INTEREST RATE SWAPS

9 Months Ended

Sep. 30, 2014

INTEREST RATE SWAPS

INTEREST RATE SWAPS

8.INTEREST RATE SWAPS

During the fourth quarter of 2013, the Bank entered into two interest rate swap agreements as part of its interest rate risk management strategy. The Bank designated the swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB advances tied to the three-month LIBOR or the overall changes in cash flows on certain money market deposit accounts.  The counterparty for both swaps met the Bank’s credit standards and the Bank believes that the credit risk inherent in the swap contracts is not significant.

The swaps were determined to be fully effective during all periods presented; therefore, no amount of ineffectiveness was included in net income. The aggregate fair value of the swaps is recorded in other assets with changes in fair value recorded in OCI. The amount included in accumulated OCI would be reclassified to current earnings should the hedge no longer be considered effective. The Bank expects the hedges to remain fully effective during the remaining term of the swaps.

Summary information about swaps designated as cash flow hedges as of September 30, 2014 and December 31, 2013 follows:

(dollars in thousands)	September 30, 2014			December 31, 2013
Notional amount	$	20,000		$	20,000
Weighted average pay rate	2.25		%	2.25		%
Weighted average receive rate	0.19		%	0.21		%
Weighted average remaining maturity in years	6			7
Unrealized gain (loss)	$	(203	)	$	170
Fair value of security pledged as collateral	$	341		$	—

The following table reflects the total interest expense recorded on these swap transactions in the consolidated statements of income during the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2014		2013		2014		2013
Interest expense on deposits related to money market swap transaction	$	50	$	—	$	150	$	—
Interest expense on FHLB advances related to FHLB swap transaction	54		—		153		—
Total interest expense on swap transactions	$	104	$	—	$	303	$	—

The following tables present the net gains (losses) recorded in accumulated OCI and the consolidated statements of income relating to the swaps for the three and nine months ended September 30, 2014:

Three Months Ended September 30, 2014 (in thousands)	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)		Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income on Derivative (Effective Portion)			Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Cash flow hedges - interest rate swaps	$	28	$	(104	)	$	—

Nine Months Ended September 30, 2014 (in thousands)	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)			Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income on Derivative (Effective Portion)			Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Cash flow hedges - interest rate swaps	$	(676	)	$	(303	)	$	—

The following table reflects the cash flow hedges included in the consolidated balance sheet as of September 30, 2014 and December 31, 2013:

	September 30, 2014				December 31, 2013
(in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Fair value included in other assets:
Cash flow hedges - interest rate swaps	$	—	$	—	$	20,000	$	170
Fair value included in other liabilities:
Cash flow hedges - interest rate swaps	$	20,000	$	203	$	—	$	—