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RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS
 9 Months Ended
Sep. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS
RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS
The Company uses derivative instruments and other risk management techniques to reduce its exposure to adverse fluctuations in interest rates in accordance with its risk management policies. The Company utilizes forward contracts and investor commitments to economically hedge mortgage banking products and may from time to time use interest rate swaps as hedges against certain liabilities.
On September 30, 2013, the Company entered into pay-fixed, receive-variable interest-rate swap contracts with institutional counterparties to hedge against variability in cash flows attributable to interest rate risk caused by changes in the LIBOR benchmark interest rate on the Company’s ongoing LIBOR based variable rate deposits. The Company is accounting for the swaps as cash flow hedges under ASC 815. The notional amount of the interest rate swaps were $50.0 million with a maturity date of September 27, 2018. The fair values of the interest rate swaps were gains of $105 thousand and $226 thousand as of September 30, 2014 and December 31, 2013, respectively.
The Company originates residential real estate mortgage loans and generates revenues from the origination and sale of these loans. Although management closely monitors market conditions, such activities are sensitive to fluctuations in prevailing interest rates and real estate markets. As of September 30, 2014, approximately 73.9 percent of all properties securing loans held for sale were located in California. A change in the underlying economic conditions of the California residential real estate market could have an adverse impact on the Company’s results of operations.
In connection with mortgage banking activities, if interest rates increase, the value of the Company’s loan commitments to borrowers and fixed rate mortgage loans held-for-sale are adversely impacted. The Company attempts to economically hedge the risk of the overall change in the fair value of loan commitments to borrowers and mortgage loans held for sale by selling forward contracts on securities with government-sponsored enterprises (GSEs) and investors in loans. Forward contracts on securities of GSEs and loan commitments to borrowers are non-designated derivative instruments and the gains and losses resulting from these derivative instruments are included in net gain on mortgage banking activities in the accompanying consolidated statements of operations. At September 30, 2014, the resulting derivative assets of $6.9 million and liabilities of $596 thousand, are included in other assets and accrued expenses and other liabilities, respectively, on the accompanying consolidated statements of financial condition. At September 30, 2014, the Company had outstanding forward sales commitments totaling $307.0 million. At September 30, 2014, the Company was committed to fund loans for borrowers of approximately $200.4 million.
The net losses relating to free-standing derivative instruments used for risk management were $2.5 million and $4.3 million for the three months ended September 30, 2014 and 2013, respectively, and $11.6 million and $4.3 million for the nine months ended September 30, 2014 and 2013, respectively, and are included in net gain on mortgage banking activities in the consolidated statements of operations.
The following table presents the amount and market value of derivative instruments included in the consolidated statements of financial condition as of the dates indicated. Note 3, Fair Value of Financial Instruments, contains further disclosures pertaining to the fair value of mortgage banking derivatives.
 
 
September 30, 2014
 
December 31, 2013
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
(In thousands)
Included in assets:
 
 
 
 
 
 
 
Interest rate lock commitments
$
192,701

 
$
6,850

 
$
129,010

 
$
3,962

Mandatory forward commitments
—

 
—

 
242,337

 
1,305

Interest rate swap
50,000

 
105

 
50,000

 
226

Total included in assets
$
242,701

 
$
6,955

 
$
421,347

 
$
5,493

Included in liabilities:
 
 
 
 
 
 
 
Interest rate lock commitments
$
7,738

 
$
325

 
$
—

 
$
—

Mandatory forward commitments
307,000

 
271

 
—

 
—

Total included in liabilities
$
314,738

 
$
596

 
$
—

 
$
—