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Derivative Instruments | 9 Months Ended
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Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments |
8. | DERIVATIVE INSTRUMENTS
On May 3, 2011, the Corporation executed an interest rate swap agreement with a 5 year term and an effective date of September 15, 2013 in order to hedge cash flows associated with $10 million of a subordinated note that was issued by the Corporation during 2007 and elected cash flow hedge accounting for the agreement. The Corporation’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2013 to September 15, 2018 without exchange of the underlying notional amount. At September 30, 2017, the variable rate on the subordinated debt was 2.87% (LIBOR plus 155 basis points) and the Corporation was paying 5.57% (4.02% fixed rate plus 155 basis points). As of September 30, 2017 and December 31, 2016, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Corporation does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges. The following tables provide information about the amounts and locations of activity related to the interest rate swaps designated as cash flow hedges within the Corporation’s consolidated balance sheet and statement of income as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016:
|  |  |  |  | Fair value as of |
|  | Balance Sheet |  |  | September 30, |  |  | December 31, |
|  | Location |  |  | 2017 |  |  | 2016 |
Interest rate contracts |  |  | Accrued interest and other liabilities |  |  | $ | (242 | ) |  | $ | (459 | )
For the Three Months Ended September 30, 2017 |  |  | (a) |  |  | (b) |  |  | (c) |  |  | (d) |  |  | (e) |
Interest rate contracts |  | $ | 46 |  |  | Interest expense – subordinated debentures |  | ($ | 71 | ) |  | Other income |  | $ | 0 |
For the Nine Months Ended September 30, 2017 |  |  | (a) |  |  | (b) |  |  | (c) |  |  | (d) |  |  | (e) |
Interest rate contracts |  | $ | 141 |  |  | Interest expense – subordinated debentures |  | ($ | 220 | ) |  | Other income |  | $ | 0 |
For the Three Months Ended September 30, 2016 |  |  | (a) |  |  | (b) |  |  | (c) |  |  | (d) |  |  | (e) |
Interest rate contracts |  | $ | 87 |  |  | Interest expense – subordinated debentures |  | ($ | 84 | ) |  | Other income |  | $ | 0 |
For the Nine Months Ended September 30, 2016 |  |  | (a) |  |  | (b) |  |  | (c) |  |  | (d) |  |  | (e) |
Interest rate contracts |  | $ | 92 |  |  | Interest expense – subordinated debentures |  | ($ | 260 | ) |  | Other income |  | $ | 0 |
(a) | Amount of Gain or (Loss) Recognized in Other Comprehensive Loss on Derivative (Effective Portion), net of tax
(b) | Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
(c) | Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
(d) | Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
(e) | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Amounts reported in accumulated other comprehensive loss related to the interest rate swap will be reclassified to interest expense as interest payments are made on the subordinated debentures. Such amounts reclassified from accumulated other comprehensive loss to interest expense in the next twelve months are expected to be $270. As of September 30, 2017 and December 31, 2016, a cash collateral balance in the amount of $1,400 was maintained with a counterparty to the interest rate swaps. These balances are included in interest bearing deposits with other banks on the consolidated balance sheet. The Corporation has entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Corporation enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Corporation agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. Concurrently, the Corporation agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Corporation’s customers to effectively convert a variable rate loan to a fixed rate. Because the Corporation acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not impact the Corporation’s results of operations. The Corporation pledged cash collateral to another financial institution with a balance $750 as of both September 30, 2017 and December 31, 2016. This balance is included in interest bearing deposits with other banks on the consolidated balance sheets. The Corporation does not require its customers to post cash or securities as collateral on its program of back-to-back swaps. However, certain language is included in the International Swaps and Derivatives Association agreement and loan documents where, in default situations, the Corporation is permitted to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Corporation may be required to post additional collateral to swap counterparties in the future in proportion to potential increases in unrealized loss positions. The following table provides information about the amounts and locations of activity related to the back-to-back interest rate swaps within the Corporation’s consolidated balance sheet as of September 30, 2017 and December 31, 2016:
|  | Notional Amount |  |  | Weighted Average Maturity (in years) |  |  | Weighted Average Fixed Rate |  |  | Weighted Average Variable Rate |  |  | Fair Value |
September 30, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
3rd Party interest rate swaps |  | $ | 14,559 |  |  |  | 8.3 |  |  |  | 4.43 | % |  |  | 1 month LIBOR + 2.35% |  |  | $ | 233 | (a)
Customer interest rate swaps |  |  | 14,559 |  |  |  | 8.3 |  |  |  | 4.43 | % |  |  | 1 month LIBOR + 2.35% |  |  |  | 233 | (b)
December 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
3rd Party interest rate swaps |  | $ | 14,814 |  |  |  | 9.0 |  |  |  | 4.43 | % |  |  | 1 month LIBOR + 2.35% |  |  | $ | 211 | (a)
Customer interest rate swaps |  |  | 14,814 |  |  |  | 9.0 |  |  |  | 4.43 | % |  |  | 1 month LIBOR + 2.35% |  |  |  | 211 | (b)
(a) | Reported in accrued interest receivable and other assets within the consolidated balance sheets
(b) | Reported in accrued interest payable and other liabilities within the consolidated balance sheets

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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