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Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities
Note 12. Derivative Instruments and Hedging Activities

The Company primarily uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another asset to the other party based on a notional amount and an underlying asset as specified in the contract. These derivative instruments may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative instruments are subject to counterparty credit risk due to the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. Derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee.

As of December 31, 2015, the Company’s derivative instruments consisted of interest rate swaps. Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors.

Interest rate lock commitments (“IRLCs”) and forward sale loan commitments. In the normal course of business, the Company may enter into IRLCs with customers on mortgage loans intended to be sold in the secondary market and commitments to sell those originated mortgage loans. The Company enters into IRLCs to provide potential borrowers an interest rate guarantee. Once a mortgage loan is closed and funded, it is included within loans held for sale and awaits sale and delivery into the secondary market. From the date we issue the commitment through the date of sale into the secondary market, the Company has exposure to interest rate movement resulting from the risk that interest rates will change from the rate quoted to the borrower. Due to these interest rate fluctuations, the Company’s balance of mortgage loans held for sale is subject to changes in fair value. Typically, the fair value of these loans declines when interest rates rise and increase when interest rates decline. The fair values of the Company’s IRLCs and forward sale loan commitments are recorded at fair value as a component of other assets and other liabilities in the consolidated balance sheets. These derivatives do not qualify as hedging instruments; therefore, changes in fair value are recorded in earnings.

Interest rate swaps. The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. The Company’s interest rate swaps qualify as fair value hedging instruments; therefore, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the same period.

The Company entered into a fourteen-year, $1.20 million notional interest rate swap agreement in March 2015, a fifteen-year, $4.37 million notional interest rate swap agreement in February 2014, and a ten-year, $3.50 million notional interest rate swap agreement in October 2013. The loan hedged by the October 2013 swap paid off in 2014 and the swap was terminated. The swap agreements, which are accounted for as fair value hedges, and the loans hedged by the agreements are recorded at fair value. The fair value hedges were effective as of December 31, 2015.

 

The following table presents the aggregate contractual or notional amounts and the fair values of the Company’s derivative instruments as of the dates indicated:

 

     December 31,  
     2015      2014  
(Amounts in thousands)    Notional  or
Contractual
Amount		      Derivative
Assets		      Derivative
Liabilities		      Notional or
Contractual
Amount		      Derivative
Assets		      Derivative
Liabilities		  

Derivatives designated as hedges:

                  

Interest rate swaps

    $ 5,335       $ —         $ 251       $ 4,363       $ —         $ 209   

Derivatives not designated as hedges:

                  

IRLCs

      —           —           —           1,391         5         —     

Forward sale loan commitments

      —           —           —           3,183         —           5   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives not designated as hedges

      —           —           —           4,574         5         5   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 5,335       $ —         $ 251       $ 8,937       $ 5       $ 214   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

The following table presents the effect of the Company’s derivative and hedging activity, if applicable, on the statement of income in the periods indicated:

 

            Year Ended December 31,  
(Amounts in thousands)    Income Statement Location      2015      2014      2013  

Derivatives designated as hedges:

            

Interest rate swaps

      Other income       $ —         $ —         $ —     

Derivatives not designated as hedges:

            

IRLCs

      Other income         —           —           (169 ) 

Forward sale loan commitments

      Other income         —           —           41   
     

 

 

     

 

 

     

 

 

  

Total derivatives not designated as hedges

  

      —           —           (128 ) 
     

 

 

     

 

 

     

 

 

  

Total derivatives

  

    $ —         $ —         $ (128 )