Derivative Instruments And Hedging Activities

6 Months Ended

Jun. 30, 2016

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments And Hedging Activities

NOTE 11. Derivative Instruments and Hedging Activities

Interest Rate Swaps

The Company uses interest rate swaps to reduce interest rate risk and to manage interest expense. By entering into these agreements, the Company converts floating rate debt into fixed rate debt, or alternatively, converts fixed rate debt into floating rate debt. Interest differentials paid or received under the swap agreements are reflected as adjustments to interest expense. These interest rate swap agreements are derivative instruments that qualify for hedge accounting as discussed below. The notional amounts of the interest rate swaps are not exchanged and do not represent exposure to credit loss. In the event of default by a counterparty, the risk in these transactions is the cost of replacing the agreements at current market rates.

The Company follows GAAP to account for derivative and hedging activities. Accordingly, a derivative is recognized in the balance sheet at its fair value. The fair value of a derivative is determined by quoted market prices and mathematical models using current and historical data. If certain hedging criteria are met, including testing for hedge effectiveness, special hedge accounting may be applied. The Company assesses each hedge, both at inception and on an ongoing basis, to determine whether the derivative used in a hedging transaction is effective in offsetting changes in the fair value or cash flows of the hedged item and whether the derivative is expected to remain effective during subsequent periods. The Company discontinues hedge accounting when (a) it determines that a derivative is no longer effective in offsetting changes in fair value or cash flows of a hedged item; (b) the derivative expires or is sold, terminated or exercised; (c) probability exists that the forecasted transaction will no longer occur or (d) management determines that designating the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued and a derivative remains outstanding, the Company recognizes the derivative in the balance sheet at its fair value and changes in the fair value are recognized in net income.

At inception, the Company designates a derivative as (a) a fair value hedge of recognized assets or liabilities or of unrecognized firm commitments (fair-value hedge) or (b) a hedge of forecasted transactions or variable cash flows to be received or paid in conjunction with recognized assets or liabilities (cash-flow hedge). For a derivative treated as a fair-value hedge, a change in fair value is recorded as an adjustment to the hedged item and recognized in net income. For a derivative treated as a cash flow hedge, the effective portion of a change in fair value is recorded as an adjustment to the hedged item and recognized as a component of accumulated other comprehensive income (loss) within shareholders’ equity. For a derivative treated as a cash flow hedge, the ineffective portion of a change in fair value is recorded as an adjustment to the hedged item and recognized in net income.

On December 4, 2008, the Company entered into an interest rate swap agreement related to the outstanding trust preferred capital notes. The swap agreement became effective on December 1, 2008. The notional amount of the interest rate swap was $7.0 million and has an expiration date of December 1, 2016. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 2.85% and receives interest quarterly at a variable rate of three month LIBOR. The variable rate resets on each interest payment date. This agreement was designated as a cash-flow hedge at inception of the contract until the redemption of the trust preferred capital notes on July 29, 2015. As a result of the redemption, the derivative contract is no longer classified as a cash flow hedge and is currently recorded in the balance sheet at its fair value with changes in fair value recorded in Other operating income in the Consolidated Statements of Income.

The following table summarizes the fair value of derivative instruments at June 30, 2016 and December 31, 2015:

	June 30, 2016			December 31, 2015
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(dollars in thousands)
Derivatives not designated as hedging instruments under GAAP
Interest rate swap contracts	Other Liabilities	$	78	Other Liabilities	$	149

The following tables present the effect of the derivative instrument on the Consolidated Balance Sheets at June 30, 2016 and 2015 and the Consolidated Statements of Income for the three and six months endedJune 30, 2016 and 2015:

	Three Months Ended
	June 30,
Derivatives in GAAP Cash Flow Hedging Relationships	Amount of Gain  (Loss) Recognized in OCI on Derivative (Effective Portion)				Location of Gain  (Loss) Recognized in Income (Ineffective Portion)	Amount of Gain  (Loss) Recognized in Income (Ineffective Portion)
	2016		2015			2016		2015
	(dollars in thousands)					(dollars in thousands)
Interest rate swap contracts, net of tax	$	—	$	23	n/a	$	—	$	—
	Six Months Ended
	June 30,
Derivatives in GAAP Cash Flow Hedging Relationships	Amount of Gain  (Loss) Recognized in OCI on Derivative (Effective Portion)				Location of Gain  (Loss) Recognized in Income (Ineffective Portion)	Amount of Gain  (Loss) Recognized in Income (Ineffective Portion)
	2016		2015			2016		2015
	(dollars in thousands)					(dollars in thousands)
Interest rate swap contracts, net of tax	$	—	$	34	n/a	$	—	$	—

The balance of the interest rate swap liability was $237 thousand at the time of the redemption of the Company's trust preferred debt on July 29, 2015. The total amount recorded in accumulated other comprehensive income at that date was reclassified to earnings due to the derecognition of the cash flow hedge. Subsequent to the redemption of the debt and reclassification, the interest rate swap derivative was adjusted to its fair value resulting in income of $38 thousand and $71 thousand being recorded in other operating income for the three and six months ended June 30, 2016, respectively.