Financial Derivatives

9 Months Ended

Sep. 30, 2015

Financial Derivatives [Abstract]

Financial Derivatives

Note 10.  Financial Derivatives

The Board of Directors has given Management authorization to enter into additional derivative activity including interest rate swaps, caps and floors, forward-rate agreements, options and futures contracts in order to hedge interest rate risk.  The Bank is exposed to credit risk equal to the positive fair value of a derivative instrument, if any, as a positive fair value indicates that the counterparty to the agreement is financially liable to the Bank.  To limit this risk, counterparties must have an investment grade long-term debt rating and individual counterparty credit exposure is limited by Board approved parameters.  Management anticipates continuing to use derivatives, as permitted by its Board-approved policy, to manage interest rate risk.

Fair Value of Derivative Instruments in the Consolidated Balance Sheets was as follows as of September 30, 2015 and December 31, 2014:

Fair Value of Derivative Instruments
(Dollars in thousands)		Balance Sheet
Date	Type	Location	Fair Value
September 30, 2015	Interest rate contracts	Other liabilities	$	-
December 31, 2014	Interest rate contracts	Other liabilities	$	191

The Effect of Derivative Instruments on the Statement of Income for the Three and Nine Months Ended September 30, 2015 and 2014 follows:

Derivatives in ASC Topic 815 Cash Flow Hedging Relationships
(Dollars in thousands)							Amount of Gain
						Location of	or (Loss)
						Gain or (Loss)	Recognized in
						Recognized in	Income on
			Location of	Amount of Gain		Income on	Derivatives
	Amount of Gain		Gain or (Loss)	or (Loss)		Derivative (Ineffective	(Ineffective Portion
	or (Loss)		Reclassified from	Reclassified from		Portion and Amount	and Amount
	Recognized in OCI		Accumulated OCI	Accumulated OCI		Excluded from	Excluded from
	net of tax on Derivative		into Income	into Income		Effectiveness	Effectiveness
Date / Type	(Effective Portion)		(Effective Portion)	(Effective Portion)		Testing)	Testing)
Interest rate contracts
Three months ended:
September 30, 2015	$	-	Interest Expense	$	-	Other income (expense)	$	-
September 30, 2014	$	64	Interest Expense	$	(96)	Other income (expense)	$	-
Nine months ended:
September 30, 2015	$	126	Interest Expense	$	(160)	Other income (expense)	$	-
September 30, 2014	$	181	Interest Expense	$	(285)	Other income (expense)	$	-

Interest Rate Swap Agreements (“Swap Agreements”)

As of September 30, 2015, the Bank had no swap agreements outstanding. The Bank had entered into interest rate swap agreements as part of its asset/liability management program.  The swap agreements were free-standing derivatives and were recorded at fair value in the Corporation’s consolidated statements of condition.  The Bank was party to master netting arrangements with its financial institution counterparties; however, the Bank did not offset assets and liabilities under these arrangements for financial statement presentation purposes.  The master netting arrangements provided for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract.  Collateral, in the form of marketable securities, was posted by the counterparty with net liability positions in accordance with contract thresholds. 

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)

As of September 30, 2015, the Bank had no repurchase agreements outstanding.  The Bank entered into agreements under which it sold securities subject to an obligation to repurchase the same or similar securities.  Under these arrangements, the Bank may have transferred legal control over the assets but still retained effective control through an agreement that both entitled and obligated the Bank to repurchase the agreements.  As a result, these repurchase agreements were accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities.  The obligation to repurchase the securities was reflected as a liability in the Corporation’s consolidated statements of condition, while the securities underlying the repurchase agreements remained in the respective investment securities asset accounts.  In other words, there was no offsetting or netting of the investment securities assets with the repurchase agreement liabilities.  In addition, as the Bank did not enter into reverse repurchase agreements, there was no such offsetting to be done with repurchase agreements.

The following table presents the liabilities subject to an enforceable master netting arrangement or repurchase agreements as of September 30, 2015 and December 31, 2014.  As of these dates, all of the Bank’s swap agreement with an institutional counterparty was in a liability position.  Therefore, there were no assets to be recognized in the consolidated statements of condition.  The Bank has no swap agreements with our commercial banking customers.

						Net Amounts		Gross Amounts Not Offset in the
		Gross		Gross Amounts		of Liabilities		Statements of Condition
		Amounts of		Offset in the		Presented in the
		Recognized		Statements of		Statements of		Financial		Cash Collateral		Net
(Dollars in thousands)		Liabilities		Condition		Condition		Instruments		Pledged		Amount
Interest Rate Swap Agreements
September 30, 2015	$	-	$	-	$	-	$	-	$	-	$	-
December 31, 2014		191		-		191		191		-		-