Interest Rate Swap Derivatives

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Interest Rate Swap Derivatives

Interest Rate Swap Derivatives

Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index, or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract. The Company obtains dealer quotation to value its derivative contracts.

The Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company provides the customer with a variable rate loan and enters into an interest rate swap in which the customer receives a variable rate payment in exchange for a fixed rate payment. The Company offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of term as the customer interest rate swap providing the dealer counterparty with a fixed rate payment in exchange for a variable rate payment. Generally, these instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.

The Company is exposed to credit-related losses in the event of non-performance by the counterparty to these agreements. Credit risk of the financial contract is controlled through the credit approval, limits, and monitoring procedures and management does not expect the counterparties to fail their obligations.

In connection with the interest rate swaps between the Company and the dealer counterparties, the agreements contain a provision that if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations. Similarly, the Company could be required to settle its obligations under certain of its agreements if certain credit ratings fall below specified standards or if specific regulatory events occur, such as a publicly issued memorandum of understanding, cease and desist order, or a termination of insurance coverage by the FDIC.

As of June 30, 2015 and December 31, 2014, the notional values or contractual amounts and fair values of the Company’s derivatives not designated in hedge relationships were as follows (dollars in thousands):

	Asset Derivatives								Liability Derivatives
	June 30, 2015				December 31, 2014				June 30, 2015				December 31, 2014
	Notional/ Contract Amount		Fair Value (1)		Notional/ Contract Amount		Fair Value (1)		Notional/ Contract Amount		Fair Value (2)		Notional/ Contract Amount		Fair Value (2)
Interest rate swaps	$	124,935	$	5,138	$	82,935	$	4,828	$	124,935	$	5,138	$	82,935	$	4,828
(1) Included in Other Assets on the condensed consolidated balance sheet.
(2) Included in Other Liabilities on the condensed consolidated balance sheet.

Swap fee income, as included in non-interest income, was $0.8 million and $1.3 million for the three and six months ended June 30, 2015, respectively, and $0.6 million and $0.9 million for the three and six months ended June 30, 2014, respectively.

The Company generally posts collateral against derivative liabilities in the form of cash. Collateral posted against derivative liabilities was $5.0 million and $4.6 million as of June 30, 2015 and December 31, 2014, respectively.

Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis and to offset net derivative position with related collateral where applicable.

The following table illustrates the potential effect of the Company’s derivative master netting arrangements, by type of financial instrument, on the Company’s condensed consolidated balance sheet as of June 30, 2015 and December 31, 2014 (dollars in thousands):

	June 30, 2015
							Gross Amounts of Financial Instruments Not Offset in the Balance Sheet
	Gross Amounts Recognized		Amounts offset in the Balance Sheet		Net Amounts in the Balance Sheet		Netting Adjustment Per Applicable Master Netting Agreements		Fair Value of Financial Collateral in the Balance Sheet		Net Amount
Asset Derivatives
Interest rate swaps	$	5,138	$	—	$	5,138	$	—	$	—	$	5,138
Liability Derivatives
Interest rate swaps	$	5,138	$	—	$	5,138	$	—	$	5,030	$	108
	December 31, 2014
							Gross Amounts of Financial Instruments Not Offset in the Balance Sheet
	Gross Amounts Recognized		Amounts offset in the Balance Sheet		Net Amounts in the Balance Sheet		Netting Adjustment Per Applicable Master Netting Agreements		Fair Value of Financial Collateral in the Balance Sheet		Net Amount
Derivative assets
Interest rate swaps	$	4,828	$	—	$	4,828	$	—	$	—	$	4,828
Derivative liabilities
Interest rate swaps	$	4,828	$	—	$	4,828	$	—	$	4,595	$	233