Derivatives and Hedging Activities

12 Months Ended

Dec. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

Derivatives and Hedging Activities

The Company is exposed to certain risk relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s forecasted variable rate borrowings. The Company recognizes interest rate swaps as either assets or liabilities at fair value in the statements of financial condition, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allow the Company to settle all interest rate swap agreements held with a single counterparty on a net basis, and to offset net interest rate swap derivative positions with related collateral, where applicable.

The interest rate swaps on variable rate borrowings were designated as cash flow hedges and were over-the-counter contracts. The contracts were entered into by the Company with a single counterparty and the specific agreement of terms were negotiated, including forecasted notional amounts, interest rates and maturity dates. The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to the agreements. The Company controls the counterparty credit risk by maintaining bilateral collateral agreements and through monitoring policy and procedures. The Company only conducts business with primary dealers and believes that the credit risk inherent in these contracts was not significant.

The Company’s interest rate swap derivative financial instruments as of December 31, 2014 are as follows:

(Dollars in thousands)	Forecasted Notional  Amount		Variable Interest Rate 1	Fixed Interest Rate 1		Payment Term 2
Interest rate swap	$	160,000	3 month LIBOR	3.378	%	Oct. 21, 2014 - Oct. 21, 2021
Interest rate swap	100,000		3 month LIBOR	2.498	%	Nov 30, 2015 - Nov. 30, 2022

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¹The Company pays the fixed interest rate and the counterparty pays the Company the variable interest rate.

² No cash will be exchanged prior to the beginning of the payment term.

Note 10. Derivatives and Hedging Activities (continued)

The hedging strategy converts the LIBOR-based variable interest rate on borrowings to a fixed interest rate, thereby protecting the Company from interest rate variability.

On October 21, 2014, the interest rate swap with the $160,000,000 notional amount began its payment term. The Company designated wholesale deposits as the cash flow hedge and these deposits were determined to be fully effective during the current year. As such, no amount of ineffectiveness has been included in the Company’s statements of operations. Therefore, the aggregate fair value of the interest rate swap was recorded in other liabilities with changes recorded in OCI. The Company expects the hedge to remain highly effective during the remaining term of the interest rate swap. Interest expense recorded on this interest rate swap totaled $1,066,000 during 2014 and is reported as a component of interest expense on wholesale deposits. Unless the interest rate swap is terminated during the next year, the Company expects $5,064,000 of the unrealized loss reported in OCI at December 31, 2014 to be reclassified to interest expense during 2015.

The following table presents the pre-tax gains or losses recorded in accumulated other comprehensive income and the Company’s statements of operations relating to the interest rate swap derivative financial instruments:

	Years ended
(Dollars in thousands)	December 31, 2014			December 31, 2013	December 31, 2012
Interest rate swaps
Amount of (loss) gain recognized in OCI (effective portion)	$	(19,557	)	18,728	(7,926	)
Amount of loss reclassified from OCI to interest expense	(993		)	—	—
Amount of loss recognized in other non-interest expense (ineffective portion)	—			—	—

The following table discloses the offsetting of financial assets and interest rate swap derivative assets:

	December 31, 2014				December 31, 2013
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statements of Financial Position	Net Amounts of Assets Presented in the Statements of Financial Position	Gross Amounts of Recognized Assets	Gross Amounts Offset in the Statements of Financial Position		Net Amounts of Assets Presented in the Statements of Financial Position
Interest rate swaps	$	—	—	—	6,844	(4,948	)	1,896

The following table discloses the offsetting of financial liabilities and interest rate swap derivative liabilities:

	December 31, 2014				December 31, 2013
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statements of Financial Position	Net Amounts of Liabilities Presented in the Statements of Financial Position	Gross Amounts of Recognized Liabilities	Gross Amounts Offset in the Statements of Financial Position		Net Amounts of Liabilities Presented in the Statements of Financial Position
Interest rate swaps	$	16,668	—	16,668	4,948	(4,948	)	—

Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparty in the form of investment securities totaling $20,339,000 at December 31, 2014. There was $0 collateral pledged from the counterparty to the Company as of December 31, 2014. There is the possibility that the Company may need to pledge additional collateral in the future if there were declines in the fair value of the interest rate swap derivative financial instruments versus the collateral pledged.