Financial Derivatives

3 Months Ended

Mar. 31, 2013

Financial Derivatives [Abstract]

Financial Derivatives

Note 11.  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.

Information regarding the interest rate swaps as of March 31, 2013 follows:

(Dollars in thousands)						Amount Expected to
						be Expensed into
Notional		Maturity	Interest Rate			Earnings within the
Amount		Date	Fixed	Variable		next 12 Months
$	10,000	5/30/2013	3.60%	0.09%	$	59
$	10,000	5/30/2015	3.87%	0.09%	$	379

Fair Value of Derivative Instruments in the Consolidated Balance Sheets were as follows as of March 31, 2013 and December 31, 2012:

Fair Value of Derivative Instruments
(Dollars in thousands)		Balance Sheet
Date	Type	Location	Fair Value
March 31, 2013	Interest rate contracts	Other liabilities	$	922
December 31, 2012	Interest rate contracts	Other liabilities	$	1,103

The Effect of Derivative Instruments on the Statement of Income for the Three Months Ended March 31, 2013 and 2012  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
March 31, 2013	$	120	Interest Expense	$	(180)	Other income (expense)	$	-
March 31, 2012	$	139	Interest Expense	$	(181)	Other income (expense)	$	-

Interest Rate Swap Agreements (“Swap Agreements”)

The Bank has entered into interest rate swap agreements as part of its asset/liability management program.  The swap agreements are free-standing derivatives and are recorded at fair value in the Corporation’s consolidated statements of condition.  The Bank is party to master netting arrangements with its financial institution counterparties; however, the Bank does not offset assets and liabilities under these arrangements for financial statement presentation purposes.  The master netting arrangements provide 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, is posted by the counterparty with net liability positions in accordance with contract thresholds. 

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

The Bank enters 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 are 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 March 31, 2013 and December 31, 2012.  As of these dates, all of the Bank’s swap agreements with institutional counterparties were in a liability position.  Therefore, there were no assets to be recognized in the consolidated statements of condition.  The swap agreements we have with our commercial banking customers are not subject to an enforceable master netting arrangement, and therefore, are excluded from this table.

						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
March 31, 2013	$	922	$	-	$	922	$	922	$	-	$	-
December 31, 2012	$	1,103	$	-	$	1,103	$	1,103	$	-	$	-