Derivative Financial Instruments

3 Months Ended

Mar. 31, 2015

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, 2015
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
No hedge designation
Rate-lock mortgage loan commitments	$	28,413		0.1	$	825
Mandatory commitments to sell mortgage loans		59,126		0.1		(223	)
Pay-fixed interest rate swap agreements		15,482		7.1		(443	)
Pay-variable interest rate swap agreements		15,482		7.1		443
Total	$	118,503		1.9	$	602

	December 31, 2014
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
No hedge designation
Rate-lock mortgage loan commitments	$	16,759		0.1	$	437
Mandatory commitments to sell mortgage loans		38,600		0.1		(184	)
Pay-fixed interest rate swap agreements		3,300		9.4		(182	)
Pay-variable interest rate swap agreements		3,300		9.4		182
Total	$	61,959		1.1	$	253

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.

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 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 rate swap agreement fair values will generally move in opposite directions resulting in little or no net impact on our 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
	March 31, 2015			December 31, 2014			March 31, 2015			December 31, 2014
	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	$	825	Other assets	$	437	Other liabilities	$	-	Other liabilities	$	-
Mandatory commitments to sell mortgage loans	Other assets		-	Other assets		-	Other liabilities		223	Other liabilities		184
Pay-fixed interest rate swap agreements	Other assets		-	Other assets		-	Other liabilities		443	Other liabilities		182
Pay-variable interest rate swap agreements	Other assets		443	Other assets		182	Other liabilities		-	Other liabilities		-
Total derivatives		$	1,268		$	619		$	666		$	366

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

Three Month Periods Ended March 31,
	Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)				Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)					Location of Gain (Loss) Recognized in Income (1)	Gain (Loss) Recognized in Income
	2015		2014			2015		2014				2015			2014
						(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements (2)	$	-	$	-	Interest expense	$	-	$	(95	)		$	-		$	-
Total	$	-	$	-		$	-	$	(95	)		$	-		$	-
No hedge designation
Rate-lock mortgage loan commitments											Net mortgage loan gains	$	388		$	(14	)
Mandatory commitments to sell mortgage loans											Net mortgage loan gains		(39	)		(83	)
Pay-fixed interest rate swap agreements											Interest income		(261	)		-
Pay-variable interest rate swap agreements											Interest income		261			-
Total												$	349		$	(97	)

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

(2) Relates to a terminated pay-fixed interest rate swap whose termination fee was included in accumulated other comprehensive income and was being amortized into earnings through December 31, 2014.