DERIVATIVES

BancShares had an interest rate swap entered into during 2011 that qualified as a cash flow hedge under GAAP. BancShares' interest rate swap agreement expired in June 2016. At December 31, 2015, the fair value of the outstanding derivative was included in other liabilities in the consolidated balance sheet, and the net change in fair value is included in the consolidated statements of cash flows under the caption net change in other liabilities.

The following table provides the notional amount of the interest rate swap and the fair value of the liability as of December 31, 2015.



	December 31, 2015
(Dollars in thousands)	Notional amount		Estimated fair value of liability
2011 interest rate swap hedging variable rate exposure on trust preferred securities 2011-2016	$	93,500	$	1,429

The interest rate swap was used for interest rate risk management purposes and converted variable-rate exposure on outstanding debt to a fixed rate. The interest rate swap had a notional amount of $93.5 million, representing the amount of variable rate trust preferred capital securities issued during 2006 and still outstanding at the swap inception date. The interest rate swap hedged interest payments through June 2016 and required fixed-rate payments by BancShares at 5.50 percent in exchange for variable-rate payments of 175 basis points above the three-month LIBOR, which was equal to the interest paid to the holders of the trust preferred capital securities. Settlement of the swap occurred quarterly. At December 31, 2015, collateral with a fair value of $2.0 million was pledged to secure the existing obligation under the interest rate swap.

For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated statement of income. BancShares’ interest rate swap was fully effective since inception. Therefore, changes in the fair value of the interest rate swap had no impact on net income. For the three months ended June 30, 2016 and 2015, BancShares recognized interest expense of $745 thousand and $830 thousand, and for the six months ended June 30, 2016 and 2015, BancShares recognized interest expense of $1.5 million and $1.7 million, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness.