DERIVATIVES AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES AND HEDGING ACTIVITIES

DERIVATIVES AND HEDGING ACTIVITIES

The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally to manage the Company’s interest rate risk. Additionally, the Company enters into interest rate derivatives and foreign exchange contracts to accommodate the business requirements of its customers (“customer related positions”). The Company minimizes the market and liquidity risks of customer-related positions by entering into similar offsetting positions with broker-dealers. Derivative instruments are carried at fair value in the Company’s financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.

The Company does not enter into proprietary trading positions for any derivatives.

Interest Rate Positions

The Company currently utilizes interest rate swap agreements as hedging instruments against interest rate risk associated with the Company’s borrowings. An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. The maximum length of time over which the Company is currently hedging its exposure to the variability in future cash flows for forecasted transactions related to the payment of variable interest on existing financial instruments is five years.

The following table reflects the Company’s derivative positions for the periods indicated below for interest rate swaps which qualify as hedges for accounting purposes:

December 31, 2013
Notional Amount		Trade Date	Effective Date	Maturity Date	Receive (Variable) Index	Current Rate Received		Pay Fixed Swap Rate		Fair Value
(Dollars in thousands)
$	25,000	16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.24	%	5.04	%	$	(3,151	)
25,000		16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.24	%	5.04	%	(3,152		)
25,000		9-Dec-08	10-Dec-08	10-Dec-18	3 Month LIBOR	0.24	%	2.94	%	(1,493		)
50,000		17-Nov-09	20-Dec-10	20-Dec-14	3 Month LIBOR	0.25	%	3.04	%	(1,341		)
25,000		5-May-11	10-Jun-11	10-Jun-15	3 Month LIBOR	0.24	%	1.71	%	(493		)
$	150,000									$	(9,630	)
December 31, 2012
Notional Amount		Trade Date	Effective Date	Maturity Date	Receive (Variable) Index	Current Rate Received		Pay Fixed Swap Rate		Fair Value
(Dollars in thousands)
$	25,000	16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.31	%	5.04	%	$	(4,416	)
25,000		16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.31	%	5.04	%	(4,417		)
25,000		8-Dec-08	10-Dec-08	10-Dec-13	3 Month LIBOR	0.31	%	2.65	%	(553		)
25,000		9-Dec-08	10-Dec-08	10-Dec-13	3 Month LIBOR	0.31	%	2.59	%	(539		)
25,000		9-Dec-08	10-Dec-08	10-Dec-18	3 Month LIBOR	0.31	%	2.94	%	(2,819		)
50,000		17-Nov-09	20-Dec-10	20-Dec-14	3 Month LIBOR	0.31	%	3.04	%	(2,647		)
25,000		5-May-11	10-Jun-11	10-Jun-15	3 Month LIBOR	0.31	%	1.71	%	(798		)
$	200,000									$	(16,189	)

During 2011, the Company had entered into a forward starting swap with a notional amount of $40.0 million, with the intention of hedging a future federal home loan advance. Subsequently, during the quarter ending March 31, 2012, the Company exited the forward starting swap. At the time of exit, the derivative instrument had a fair value of $22,000, which was received in cash and recognized in other income.

For derivative instruments that are designated and qualify as hedging instruments, the effective portion of the gains or losses is reported as a component of OCI, and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  The Company expects approximately $4.5 million (pre-tax) to be reclassified to interest expense from OCI, related to the Company’s cash flow hedges, in the next twelve months.  This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of December 31, 2013.

The Company recognized $244,000 of net amortization income that was an offset to interest expense related to previously terminated swaps for the years ended December 31, 2013, 2012 and 2011.

The Company had no fair value hedges as of December 31, 2013, 2012 and 2011.

Customer Related Positions

Interest rate derivatives, primarily interest-rate swaps, offered to commercial borrowers through the Bank’s loan level derivative program do not qualify as hedges for accounting purposes. The Bank believes that its exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an offsetting dealer transaction. The commercial customer derivative program allows the Bank to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap.

Foreign exchange contracts offered to commercial borrowers through the Bank’s derivative program do not qualify as hedges for accounting purposes. The Bank acts as a seller and buyer of foreign exchange contracts to accommodate its customers. To mitigate the market and liquidity risk associated with these derivatives, the Bank enters into similar offsetting positions.

