Derivative Financial Instruments

9 Months Ended

Sep. 30, 2015

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

NOTE 12: DERIVATIVE FINANCIAL INSTRUMENTS

At September 30, 2015 and December 31, 2014, we had an 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 and nine months ended September 30, 2015 and 2014. The fair value of $(335) thousand and $(479) thousand was reflected in other liabilities in the accompanying consolidated balance sheets at September 30, 2015 and December 31, 2014, respectively.

We entered into interest rate swaps with a notional amount of $37.8 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 $37.8  million (pay fixed/receive floating swaps). At September 30, 2015, the weighted average receive rate of these interest rate swaps was 1.87%, the weighted average pay rate was 3.65% and the weighted average maturity was 11.3 years.  The fair values of $978 thousand and $978 thousand were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at September 30, 2015.  The fair values of $618 thousand and $618 thousand were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at December 31, 2014.  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.

We entered into interest rate swaps with notional amounts totaling $8.89 million at September  30, 2015, and $9.36 million at December 31, 2014, that were designated as fair value hedges of certain fixed rate loans with municipalities. At September 30, 2015, the weighted average receive rate of these interest rate swaps was 1.57%, the weighted average pay rate was 3.26% and the weighted average maturity was 16.8 years. The fair value of $385 thousand at September 30, 2015, was reflected as a reduction to loans and an increase to other assets. The ineffective portion of the interest swaps was immaterial and as such, amounts are not recognized in earnings.

We assessed our counterparty risk at September 30, 2015 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 Note 6 to these consolidated financial statements.