25.               DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company is a party to derivative financial instruments in the normal course of business to meet the needs of commercial banking customers. These financial instruments have been limited to interest rate swap agreements, which are entered into with counterparties that meet established credit standards and, where appropriate, contain master netting and collateral provisions protecting the party at risk. The Company believes that the credit risk inherent in all of the derivative contracts is minimal based on the credit standards and the netting and collateral provisions of the interest rate swap agreements.

 

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.  These derivatives are not designated as hedges and are not speculative.  Rather, these derivatives result from a service the Company provides to certain customers, which the Company implemented during the first quarter of 2012.  As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.  As of December 31, 2013, the Company had six interest rate swaps with an aggregate notional amount of $26.3 million related to this program. During the years ended December 31, 2013 and 2012, the Company recognized a net gain of $98 thousand and $156 thousand, respectively, related to interest rate swap agreements that are included as a component of services charges and other non-interest income in the Company’s consolidated statements of income.

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of condition as of December 31, 2013 and 2012:

 

As of December 31, 2013

 

		Asset derivatives						Liability derivatives
(dollars in thousands)		Notional  amount			Fair value (1)			Notional  amount			Fair value (2)
Interest rate swap agreements		$	13,151		$	294		$	13,151		$	270
Total derivatives		$	13,151		$	294		$	13,151		$	270

 

(1)              Included in other assets in our Consolidated Statements of Financial Condition.

(2)              Included in other liabilities in our Consolidated Statements of Financial Condition.

 

As of December 31, 2012

 

		Asset derivatives						Liability derivatives
(dollars in thousands)		Notional  amount			Fair value (1)			Notional  amount			Fair value (2)
Interest rate swap agreements		$	10,248		$	395		$	10,248		$	418
Total derivatives		$	10,248		$	395		$	10,248		$	418

 

(1)              Included in other assets in our Consolidated Statements of Financial Condition.

(2)              Included in other liabilities in our Consolidated Statements of Financial Condition.

 

The following displays offsetting interest rate swap assets and liabilities for the dates presented:

 

Offsetting of Derivative Assets

As of December 31, 2013

 

Gross

Gross Amounts

Net Amounts of

Gross Amounts Not Offset in the

Amounts of

Offset in the

Assets presented in

Statement of Financial Condition

Recognized

Statement of

the Statement of

Financial

Collateral

Assets *

Financial Condition

Financial Condition

Instruments

Received

Net Amount

Interest rate swaps

$

313

$

—

$

313

$

—

$

51

$

262

 

Offsetting of Derivative Liabilities

As of December 31, 2013

 

Gross

Gross Amounts

Net Amounts of

Gross Amounts Not Offset in the

Amounts of

Offset in the

Liabilities presented in

Statement of Financial Condition

Recognized

Statement of

the Statement of

Financial

Collateral

Liabilities *

Financial Condition

Financial Condition

Instruments

Posted

Net Amount

Interest rate swaps

$

288

$

—

$

288

$

—

$

—

$

288

 

* - Balance includes accrued interest receivable/payable and credit valuation adjustments.

 

Offsetting of Derivative Assets

As of December 31, 2012

 

Gross

Gross Amounts

Net Amounts of

Gross Amounts Not Offset in the

Amounts of

Offset in the

Assets presented in

Statement of Financial Condition

Recognized

Statement of

the Statement of

Financial

Collateral

Assets *

Financial Condition

Financial Condition

Instruments

Received

Net Amount

Interest rate swaps

$

409

$

—

$

409

$

—

$

—

$

409

 

Offsetting of Derivative Liabilities

As of December 31, 2012

 

		Gross			Gross Amounts			Net Amounts of			Gross Amounts Not Offset in the
		Amounts of			Offset in the			Liabilities presented in			Statement of Financial Condition
		Recognized			Statement of			the Statement of			Financial			Collateral
		Liabilities *			Financial Condition			Financial Condition			Instruments			Posted			Net Amount
Interest rate swaps		$	432		$	—		$	432		$	—		$	(503	)	$	(71	)

 

* - Balance includes accrued interest receivable/payable and credit valuation adjustments.

 

The Company has agreements with certain of its derivative counterparties that provide 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 provide that if the Company fails to maintain its status as a well or adequately 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 December 31, 2013, the termination value of the interest rate swaps in a liability position was $288 thousand compared to $432 thousand at December 31, 2012. The Company has minimum collateral posting thresholds with its counterparty. As of December 31, 2013, the Company was not required to post collateral, and at December 31, 2012, the Company posted collateral of $503 thousand. The counterparty posted collateral in the amount of $51 thousand as of December 31, 2013 and was not required to post collateral as of December 31, 2012.  If the Company had breached any of these provisions at December 31, 2013 it would have been required to settle its obligation under the agreement at the termination value and could have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the counterparty. The Company had not breached any provisions at December 31, 2013.