Bank of the West 2014 Annual Report Download - page 40

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The following table shows the effect of fair value hedging on the Bank’s pre-tax income:
Years ended December 31,
2014 2013
(dollars in thousands) Deposits Long-Term Debt Deposits Long-Term Debt
Gains recorded in net interest income $ - $5,215 $ 143 $ 5,782
Gains (losses) recorded in noninterest income:
Recognized on derivatives -75(108) (6,785)
Recognized on hedged items - 883 122 7,159
Recognized as ineffective portion $ - $ 958 $ 14 $ 374
Total $ - $6,173 $ 157 $ 6,156
Cash flow hedges
Interest rate swap contracts are used to hedge the forecasted cash flows of underlying floating-rate debt and
floating-rate loans, including floating-rate FHLB advances. Changes in the fair values of derivatives designated as cash
flow hedges, to the extent effective, are recorded in AOCI until income from the cash flows of the hedged items is
realized. Any ineffectiveness arising during the hedging relationship is recognized in income in the period in which it
arises. As of December 31, 2014, the weighted-average remaining life of the currently active cash flow hedges was
approximately 3.5 years.
The following table shows the impact of the effective portion of cash flow hedging on the Bank’s pre-tax, OCI and
net income:
Years Ended
December 31,
(dollars in thousands) 2014 2013
Net unrealized gain (loss) recognized in OCI $ 37,105 $ (9,205)
Net gain reclassified from AOCI to net income (28,320) (13,277)
The estimated amount to be reclassified from AOCI into noninterest income during the next 12 months is a gain of
$36.8 million. This amount could differ from amounts actually realized due to changes in interest rates and the addition
of other hedges subsequent to December 31, 2014.
Free-standing derivatives
Free-standing derivative instruments include derivative transactions entered into for purposes for which hedge
accounting does not apply. These derivatives include interest rate swaps, interest rate collars, interest rate floors, market-
linked swaps and purchased options, written market-linked options and forward commitments to fund and sell residential
mortgage loans. The Bank acts as a seller and buyer of interest rate derivatives and foreign exchange contracts to
accommodate customers. To mitigate the market and liquidity risk associated with these derivatives, the Bank generally
enters into similar offsetting positions.
Under the Guarantee, the credit guarantee derivative is recorded at fair value in other assets in the consolidated
balance sheets. See Note 20 for additional details.
The following table presents the net gains recorded in noninterest income relating to free-standing derivatives not
recognized as hedging instruments, held by the Bank:
As of December 31,
(dollars in thousands) 2014 2013
Interest rate contracts $14,614 $10,711
Credit guarantee derivative (333) 4,396
Market-linked swaps and options 24 2
Foreign exchange contracts 5,523 12,662
Total net gains $19,828 $27,771
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