17. Derivatives

The Company has stand-alone derivative financial instruments in the form of interest rate caps that derive their value from a fee paid and are adjusted to fair value based on index and strike rate, and swap agreements that derive their value from the underlying interest rate. 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 arises in the event of nonperformance by the counterparties to these agreements, and is limited to the net difference between the calculated amounts to be received and paid, if any. Such differences, which represent the fair value of the derivative instruments, are reflected on the Company's balance sheet as derivative assets and derivative liabilities. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail to meet their obligations.

The Company currently holds derivative instruments that contain credit-risk related features that are in a net liability position, which may require that collateral be assigned to dealer banks. At June 30, 2015, the Company had posted cash collateral totaling $1.6 million with dealer banks related to derivative instruments in a net liability position.

The Company does not offset fair value amounts recognized for derivative instruments. The Company does not net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement.

Risk Management Policies—Derivative Instruments

The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net income volatility within an assumed range of interest rates.

Interest Rate Risk Management—Cash Flow Hedging Instruments

The Company uses variable rate debt as a source of funds for use in the Company's lending and investment activities and other general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore, generally hedges a portion of its variable-rate interest payments.

Information pertaining to outstanding interest rate caps and swap agreements used to hedge junior subordinated debt and FHLB advances is as follows.

June 30, 2015
Notional Amount		Inception Date	Termination Date	Index	Receive Rate			Pay Rate			Strike Rate			Unrealized Loss			Fair Value			Balance Sheet Location
(Dollars in thousands)
	Interest rate swaps:
$	5,000	July 2013	July 2033	3 Mo. LIBOR		0.28	%		3.38	%		n/a			(472	)		(472	)	Other Liabilities
	5,000	July 2013	July 2028	3 Mo. LIBOR		0.28	%		3.23	%		n/a			(368	)		(368	)	Other Liabilities
	5,000	July 2013	July 2023	3 Mo. LIBOR		0.28	%		2.77	%		n/a			(208	)		(208	)	Other Liabilities
	Interest rate caps:
	6,000	October 2014	September 2019	3 Mo. LIBOR		n/a			n/a			2.50	%		(114	)		63		Other Assets
	10,000	March 2015	February 2020	3 Mo. LIBOR		n/a			n/a			2.50	%		(80	)		136		Other Assets

$	31,000													$	(1,242	)	$	(849	)

June 30, 2014
Notional Amount		Inception Date	Termination Date	Index	Receive Rate			Pay Rate			Strike Rate			Unrealized Loss			Fair Value			Balance Sheet Location
(Dollars in thousands)
	Interest rate swaps:
$	10,000	February 2010	February 2015	3 Mo. LIBOR		2.12	%		4.69	%		n/a		$	(99	)	$	(165	)	Other Liabilities
	5,000	July 2013	July 2033	3 Mo. LIBOR		0.23	%		3.38	%		n/a			(216	)		(216	)	Other Liabilities
	5,000	July 2013	July 2028	3 Mo. LIBOR		0.23	%		3.23	%		n/a			(200	)		(200	)	Other Liabilities
	5,000	July 2013	July 2023	3 Mo. LIBOR		0.23	%		2.77	%		n/a			(133	)		(133	)	Other Liabilities
	Interest rate caps:
	6,000	September 2009	September 2014	3 Mo. LIBOR		n/a			n/a			2.51	%		(16	)		—		Other Assets

$	31,000													$	(664	)	$	(714	)

During the years ended June 30, 2015 and 2014, no interest rate cap or swap agreements were terminated prior to maturity. Changes in the fair value of interest rate caps and swaps designated as hedging instruments of the variability of cash flows associated with variable rate debt are reported in other comprehensive income. These amounts subsequently are reclassified into interest expense as a yield adjustment in the same period in which the related interest on the debt affects earnings. Risk management results for the years ended June 30, 2105 and 2014 related to the balance sheet hedging of variable rate debt indicates that the hedges were effective.

During the periods presented, amounts recognized in income related to hedge ineffectiveness resulted from amortization of the non-zero fair value associated with the Company's single interest rate swap held at the time of the merger with FHB Formation LLC in December 2010. During the periods presented, amounts recognized in income related to amounts excluded from effectiveness testing resulted from amortization of the acquisition price of interest rate caps. The table below presents amounts recognized in income related to both hedge ineffectiveness and amounts excluded from effectiveness testing.

	Year Ended June 30,
	2015			2014
	(Dollars in thousands)
Interest income (expense):
Interest rate caps	$	(15	)	$	(24	)
Interest rate swap		64			100

Total	$	49		$	76

The Company does not expect to record interest income or interest expense related to interest rate swap or interest rate cap ineffectiveness in the next twelve months.