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DERIVATIVES
 6 Months Ended
Jun. 30, 2016
DERIVATIVES  
DERIVATIVES

12. DERIVATIVES

 

Cash Flow Hedges of Interest Rate Risk

 

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

 

Interest rate swaps with notional amounts totaling $125.0 million as of June 30, 2016 and December 31, 2015, were designated as cash flow hedges of certain Federal Home Loan Bank advances. The swaps were determined to be fully effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps is recorded in other assets/(other liabilities), with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.

 

Summary information about the interest rate swaps designated as cash flow hedges at June 30, 2016 and December 31, 2015 is as follows:

 

(Dollars in thousands) June 30, 2016  December 31, 2015 
Notional amounts $125,000  $125,000 
Weighted average pay rates  1.58%  1.58%
Weighted average receive rates  0.63%  0.51%
Weighted average maturity  2.72 years   3.22 years 

 

Interest expense recorded on these swap transactions totaled $239,000 and $489,000 for the three and six months ended June 30, 2016, respectively, and $176,000 and $310,000 for the three and six months ended June 30, 2015, respectively, and is reported as a component of interest expense on FHLB Advances. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the six months ended June 30, 2016 the Company had $489,000 of reclassifications to interest expense. During the next twelve months, the Company estimates that $1.2 million will be reclassified as an increase in interest expense.

 

The following tables present the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the three and six months ended June 30, 2016 and 2015:

 

        Amount of (loss) 
  Amount of (loss)  Amount of (loss)  recognized in other 
(In thousands) recognized in OCI  reclassified from OCI  non-interest income 
Interest rate contracts (Effective Portion)  to interest expense  (Ineffective Portion) 
Three months ended June 30, 2016 $(661) $(239) $- 
Six months ended June 30, 2016 $(2,684) $(489) $- 
Three months ended June 30, 2015 $117  $(176) $- 
Six months ended June 30, 2015 $(698) $(310) $- 

 

The following table reflects the cash flow hedge included in the Consolidated Balance Sheets at the dates indicated:

 

  June 30, 2016  December 31, 2015 
     Fair  Fair     Fair  Fair 
  Notional  Value  Value  Notional  Value  Value 
(In thousands) Amount  Asset  Liability  Amount  Asset  Liability 
Included in other assets/(liabilities):                        
Interest rate swaps related to FHLB Advances $100,000  $-  $(2,328) $100,000  $14  $(713)
Forward starting interest rate swap related to FHLB Advances $25,000  $-  $(1,161) $25,000  $-  $(595)

 

Non-Designated Hedges

 

Derivatives not designated as hedges may be used to manage the Company’s exposure to interest rate movements or to provide service to customers but do not meet the requirements for hedge accounting under U.S. GAAP. The Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a third party in order to minimize the net risk exposure resulting from such transactions. These interest-rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in current period earnings.

 

The following table presents summary information about these interest rate swaps at June 30, 2016 and December 31, 2015:

 

(Dollars in thousands) June 30, 2016  December 31, 2015 
Notional amounts $55,702  $56,328 
Weighted average pay rates  3.48%  3.39%
Weighted average receive rates  3.48%  3.39%
Weighted average maturity  15.07 years   15.59 years 
Fair value of combined interest rate swaps $-  $- 

 

Credit-Risk-Related Contingent Features

 

As of June 30, 2016 the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $6.5 million. As of June 30, 2016, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $6.7 million against its obligations under these agreements. If the Company had breached any of these provisions at June 30, 2016, it could have been required to settle its obligations under the agreements at the termination value.