INTEREST RATE SWAPS

6 Months Ended

Jun. 30, 2015

INTEREST RATE SWAPS

INTEREST RATE SWAPS

8.INTEREST RATE SWAPS

Interest rate swap derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s unrealized gain or loss is recorded as a component of other comprehensive income (loss). For derivatives not designated as hedges, the gain or loss is recognized in current period earnings.

Interest Rate Swaps Used as Cash Flow Hedges

The Bank entered into two interest rate swap agreements (“swaps”) during 2013 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 London Interbank Offered Rate (“LIBOR”) or the overall changes in cash flows on certain money market deposit accounts tied to one-month LIBOR.  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 liabilities 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.

The following table reflects information about swaps designated as cash flow hedges as of June 30, 2015 and December 31, 2014:

							June 30, 2015						December 31, 2014
(in thousands)	Notional Amount		Pay Rate		Receive Rate	Term	Assets/(Liabilities)			Unrealized Gain (Loss) in Accumulated OCI			Assets/(Liabilities)			Unrealized Gain (Loss) in Accumulated OCI
Interest rate swap on money market deposits	$	10,000	2.17	%	1-month LIBOR	Dec. 2013 - Dec. 2020	$	(239	)	$	(155	)	$	(232	)	$	(150	)
Interest rate swap on FHLB advance	10,000		2.33	%	3-month LIBOR	Dec. 2013 - Dec. 2020	(266		)	(173		)	(256		)	(166		)
	$	20,000					$	(505	)	$	(328	)	$	(488	)	$	(316	)

The following table reflects the total interest expense recorded in the consolidated statements of income during the three and six months ended June 30, 2015 and 2014 as a result of periodic swap settlements:

	Three Months Ended				Six Months Ended
	June,				June,
(in thousands)	2015		2014		2015		2014
Interest rate swap on money market deposits	$	50	$	51	$	99	$	100
Interest rate swap on FHLB advance	53		48		105		99
Total interest expense on swap transactions	$	103	$	99	$	204	$	199

The following tables present the net gains (losses) recorded in accumulated OCI and the consolidated statements of income relating to the swaps used as cash flow hedges for the three and six months ended June 30, 2015 and 2014:

	Three Months Ended						Six Months Ended
	June,						June,
(in thousands)	2015			2014			2015			2014
Gains (losses) recognized in OCI on derivative (Effective Portion)	$	175		$	(364	)	$	(221	)	$	(704	)
Losses reclassified from OCI on derivative (Effective Portion)	$	(103	)	$	(99	)	$	(204	)	$	(199	)
Gains (losses) recognized in income on derivative (Ineffective Portion)	$	—		$	—		$	—		$	—

The estimated net amount of the existing losses that are reported in accumulated OCI at June 30, 2015 that is expected to be reclassified into earnings within the next twelve months is $369,000.

Non-hedge Interest Rate Swaps

The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.

Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counter party or client owes the Bank, and results in credit risk to the Bank. When the fair value of a derivative instrument contract is negative, the Bank owes the client or counterparty and therefore, has no credit risk.

A summary of the Bank’s interest rate swaps related to clients as of June 30, 2015 and December 31, 2014 is included in the following table:

		Notional Amount		Fair Value			Notional Amount		Fair Value
(in thousands)	Bank Position	June 30, 2015					December 31, 2014
Interest rate swaps with Bank clients	Pay variable/receive fixed	$	19,277	$	(69	)	$	—	$	—
Offsetting interest rate swaps with counterparty	Pay fixed/receive variable	19,277		69			—		—
Total		$	38,554	$	—		$	—	$	—

The Bank is required to pledge securities as collateral when the Bank is in a net loss position for all swaps with non-client counterparties when such net loss positions exceed $250,000. The fair value of investment securities pledged as collateral by the Bank to cover such net loss positions totaled $974,000 and $734,000 at June 30, 2015 and December 31, 2014.