31. Derivatives

The Company uses derivatives to manage its exposure to interest rate risk. The Company maintains an overall interest-rate-risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate changes. Derivatives include interest rate swaps, interest rate caps and forward contracts. The Company's goal is to manage interest rate sensitivity by modifying the re-pricing or maturity characteristics of certain balance sheet assets and liabilities so the net interest margin is not, on a material basis, adversely affected by movements in interest rates.

The Company accounts for derivatives on a mark-to-market basis, with gains or losses charged to operations as they occur. The fair value of derivatives is generally reported net by counterparty. The fair value of derivatives accounted for as hedges is also reported net of accrued interest and included in other liabilities within the consolidated statement of financial condition. Derivatives not accounted for as hedges that are in a net asset position are recorded as securities held for trading and derivatives in a net liability position are recorded as other liabilities within the consolidated statement of financial condition.

Cash Flow Hedges

The Company had previously designated the pay-fixed-interest rate swaps to hedge the variability of future interest cash flows of adjustable rate advances from the FHLB. As of December 31, 2013 and 2012, the Company did not have any pay-fixed-interest rate swaps designated as cash flow hedges. For the year ended December 31, 2013, no ineffectiveness was recognized related to pay-fixed-interest rate swaps designated as cash flow hedges. For the year ended December 31, 2012, the Company recognized $1.1 million of ineffectiveness for the pay-fixed-interest rate swaps designated as cash flow hedges. As of December 31, 2013 and 2012, no unrealized losses on cash flow hedges were recorded in accumulated other comprehensive income.

The following table presents the location and effect of cash flow derivatives on the Company's results of operations and financial condition for the year ended December 31, 2012. The Company did not have any cash flow derivatives for the year ended December 31, 2013.

The Company held $60.0 million and $125.0 million in notional value of derivatives not designated as hedges at December 31, 2013 and 2012, respectively.

The Company periodically purchases interest rate caps to manage its interest rate exposure. Interest rate cap agreements generally involve the purchase of out-of-the-money caps to protect the Company from the adverse effects of rising interest rates. These products are not linked to specific assets and liabilities that appear on the balance sheet or to a forecasted transaction and, therefore, do not qualify for hedge accounting. As of December 31, 2013 and 2012, the Company had no outstanding interest rate caps.

The Company periodically enters into forward contracts to create an economic hedge on its MSRs and mortgage pipeline. As of December 31, 2013, the Company had no notional amount of forward contracts used to hedge its MSR. As of December 31, 2012, the Company had a notional amount of $50.0 million of forward contracts used to hedge its MSR. As of December 31, 2013 and 2012, the Company had a notional amount of $45.0 million and $75.0 million, respectively, of forwards hedging its mortgage pipeline. For the years ended December 31, 2013 and 2012, the Company recorded gains of approximately $2.5 million and losses of approximately $6.3 million, respectively, on forward contracts, including losses of $2.3 million and gains of $0.6 million, respectively, related to the economic hedge on its MSRs.

Interest rate lock commitments are commitments with a loan applicant in which the loan terms, including interest rate and price, are guaranteed for a designated period of time subject to credit approval. The Company enters into IRLCs in connection with its residential mortgage banking activities to fund residential mortgage loans at specified times in the future. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative instruments under applicable accounting guidance. As such, these IRLCs are recorded at fair value, with changes in fair value recorded in earnings as a net gain on trading assets and derivatives in the period they occur.

Credit risk related to derivatives arises when amounts receivable from counterparties exceed amounts payable. Because the notional amount of the instruments only serves as a basis for calculating amounts receivable or payable, the risk of loss with any counterparty is limited to a small fraction of the notional amount. The Company's maximum loss related to credit risk is equal to the gross fair value of its derivative instruments. The Company deals only with derivative dealers that are national market makers with strong credit ratings in their derivatives activities. The Company further controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, counterparties are required to provide cash collateral to the Company when their unsecured loss positions exceed certain negotiated limits.

Derivative contracts used as economic hedges, such as forward contracts, to which the Company is a party, settle monthly, quarterly or semiannually. Furthermore, the Company has netting agreements with the dealers and only does business with creditworthy dealers. Because of these factors, the Company's credit risk exposure related to derivatives contracts at December 31, 2013 and 2012 was not considered material.