DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2016

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS

At September 30, 2016 and December 31, 2015, 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 or nine months ended September 30, 2016 or September 30, 2015. The fair values of $51 thousand and $239 thousand was reflected in other liabilities in the accompanying consolidated balance sheets at September 30, 2016 and December 31, 2015, respectively.

We have interest rate swaps with a notional amount of $45.1 million with certain 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 $45.1 million (pay fixed/receive floating swaps). At September 30, 2016, the weighted average receive rate of these interest rate swaps was 2.24%, the weighted average pay rate was 3.64% and the weighted average maturity was 9.4 years.  The fair values of $1.83 million and $1.83 million were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at September 30, 2016. At December 31, 2015, the weighted average receive rate of these interest rate swaps was 2.13%, the weighted average pay rate was 3.60% and the weighted average maturity was 10.2 years.  The fair values of $765 thousand and $765 thousand were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at December 31, 2015. Hedge accounting has not been applied for these derivatives.  Since 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 have interest rate swaps with notional amounts totaling $8.4 million at September 30, 2016, and $9.8 million at December 31, 2015, that were designated as fair value hedges of certain fixed rate loans with municipalities. At September 30, 2016, the weighted average receive rate of these interest rate swaps was 1.87%, the weighted average pay rate was 3.27% and the weighted average maturity was 15.8 years. The fair value of $572 thousand at September 30, 2016, was reflected as a reduction to loans and an increase to other assets. At December 31, 2015 the weighted average receive rate of these interest rate swaps was 1.78%, the weighted average pay rate was 3.25% and the weighted average maturity was 16.6 years. The fair value of $319 thousand at December 31, 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, 2016 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 8 to these consolidated financial statements.