outstanding are used for protection against rising interest rates. Similar to unrealized gains and losses arising from changes in fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being economically hedged.

Forward Contracts- Forward contracts are sales of to-be-announced (“TBA”) mortgage-backed securities that will settle over the standard delivery date and do not qualify as “regular way” security trades. Regular-way security trades are contracts that have no net settlement provision and no market mechanism to facilitate net settlement and that provide for delivery of a security within the time generally established by regulations or conventions in the marketplace or exchange in which the transaction is being executed. The forward sales are considered derivative instruments that need to be marked to market. These securities are used to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. Unrealized gains (losses) are recognized as part of mortgage banking activities in the consolidated statement of income.

To satisfy the needs of its customers, the Corporation may enter into nonhedging transactions. In these transactions, generally, the Corporation participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and conditions.

In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or nonhedging derivative instrument.

The following table summarizes the notional amounts of all derivative instruments:
	Notional Amounts
	As of		As of
	March 31,		December 31,
	2015		2014
Undesignated economic hedges:	(In thousands)
Interest rate contracts:
Interest rate swap agreements	$	5,440	$	5,440
Written interest rate cap agreements		36,809		37,132
Purchased interest rate cap agreements		36,809		37,132
Forward Contracts:
Sale of TBA GNMA MBS pools		32,000		19,000
	$	111,058	$	98,704
Notional amounts are presented on a gross basis with no netting of offseting exposure positions.

The following table summarizes the fair value of derivative instruments as of the indicated dates and the location in the statement of financial condition:
	Asset Derivatives					Liability Derivatives
	Statement of	March 31,		December 31,			March 31,		December 31,
	Financial	2015		2014			2015		2014
	Condition Location	Fair Value		Fair Value		Statement of Financial Condition Location	Fair Value		Fair Value
	(In thousands)
Undesignated economic hedges:
Interest rate contracts:
Interest rate swap agreements	Other assets	$	-	$	33	Accounts payable and other liabilities	$	-	$	33
Written interest rate cap agreements	Other assets		-		-	Accounts payable and other liabilities		1		6
Purchased interest rate cap agreements	Other assets		1		6	Accounts payable and other liabilities		-		-
Forward Contracts:
Sales of TBA GNMA MBS pools	Other assets		-		-	Accounts payable and other liabilities		220		148
		$	1	$	39		$	221	$	187

The following table summarizes the effect of derivative instruments on the statement of income :
		Gain (or Loss)
	Location of Gain or (Loss)		Quarter Ended
	Recognized in Income on	March 31,
(In thousands)	Derivatives	2015		2014
			(In thousands)
UNDESIGNATED ECONOMIC HEDGES:
Interest rate contracts:
Interest rate swap agreements	Interest income - Loans	$	-	$	313
Forward contracts:
Sales of TBA GNMA MBS pools	Mortgage Banking Activities		(72)		(165)
Total (loss) gain on derivatives		$	(72)	$	148

Derivative instruments, such as interest rate swaps, are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market's expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve and the level of interest rates, as well as the expectations for rates in the future.

A summary of interest rate swaps is as follows:

	As of		As of
	March 31,		December 31,
	2015		2014
		(Dollars in thousands)
Pay fixed/receive floating :
Notional amount	$	5,440	$	5,440
Weighted-average receive rate at period end		2.04%		2.03%
Weighted-average pay rate at period end		3.45%		3.45%
As of March 31, 2015, the Corporation has not entered into any derivative instrument containing credit-risk-related
contingent features.