Derivative Financial Instruments

9 Months Ended

Sep. 30, 2013

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS

At September 30, 2013 and December 31, 2012, we hadan interest rate swap with a notional amount of $10 million that was designated as  a cash flow hedge. The swap was used to convert a portion of the floating rate interest on our trust preferred issuance to a fixed rate of interest. Each quarter we assess the effectiveness of the hedging relationships by comparing the changes in cash flows of the derivative hedging instruments with the changes in cash flows of the designated hedged item. There was no ineffective portion recognized in earnings during the three or nine months ended September 30, 2013 or 2012. The fair value of $(793) thousand and $(1.06) million was reflected in other comprehensive income in the accompanying consolidated balance sheets at September 30, 2013 and December 31, 2012, respectively.

We entered into interest rate swaps during 2013 with a notional amount of $36.46 million with certain of our commercial customers.  In order to minimize our risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps with our counterparty totaling $36.46 million (pay fixed/receive floating swaps). Hedge accounting has not been applied for these derivatives.  Because the terms of the swaps with our customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact our results of operations. The fair values of $516 thousand and $502 thousand were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at September 30, 2013.

During 2013, we entered into interest rate swaps with notional amounts totaling $8.80 million that were designated as fair value hedges of certain fixed rate loans with municipalities. The amounts recognized in earnings and other assets for the ineffective portion of the interest swaps was immaterial.

We assessed our counterparty risk at September 30, 2013 and determined any credit risk inherent in our derivative contracts was insignificant. Information about the fair value of derivative financial instruments can be found in Footnote 9 to these consolidated financial statements.