Derivative Instruments

3 Months Ended

Mar. 31, 2016

Derivative Instruments [Abstract]

Derivative Instruments

NOTE 9 – DERIVATIVE INSTRUMENTS 

Interest-rate swaps:

CFBank utilizes interest-rate swaps as part of its asset/liability management strategy to help manage its interest rate risk position, and does not use derivatives for trading purposes.  The notional amount of the interest-rate swaps does not represent amounts 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.  CFBank was party to interest-rate swaps with a combined notional amount of $2,849 atMarch 31, 2016 and $2,877 at December 31, 2015.

The objective of the interest-rate swaps is to protect the related fixed-rate commercial real estate loans from changes in fair value due to changes in interest rates.  CFBank has a program whereby it lends to its borrowers at a fixed rate with the loan agreement containing a two-way yield maintenance provision, which will be invoked in the event of prepayment of the loan, and is expected to exactly offset the fair value of unwinding the swap.  The yield maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as such, the swaps and embedded derivatives are not designated as hedges.  Accordingly, both instruments are carried at fair value and changes in fair value are reported in current period earnings.  CFBank currently does not have any derivatives designated as hedges. 

Contingent Features:

The counterparty to CFBank’s interest-rate swaps is exposed to credit risk whenever the interest-rate swaps are in a liability position.  At March 31, 2016, CFBank had $743 in securities and cash pledged as collateral for these derivatives.  Should the liability increase, beyond the collateral value, CFBank will be required to pledge additional collateral. 

Additionally, CFBank’s interest-rate swap instruments contain provisions that require CFBank to remain well capitalized under regulatory capital standards.  The interest-rate swaps may be called by the counterparty if CFBank fails to maintain well-capitalized status under regulatory capital standards.  As of March 31, 2016, CFBank was well-capitalized under regulatory capital standards

Summary information about the derivative instruments is as follows:

	March 31, 2016		December 31, 2015
	(unaudited)
Notional amount	$	2,849	$	2,877
Weighted average pay rate on interest-rate swaps		3.67%		3.67%
Weighted average receive rate on interest-rate swaps		0.47%		0.39%
Weighted average maturity (years)		3.7		4.0
Fair value of interest-rate swaps	$	(245)	$	(213)
Fair value of yield maintenance provisions		245		213

The fair value of the yield maintenance provisions and interest-rate swaps is recorded in other assets and other liabilities, respectively, in the consolidated balance sheet.  Changes in the fair value of the yield maintenance provisions and interest-rate swaps are reported currently in earnings, as other noninterest income in the consolidated statements of operations.  There were no net gains or losses recognized in earnings related to yield maintenance provisions and interest-rate swaps for the three months ended March 31, 2016 or 2015.  

Mortgage banking derivatives:

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market are considered derivatives.  These mortgage banking derivatives are not designated in hedge relationships.  The Company had approximately $1,977 and  $1,560 of interest rate lock commitments related to residential mortgage loans at March 31, 2016 and December 31, 2015, respectively.  The fair value of these mortgage banking derivatives was reflected by a derivative asset of $6 and $8 at March 31, 2016 and December 31, 2015, respectively, which was included in other assets in the consolidated balance sheet. Fair values were estimated based on anticipated gains on the sale of the underlying loans. Changes in the fair values of these mortgage banking derivatives are included in net gains on sales of loans.