Financial Derivatives

12 Months Ended

Dec. 31, 2015

Financial Derivatives [Abstract]

Financial Derivatives

Note 14.  Financial Derivatives

As part of managing interest rate risk, the Bank entered into interest rate swap agreements as vehicles to partially hedge cash flows associated with interest expense on variable rate deposit accounts.  Under the swap agreements, the Bank received a variable rate and paid a fixed rate. Such agreements are generally entered into with counterparties that meet established credit standards and most contain collateral provisions protecting the at-risk party.  The Bank considered the credit risk inherent in these contracts to be negligible.  Interest rate swap agreements derive their value from underlying interest rates.  These transactions involved both credit and market risk.  The notional amounts were amounts on which calculations, payments, and the value of the derivative were based.  The notional amounts did not represent direct credit exposures.  Direct credit exposure was limited to the net difference between the calculated amounts to be received and paid, if any.  Such difference, which represented the fair value of the swap, was reflected on the Corporation’s balance sheet.

The Corporation was exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements.  The Corporation controlled the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and did not expect the counterparty to fail its obligations.

The primary focus of the Corporation’s asset/liability management program is to monitor the sensitivity of the Corporation’s net portfolio value and net income under varying interest rate scenarios to take steps to control its risks.  On a quarterly basis, the Corporation simulates the net portfolio value and net interest income expected to be earned over a twelve-month period following the date of simulation.  The simulation is based upon projection of market interest rates at varying levels and estimates the impact of such market rates on the levels of interest-earning assets and interest-bearing liabilities during the measurement period.  Based upon the outcome of the simulation analysis, the Corporation considered the use of derivatives as a means of reducing the volatility of net portfolio value and projected net income within certain ranges of projected changes in interest rates.  The Corporation evaluated the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates. The final swap transaction matured in 2015.

During 2008, the Bank entered into two swap transactions with each swap having a notional amount of $10 million. One swap matured in 2013 and the second swap matured in 2015. According to the terms of each transaction, the Bank paid fixed-rate interest payments and received floating-rate payments.  The variable rate was indexed to the 91-day Treasury Bill auction (discount) rate and reset weekly. The swaps were entered into in order to hedge the Corporation’s exposure to changes in cash flows attributable to the effect of interest rate changes on variable-rate liabilities.  Information regarding the interest rate swaps as of December 31, 2014 follows:

Fair Value of Derivative Instruments in the Consolidated Balance Sheets was as follows:

Fair Value of Derivative Instruments
(Dollars in thousands)		Balance Sheet
Date	Type	Location	Fair Value
December 31, 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 years ended December 31, 2015, 2014 and 2013 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)
December 31, 2015	Interest rate contracts	$	-	Interest Expense	$	(160)	Other income (expense)	$	-
December 31, 2014	Interest rate contracts	$	244	Interest Expense	$	(382)	Other income (expense)	$	-
December 31, 2013	Interest rate contracts	$	358	Interest Expense	$	(525)	Other income (expense)	$	-

Interest Rate Swap Agreements (“Swap Agreements”)

The Bank 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”)

The Bank previously entered into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities.  Under these arrangements, the Bank may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates 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 is reflected as a liability in the Corporation’s consolidated statements of condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts.  In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities.  In addition, as the Bank does not enter into reverse repurchase agreements, there is 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 December 31, 2015, 2014 and 2013.  In prior periods, all of the Bank’s swap agreement with an institutional counterparty were 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.

				Gross		Net Amounts		Gross Amounts Not Offset in the
		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
December 31, 2015	$	-	$	-	$	-	$	-	$	-	$	-
December 31, 2014	$	191	$	-	$	191	$	191	$	-	$	-
December 31, 2013	$	561	$	-	$	561	$	561	$	-	$	-