Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2016

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

20.        Derivative Instruments 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, primarily by managing the amount, sources, and duration of its assets and liabilities, and through the use of derivative instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate borrowings.  The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

Derivatives Not Designated as Hedging Instruments

The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the consolidated balance sheet at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of income.

The Company has two risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant.  The risk participation agreement provides credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution.

Derivatives Designated as Hedging Instruments

In 2016, the Company entered into interest rate swaps to modify the interest rate characteristics of certain short-term FHLB advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges. Fair values included in other assets and other liabilities on the consolidated balance sheet applicable to these agreements amounted to $2.9 million and $0.2 million respectively at December 31, 2016. For the year ended December 31, 2016 the amount included in other comprehensive income totaled $1.8 million net of tax.

The following table depicts the fair value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements as December 31:

(In thousands)	2016		2015
Derivatives Not Designated as Hedging Instruments:
Fair value adjustment	$	309	$	6,224
Notional amount
Interest rate derivatives		371,101		192,625
Risk participation agreements		11,421		-
Derivatives Designated as Hedging Instruments:
Fair value adjustment - interest rate derivatives		2,704		-
Notional amount - interest rate derivatives		250,000		-

The following table indicates the gain or loss recognized in income on derivatives for the years ended December 31:

(In thousands)	2016			2015		2014
Non-hedging interest rate derivatives:
Increase in interest income	$	95		$	33	$	88
Increase in other income		3,480			684		59
Hedging interest rate derivatives:
(Decrease) in interest expense		(70	)		-		-