Derivatives and Hedging

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company has established policies that neither carrying nor fair value at risk should exceed established guidelines. The Company has designed strategies to confine these risks within the established limits and identify appropriate trade-offs in the financial structure of its balance sheet. These strategies include the use of derivative financial instruments to help achieve the desired balance sheet repricing structure while meeting the desired objectives of its clients. Currently the Company employs certain interest rate swaps that are designated as fair value hedges. The Company also has interest rate derivatives that result from a service provided to certain qualifying clients and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition as of December 31, 2013 (dollars in thousands).

Information about the valuation methods used to measure fair value is provided in note 24.



		Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
	Balance Sheet Location	December 31, 2013		December 31, 2012		Balance Sheet Location	December 31, 2013		December 31, 2012
Derivatives designated as hedging instruments:
Interest rate products	Other assets	$	129	$	—	Other liabilities	$	—	$	—
Total derivatives designated as hedging instruments		$	129	$	—		$	—	$	—

Derivatives not designated as hedging instruments:
Interest rate products	Other assets	$	73	$	—	Other liabilities	$	74	$	—
Total derivatives not designated as hedging instruments		$	73	$	—		$	74	$	—

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed-rate loans due to changes in the benchmark interest rate, LIBOR. Interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of December 31, 2013, the Company had one interest rate swap with a notional amount of $10.0 million that was designated as a fair value hedge of interest rate risk associated with the Company’s fixed-rate loans. The Company did not have any fair value hedges outstanding as of December 31, 2012.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the year ended December 31, 2013, the Company recognized a net gain of $10 thousand in non-interest income related to hedge ineffectiveness.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain clients, which the Company implemented during the third quarter of 2013. The Company executes interest rate swaps with commercial banking clients to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the client swaps and the offsetting swaps are recognized directly in earnings. As of December 31, 2013, the Company had three matched interest rate swap transactions with an aggregate notional amount of $7.3 million related to this program.

Effect of Derivative Instruments on the Consolidated Statement of Operations

The tables below present the effect of the Company’s derivative financial instruments on the Income Statement for the year ended December 31, 2013 (in thousands).



Derivatives in Fair Value Hedging Relationships	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative			Amount of Gain or (Loss) Recognized in Income on Hedged Item
		For the years ended December 31,			For the years ended December 31,
		2013		2012	2013			2012
Interest rate products	Interest income	$	129	—	$	(120	)	—
Total		$	129	—	$	(120	)	—



		Amount of Gain or (Loss) Recognized in Income on Derivative
		For the years ended December 31,
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	2013			2012
Interest rate products	Other non-interest income	$	(1	)	—
Total		$	(1	)	—

Credit-risk-related Contingent Features

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of December 31, 2013, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $36 thousand. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and as of December 31, 2013, those thresholds had not been exceeded, and as a result, no collateral was posted at that time. If the Company had breached any of these provisions at December 31, 2013, it could have been required to settle its obligations under the agreements at the termination value.