DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2016

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 21: DERIVATIVE FINANCIAL INSTRUMENTS

At December 31, 2015, we had an interest rate swap with a notional amount of $10 million that was designated as a cash flow hedge. The swap was used to convert a portion of the floating rate interest on our trust preferred issuance to a fixed rate of interest. Each quarter we assess the effectiveness of the hedging relationships by comparing the changes in cash flows of the derivative hedging instruments with the changes in cash flows of the designated hedged item. There was no ineffective portion recognized in earnings during 2016, 2015 or 2014. The interest rate swap expired on December 15, 2016, therefore there was no balance reflected in other liabilities in the accompanying consolidated balance sheet at December 31, 2016. The fair value of $(239) thousand was reflected in other liabilities in the accompanying consolidated balance sheets at December 31, 2015.

We have interest rate swaps with a notional amount of $40.73 million with certain commercial customers.  In order to minimize our risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps with our counterparty totaling $40.73 million (pay fixed/receive floating swaps). At December 31, 2016, the weighted average receive rate of these interest rate swaps was 2.66%, the weighted average pay rate was 3.85% and the weighted average maturity was 7.5 years.  The fair values of $194 thousand and $194 thousand were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at December 31, 2016. At December 31, 2015 the weighted average receive rate of these interest rate swaps was 2.13%, the weighted average pay rate was 3.60% and the weighted average maturity was 10.2 years. The fair values of $765 thousand and $765 thousand were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at December 31, 2015. Hedge accounting has not been applied for these derivatives.  Since the terms of the swaps with our customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact our results of operations.

We have interest rate swaps with notional amounts totaling $7.48 million at December 31, 2016, and $9.8 million at December 31, 2015, that were designated as fair value hedges of certain fixed rate loans with municipalities. At December 31, 2016, the weighted average receive rate of these interest rate swaps was 2.09%, the weighted average pay rate was 3.11% and the weighted average maturity was 16.5 years. The fair value of $228 thousand at December 31, 2016, was reflected as a reduction to loans and an increase to other assets. At December 31, 2015 the weighted average receive rate of these interest rate swaps was 1.78%, the weighted average pay rate was 3.25% and the weighted average maturity was 16.6 years. The fair value of $319 thousand at December 31, 2015, was reflected as a reduction to loans and an increase to other assets. The ineffective portion of the interest swaps was immaterial and as such, amounts are not recognized in earnings.

We assessed our counterparty risk at December 31, 2016 and determined any credit risk inherent in our derivative contracts was insignificant. Information about the fair value of derivative financial instruments can be found in Note 7 to these consolidated financial statements.