Note 14 - Derivative Financial Instruments

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

14. DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives Designated as Hedging Instruments

On April 1, 2016, the Bank entered into a forward interest rate swap contract on a variable rate FHLB advance (indexed to three-month LIBOR) with a total notional amount

of $10.0 million. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under

ASC Topic 815, Derivatives and Hedging,

with the objective of protecting the quarterly interest rate payments on the FHLB advance from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate throughout the seven-year period beginning on April 5, 2016 and ending on April 5, 2023. Under the swap arrangement, which became effective on April 5, 2016, the Bank will pay a fixed interest rate of 1.46% and receive a variable interest rate based on three-month LIBOR on the total notional amount of $10.0 million, with quarterly net settlements.

No ineffectiveness related to the interest rate swap designated as a cash

flow hedge was recognized in the consolidated statements of operations for the three- and nine-month periods ended September 30, 2016. The accumulated net after-tax loss related to the effective cash flow hedge included in accumulated other comprehensive income totaled $82 thousand as of September 30, 2016. Amounts reported in accumulated other comprehensive income related to this derivative are reclassified to other interest expense as interest payments are made on the Bank's variable rate FHLB advance.

Derivatives Not Designated as Hedging Instruments

In 2014, the Bank entered into three separate interest rate cap agreements to mitigate risks assoc

iated with increases in interest rates on an aggregate notional amount of $40 million. The interest rate caps qualify as derivatives but were not designated as hedging instruments. Accordingly, changes in the fair value of the instruments are included in results of operations. Under the three agreements, the Bank paid an up-front premium totaling approximately $126 thousand in return for the ability to receive cash flows if interest rates rise above a strike rate indexed to three-month LIBOR. The agreements have contractual terms that mature at various dates in 2017. As of September 30, 2016, the strike rate had not been achieved on any of the three agreements, and accordingly, the Bank has received no cash flows associated with the agreements. Since the inception of the agreements, on a quarterly basis, the Bank has recorded the current fair value of the derivatives within other assets on the Bank’s consolidated balance sheet, with changes in the fair value included in interest expense on the Bank’s consolidated statements of operations. As of September 30, 2016, the fair value of each of the three derivative agreements was zero. During the nine months ended September 30, 2016, approximately $3 thousand was recognized as interest expense associated with the agreements.