Interest Rate Swaps

9 Months Ended

Sep. 30, 2016

Interest Rate Swaps

Interest Rate Swaps

NOTE 10: Interest Rate Swaps

The Corporation uses interest rate swaps to manage its exposure to interest rate risk. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts.  The Corporation has interest rate swaps that qualify as cash flow hedges. The Corporation’s cash flow hedges effectively modify the Corporation’s exposure of its trust preferred capital notes to interest rate risk by converting variable rates of interest on $10.00 million and $15.00 million of the Corporation’s trust preferred capital notes to fixed rates of interest until September 2020 and December 2019, respectively.

The cash flow hedges’ total notional amount is $25.00 million. At September 30, 2016, the cash flow hedges had a fair value of ($603,000), which is recorded in other liabilities. The cash flow hedges were fully effective at September 30, 2016 and therefore the net loss on the cash flow hedges was recognized as a component of other comprehensive income (loss), net of deferred income taxes.

The Corporation also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs.  The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms.  The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate.  The total notional amount of the interest rate swaps on loans is $50.51 million.  At September 30, 2016, the interest rate swaps had a net fair value of zero, with $815,000 recognized in other assets and $815,000 recognized in other liabilities.  Changes in fair value are recorded in other noninterest expense and net to zero because of the identical amounts and terms of the swaps.