DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

On July 29, 2009 we entered into an interest rate swap agreement with PNC Bank (PNC) of Pittsburgh, PA, for our $10 million Trust preferred borrowing, which carries a floating interest rate of 90 day London Interbank Offered Rate (LIBOR) plus 160 basis points. The terms of this hedge allowed us to mitigate our exposure to interest-rate fluctuations by swapping our floating rate obligation for a fixed rate obligation. The notional amount of the swap agreement was $10 million, and had an expiration date of September 30, 2014. Under the terms of the agreement, at the end of each quarter we swapped our floating rate for a fixed rate of 3.26%. Including the additional 160 basis points, the effective fixed rate of interest cost was 4.86% on our $10 million Trust Preferred borrowings.

The fixed-rate payment feature of this swap was structured to mirror the provisions of the hedged borrowing agreement. This swap qualified as a cash flow hedge and the underlying liability was carried at fair value in other liabilities, with the changes in fair value of the instrument included in Stockholders’ Equity in accumulated other comprehensive income. This swap expired on September 30, 2014 and was not renewed.

In August 2014 we began participating in a mandatory delivery program for mortgage loans. Under the mandatory delivery program we committed to deliver a block of loans to an investor at a preset cost prior to the close of such loans. This differs from a best efforts delivery which sets the cost to the investor on a loan by loan basis. Mandatory delivery creates a higher level of risk for us but is not binding to the client. Our client could decide, at any time between the time of the rate lock and the actual closing on their mortgage loan, not to proceed with the commitment. There is a higher occurrence of this during periods of volatility.

To mitigate this risk, we pair the rate lock commitment with the sale of a notional security bearing similar attributes. At the time the loan is delivered to the investor, matched securities are repurchased. Gains or losses associated with this pairing are recorded in mortgage banking income on our income statement as incurred. Our Board approved mandatory delivery policy only allows us to commit $50 million to the program at any given time. We utilize the services of Optimal Blue to help monitor and manage our rate lock activities in this program. We reported a gain related to our mandatory delivery program in the second quarter of 2015 of $585 thousand that was recorded in mortgage banking income. Year to date 2015 we have reported a gain related to our mandatory delivery program of $191 thousand. We did not participate in a mandatory delivery program in the first half of 2014.