Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative and Hedging Activities

Derivative and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities.

Non-designated Hedges. Derivatives not designated in qualifying hedging relationships are not speculative and result from a service the Company provides to certain qualifying commercial borrowers in a loan related transaction and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The Company implemented this program during the quarter ended September 30, 2014. As of September 30, 2015, the Company had 17 interest rate swaps with an aggregate notional amount of $248.3 million related to this program.

Cash flow Hedges of Interest Rate Risk. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended September 30, 2015, such derivatives were used to hedge the variable cash outflows associated with Federal Home Loan Bank borrowings. The ineffective portion of the change in fair value of the derivatives are recognized directly in earnings. The Company implemented this program during the quarter ended September 30, 2015. During the three and nine months ended September 30, 2015, the Company’s did not record any hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. During the next twelve months, the Company estimates that $431,000 will be reclassified as an increase to interest expense. As of September 30, 2015, the Company had one outstanding interest rate derivative with a notional amount of $40 million that was designated as a cash flow hedge of interest rate risk.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition at September 30, 2015 and December 31, 2014 (in thousands):

	At September 30, 2015
	Asset Derivatives			Liability Derivatives
	Consolidated Statements of Financial Condition	Fair Value		Consolidated Statements of Financial Condition	Fair Value
Derivatives not designated as a hedging instruments:
Interest rate products	Other assets	$	6,634	Other liabilities	$	6,572
Credit contracts	Other assets	8			—
Total derivatives not designated as hedging instruments		$	6,642		$	6,572
Derivatives designated as a a hedging instrument:
Interest rate products	Other assets	$	—	Other liabilities	$	387
Total derivatives designated as a hedging instrument		$	—		$	387

	At December 31, 2014
	Asset Derivatives			Liability Derivatives
	Consolidated Statements of Financial Condition	Fair Value		Consolidated Statements of Financial Condition	Fair Value
Derivatives not designated as a hedging instruments:
Interest rate products	Other assets	$	2,040	Other liabilities	$	2,052
Credit contracts	Other assets	6			—
Total derivatives not designated as hedging instruments		$	2,046		$	2,052

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income during the three and nine months ended September 30, 2015 (in thousands).

		Gain (loss) recognized in Income on derivatives
	Consolidated Statements of Income	Three months ended September 30, 2015			Nine months ended September 30, 2015
Derivatives not designated as a hedging instruments:
Interest rate products	Other income	$	(335	)	$	75
Credit contracts	Other income	2			1
Total		$	(333	)	$	76
Derivatives designated as a hedging instruments:
Hedge advances	Other income	$	(17	)	$	(17	)
Hedge counterparty	Other income	(38		)	(38		)
Total		$	(55	)	$	(55	)

The Company has agreements with certain of its derivative counterparties that contain a provision that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company also has agreements with certain of its derivative counterparties that contain a provision that if the Company fails to maintain its status as a well / adequate capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of September 30, 2015, the termination value of derivatives in a net liability position, which includes accrued interest, was $7.1 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $6.7 million against its obligations under these agreements. If the Company had breached any of these provisions at September 30, 2015, it could have been required to settle its obligations under the agreements at the termination value.