Derivative Instruments

6 Months Ended

Jun. 30, 2016

Derivative Instrument

Derivative Instruments

Note 12. Derivative Instruments

The Company has entered into interest rate swap agreements with certain borrowers to assist them in mitigating their interest rate risk exposure associated with the loans they have with the Company.  At the same time, the Company has entered into identical interest rate swap agreements with another financial institution to mitigate the Company’s interest rate risk exposure associated with the swap agreements with its borrowers.  At June 30, 2016, the Company had swaps with matched terms with an aggregate notional amount of $22.2 million and a fair value of $1.5 million.  The fair values of these swaps are recorded as other assets and other liabilities in the Company’s condensed consolidated balance sheet.  Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Company’s income statement as a component of non-interest income.  Since the terms of the swap agreements between the Company and its borrowers have been matched with the terms of swap agreements with another financial institution, the adjustments for the change in their fair value offset each other in non-interest income.

Although changes in the fair value of swap agreements between the Company and borrowers and the Company and other financial institutions offset each other, changes in the credit risk of these counterparties may result in a difference in the fair value of these swap agreements.  Offsetting swap agreements the Company has with other financial institutions are collateralized with cash, and swap agreements with borrowers are secured by the collateral arrangements for the underlying loans these borrowers have with the Company.  During the six months ended June 30, 2016, there were no losses recorded on swap agreements, attributable to the change in credit risk associated with a counterparty.  All interest rate swap agreements entered into by the Company as of June 30, 2016 are not designated as hedging instruments.

The following table summarizes the Company’s derivative instruments, included in “other assets” and “other liabilities” in the condensed consolidated balance sheets, as of June 30, 2016:

	June 30, 2016
	Derivative Assets				Derivative Liabilities
	Notional		Fair Value		Notional		Fair Value
	(dollars in thousands)
Derivative instruments not designated as hedging instruments:
Interest rate swap contracts - pay floating, receive fixed	$	22,191	$	1,503	$	-	$	-
Interest rate swap contracts - pay fixed, receive floating	-		-		22,191		1,503
Total	$	22,191	$	1,503	$	22,191	$	1,503

The Company was not party to any swap agreements as of December 31, 2015.