Note

Derivative Instruments and Hedging Activities

As of

June 30, 2017,

the Company’s derivative instruments consisted of interest rate swaps. Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. The Company’s interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period.

The Company’s interest rate swaps include a

fourteen

-year,

$1.20

million notional interest rate swap agreement entered into in

March 2015

and a

fifteen

-year,

$4.37

million notional interest rate swap agreement entered into in

February 2014.

The swap agreements, which are accounted for as fair value hedges, and the loans hedged by the agreements are recorded at fair value. The fair value hedges were effective as of

June 30, 2017.

The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

	June 30, 2017						December 31, 2016
(Amounts in thousands)	Notional or Contractual Amount		Derivative Assets		Derivative Liabilities		Notional or Contractual Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedges
Interest rate swaps	$	4,689	$	-	$	158	$	4,835	$	-	$	167
Total derivatives	$	4,689	$	-	$	158	$	4,835	$	-	$	167

The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
(Amounts in thousands)	2017		2016		2017		2016		Income Statement Location
Derivatives designated as hedges
Interest rate swaps	$	19	$	27	$	41	$	55	Interest and fees on loans
Total derivative expense	$	19	$	27	$	41	$	55