Derivative Financial Instruments

12 Months Ended

Dec. 31, 2013

Derivative Financial Instruments

Derivative Financial Instruments

(21) Derivative Financial Instruments

Occasionally, Bancorp enters into free-standing interest rate swaps for the benefits of its commercial customers who desire to hedge their exposure to changing interest rates.  Bancorp hedges its interest rate exposure on commercial customer transactions by entering into offsetting swap agreements with approved reputable independent counterparties with substantially matching terms.  These undesignated derivative instruments are recognized on the consolidated balance sheet at fair value.  Because of matching terms of offsetting contracts and the collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition are expected to have an insignificant effect on earnings. Exchanges of cash flows related to the undesignated interest rate swap agreements for 2013 were offsetting and therefore had no net effect on Bancorp’s earnings or cash flows.

Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. Bancorp controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations.

At December 31, 2013 and 2012, Bancorp had outstanding undesignated interest rate swap contracts as follows:

	Receiving						Paying
	December 31,			December 31,			December 31,		December 31,
(dollar amounts in thousands)	2013			2012			2013		2012
Notional amount	$	5,159		$	4,459		$	5,159	$	4,459
Weighted average maturity (years)	6.4			6.3			6.4		6.3
Fair value	$	(275	)	$	(415	)	$	275	$	415

In December 2013, Bancorp entered into an interest rate swap to hedge cash flows of a $10 million floating-rate FHLB borrowing. The interest rate swap involves exchange of Bancorp’s floating rate interest payments on the underlying principal amount. This swap was designated, and qualified, for cash-flow hedge accounting. The term of the swap began December 6, 2013 and ends December 6, 2016. For derivative instruments that are designated and qualify as hedging instruments, the effective portion of gains or losses is reported as a component of other comprehensive income, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction affects earnings. The following table details Bancorp’s derivative positions designated as cash flow hedges as of December 31, 2013.

(dollars in thousands)

Notional		Effective	Maturity	Receive (variable)	Pay fixed		Fair value
amount		date	date	index	swap rate		of asset
$	10,000	12/6/2013	12/6/2016	US 3 Month LIBOR	0.715	%	$	24

Bancorp did not have any derivative positions designated as cash flow hedges at December 31, 2012.