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DERIVATIVES

9 Months Ended

Sep. 30, 2017

12. DERIVATIVES

Cash Flow Hedges of Interest Rate Risk

As part of its asset liability management, the Company utilizes interest rate swap agreements to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Interest rate swaps with notional amounts totaling $290.0 million and $175.0 million at September 30, 2017 and December 31, 2016, respectively, were designated as cash flow hedges of certain FHLB advances. The swaps were determined to be fully effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps is recorded in other assets/(other liabilities), with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.

The following table summarizes information about the interest rate swaps designated as cash flow hedges at September 30, 2017 and December 31, 2016:

(Dollars in thousands)	September 30, 2017			December 31, 2016
Notional amounts	$	290,000		$	175,000
Weighted average pay rates		1.78	%		1.61	%
Weighted average receive rates		1.33	%		0.95	%
Weighted average maturity		2.89 years			2.98 years

Interest expense recorded on these swap transactions totaled $369,000 and $1.1 million for the three and nine months ended September 30, 2017 and $236,000 and $725,000 for the three and nine months ended September 30, 2016, respectively, and is reported as a component of interest expense on FHLB advances. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the nine months ended September 30, 2017, the Company had $1.1 million of reclassifications to interest expense. During the next twelve months, the Company estimates that $0.7 million will be reclassified as an increase in interest expense.

The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the three and nine months ended September 30, 2017 and 2016:

							Amount of loss
	Amount of gain (loss)			Amount of loss			recognized in other
(In thousands)	recognized in OCI			reclassified from OCI			non-interest income
Interest rate contracts	(Effective Portion)			to interest expense			(Ineffective Portion)
Three months ended September 30, 2017	$	144		$	(369	)	$	-
Nine months ended September 30, 2017	$	(1,216	)	$	(1,103	)	$	-
Three months ended September 30, 2016	$	764		$	(236	)	$	-
Nine months ended September 30, 2016	$	(1,920	)	$	(725	)	$	-

The following table reflects the cash flow hedges included in the Consolidated Balance Sheets at the dates indicated:

	September 30, 2017							December 31, 2016
			Fair		Fair					Fair		Fair
(In thousands)	Notional		Value		Value			Notional		Value		Value
	Amount		Asset		Liability			Amount		Asset		Liability
Included in other assets/(liabilities):
Interest rate swaps related to FHLB advances	$	290,000	$	1,749	$	(1,021	)	$	175,000	$	1,994	$	(1,153	)

Non-Designated Hedges

Derivatives not designated as hedges may be used to manage the Company’s exposure to interest rate movements or to provide service to customers but do not meet the requirements for hedge accounting under U.S. GAAP. The Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a third party in order to minimize the net risk exposure resulting from such transactions. These interest-rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in current period earnings.

The following table presents summary information about these interest rate swaps at September 30, 2017 and December 31, 2016:

(Dollars in thousands)	September 30, 2017			December 31, 2016
Notional amounts	$	80,939		$	62,472
Weighted average pay rates		3.84	%		3.50	%
Weighted average receive rates		3.84	%		3.50	%
Weighted average maturity		12.32 years			13.97 years
Fair value of combined interest rate swaps	$	-		$	-

Credit-Risk-Related Contingent Features

As of September 30, 2017, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0.5 million and the termination value of derivatives in a net asset position was $0.8 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. If the termination value of derivatives is a net liability position, the Company is required to post collateral against its obligations under the agreements. However, if the termination value of derivatives is a net asset position, the counterparty is required to post collateral to the Company. At September 30, 2017, the Company posted collateral of $0.8 million against its obligations under the agreements in a net liability position and received collateral of $0.6 million from its counterparty under the agreements in a net asset position. If the Company had breached any of these provisions at September 30, 2017, it could have been required to settle its obligations under the agreements at the termination value.