The following table reflects the Company’s customer related derivative positions for the periods indicated below for those derivatives not designated as hedges for accounting purposes:

	Number of Positions (1)	Notional Amount Maturing
		Less than 1 year		Less than 2 years	Less than 3 years	Less than 4 years	Thereafter	Total		Fair Value
	December 31, 2013
	(Dollars in thousands)
Loan level swaps
Receive fixed, pay variable	168	$	48,882	97,975	42,957	42,116	329,554	$	561,484	$	9,484
Pay fixed, receive variable	162	$	48,882	97,975	42,957	42,116	329,554	$	561,484	$	(9,523	)
Foreign exchange contracts
Buys foreign currency, sells U.S. currency	6	$	11,367	—	—	—	—	$	11,367	$	396
Buys U.S. currency, sells foreign currency	6	$	11,367	—	—	—	—	$	11,367	$	(390	)
	December 31, 2012
	(Dollars in thousands)
Loan level swaps
Receive fixed, pay variable	143	$	16,766	65,344	105,939	45,267	268,932	$	502,248	$	28,678
Pay fixed, receive variable	137	$	16,766	65,344	105,939	45,267	268,932	$	502,248	$	(28,663	)
Foreign exchange contracts
Buys foreign currency, sells U.S. currency	16	$	42,516	—	—	—	—	$	42,516	$	1,748
Buys U.S. currency, sells foreign currency	16	$	42,516	—	—	—	—	$	42,516	$	(1,718	)

(1)     The Company may enter into one swap agreement which offsets multiple reverse swap agreements. The positions will offset and the terms will be identical.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet at the periods indicated:

	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	Fair Value at December 31, 2013		Fair Value at December 31, 2012		Balance Sheet Location	Fair Value at December 31, 2013		Fair Value at December 31, 2012
	(Dollars in thousands)
Derivatives designated as hedges
Interest rate swaps	Other assets	$	—	$	—	Other liabilities	$	9,630	$	16,189
Derivatives not designated as hedges
Customer related positions
Loan level swaps	Other assets	$	16,301	$	28,678	Other liabilities	$	16,340	$	28,663
Foreign exchange contracts	Other assets	396		1,748		Other liabilities	390		1,718
Total		$	16,697	$	30,426		$	16,730	$	30,381

The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:

	Years Ended December 31
	2013			2012			2011
	(Dollars in thousands)
Derivatives designated as hedges
Gain (loss) in OCI on derivative (effective portion), net of tax	$	350		$	(2,122	)	$	(7,021	)
Net loss reclassified from OCI into income (effective portion)	$	(5,723	)	$	(5,417	)	$	(5,472	)
Loss recognized in income on derivative (ineffective portion & amount excluded from effectiveness testing):
Interest expense	$	—		$	—		$	—
Other expense	—			—			—
Total	$	—		$	—		$	—
Derivatives not designated as hedges
Changes in fair value of customer related positions:
Other income	$	38		$	134		$	164
Other expense	(116		)	(49		)	(56		)
Total	$	(78	)	$	85		$	108

By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s Board of Directors. As such, management believes the risk of incurring credit losses on derivative contracts with those counterparties is remote and losses, if any, would be immaterial. The Company had $3.4 million in exposure relating to institutional counterparties at December 31, 2013 and had no such exposure at December 31, 2012, as all such swaps were in a liability position. The Company’s exposure relating to customer counterparties was approximately $13.6 million and $31.0 million at December 31, 2013 and 2012, respectively. Credit exposure may be reduced by the amount of collateral pledged by the counterparty.

Mortgage Derivatives

Prior to closing and funding certain one-to-four family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments may be executed, under which the Company agrees to deliver whole mortgage loans to various investors. In addition, the Company may also enter into additional Forward To Be Announced ("TBA") mortgage contracts, also considered derivative instruments, which are purchased by the company from a list of diversified counterparties in order to hedge customer rate locks. These forward contracts carry a market price that has a strong inverse relationship to that of mortgage prices. When the Company locks a rate to the customer, the rate can be held for the benefit of the customer for a certain period of time until the mortgage is sold. During that time, the Company may not have agreed on a price with a mortgage investor and fluctuations in market conditions may cause the mortgage to lose market value. Within a short period after the rate is locked with the customer, the Company may, depending upon the effectiveness of existing hedges, execute a Forward TBA trade with a counterparty to hedge that market risk. Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future hedges. The effectiveness of the hedges rely on the accuracy of these assumptions.

The table below summarizes the fair value of mortgage derivatives at the periods indicated:

	December 31
	2013			2012
	(Dollars in thousands)
Mortgage derivative assets
Interest rate lock commitments	$	204		$	102
Forward TBA mortgage contracts	64			—
Total mortgage derivative assets	$	268		$	102
Mortgage derivative liabilities
Forward sales agreements	$	(35	)	$	(223	)
Total mortgage derivative liabilities	$	(35	)	$	(223	)

The changes in fair value on the interest rate lock commitments, forward delivery sale commitments, and forward TBA mortgage contracts are recorded in current period earnings as a component of mortgage banking income. In addition, the Company has elected the fair value option to carry loans held for sale at fair value. The change in fair value of loans held for sale is also recorded as a component of mortgage banking income in accordance with the Company's fair value election.