(6)Off-Balance Sheets Activities and Derivatives

In the normal course of business, there are outstanding commitments and contingencies which are not reflected in the accompanying consolidated financial statements.

Loan Commitments

The Bank is a party to conditional commitments to lend funds in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit which include commercial lines of credit and home equity lines that involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Bank’s exposure to credit loss is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

The following financial instruments were outstanding whose contract amounts represent credit risk:

	September 30,		December 31,
	2014		2013
	(In thousands)

Commitments to grant loans	$	15,041	$	12,858
Commitments to originate loans to be sold	11,161		7,150
Unfunded commitments under home equity lines of credit	47,411		46,456
Unfunded commitments under commercial lines of credit	12,834		11,315
Unfunded commitments under SBA lines of credit	4,329		3,601
Unadvanced funds on construction loans	912		3,812

The commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines-of-credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based upon management’s credit evaluation of the counterparty. Collateral held generally consists of real estate.

Interest Rate Risk Management — Derivative Instruments Not Designated As Hedging Instruments

Certain derivative instruments do not meet the requirements to be accounted for as hedging instruments. These undesignated derivative instruments are recognized on the balance sheet at fair value, with changes in fair value recorded in other non-interest income.

Derivative Loan Commitments

Mortgage loan commitments are considered derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Bank enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market.

Outstanding derivative loan commitments expose the Bank to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.

Forward Loan Sale Commitments

To protect against the price risk inherent in derivative loan commitments, the Bank utilizes best efforts forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

With a best efforts contract, the Bank commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). Forward commitments to sell loans totaled $24.4 million and $15.7 million at September 30, 2014 and December 31, 2013, respectively.

The following table presents the fair values of derivative instruments in the consolidated balance sheets:

	Assets			Liabilities
	Balance			Balance
	Sheet	Fair		Sheet	Fair
(Dollars in thousands)	Location	Value		Location	Value

September 30, 2014

Derivative loan commitments	Other assets	$	120	N/A	$	—
Forward loan sale commitments	N/A	—		Other liabilities	8

Total derivatives not designated as hedging instruments		$	120		$	8

December 31, 2013

Derivative loan commitments	N/A	$	—	Other liabilities	$	4
Forward loan sale commitments	Other assets	248		N/A	—

Total derivatives not designated as hedging instruments		$	248		$	4

The following table presents information pertaining to the gains and losses on Bank’s derivative instruments not designated as hedging instruments:

(Dollars in Thousands) Derivatives Not Designated As Hedging	Location of	Three Months Ended September 30,						Nine Months Ended September 30,
Instruments	Gain/(Loss)	2014			2013			2014			2013

Derivative loan commitments	Gain (loss) on sales of loans, net	$	(288	)	$	1,512		$	351		$	95
Forward loan sale commitments	Gain (loss) on sales of loans, net	185			1,710			(256		)	(176		)
		$	(103	)	$	(198	)	$	95		$	(81	)

Loss Contingencies

In October 2013, management was notified of a claim made related to a loan application management services contract pertaining to monthly user fees which had not been invoiced over the term of such contract. The company making the claim acquired the application provider in early 2013. The claim was for $178,000, covering a multi-year period of fees, though invoices and other communications from such company and/or its predecessor indicated balances due from the Bank, which did not include the fees in question, represented all open invoices or all amounts past due. There is no longer a claim for the $178,000.