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Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions | 3 Months Ended
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Mar. 31, 2018
Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk |
Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions | Note 15 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk Risk Management Objective of Using Derivatives The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate borrowings. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $117,308 will be reclassified as a reduction to interest expense. Non-designated Hedges Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. Disclosure of Fair Values of Derivative Instruments on the Balance Sheet The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2018 and December 31, 2017. Fair Value of Derivative Instruments
|  |  |  |  | Asset Derivatives |  | Liability Derivatives
|  |  |  |  | As of March 31, 2018 |  | As of December 31, 2017 |  | As of March 31, 2018 |  | As of December 31, 2017
| Number of Transactions |  | Notional Amount $ |  | Balance Sheet Location | Fair Value $ |  | Balance Sheet Location | Fair Value $ |  | Balance Sheet Location | Fair Value $ |  | Balance Sheet Location | Fair Value $
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Products | 1 |  | 25,774 |  | Other Assets | - |  | Other Assets | - |  | Other Liabilities | 7 |  | Other Liabilities | 1,287
Total derivatives designated as hedging instruments |  |  |  |  |  | - |  |  | - |  |  | 7 |  |  | 1,287
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Products | 2 |  | 51,548 |  | Other Assets | 7 |  | Other Assets | - |  | Other Liabilities | 7 |  | Other Liabilities | 1,287
Other Contracts | 3 |  | 15,908 |  | Other Assets | - |  | Other Assets | - |  | Other Liabilities | 7 |  | Other Liabilities | 13
Total derivatives not designated as hedging instruments |  |  |  |  |  | 7 |  |  | - |  |  | 14 |  |  | 1,301
Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income as of March 31, 2018, and December 31, 2017. The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
Derivatives in Subtopic 815-20 Hedging Relationships |  | Amount of Gain or (Loss) Recognized in OCI on Derivative | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income |  | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
|  | Quarter Ended March 31, |  |  | Year Ended December 31, |  |  | Quarter Ended March 31, |  |  | Year Ended December 31,
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products | $ | 1,206 |  | $ | (504) | Interest income | $ | (74) |  | $ | (211)
Total | $ | 1,206 |  | $ | (504) |  | $ | (74) |  | $ | (211)
Tabular Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on the Income Statement The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of March 31, 2018, and December 31, 2017.
Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
|  |  | Quarter Ended March 31, 2018 |  |  | Year Ended December 31, 2017
|  |  | Interest Income (Expense) |  |  | Other Income (Expense) |  |  | Interest Income (Expense) |  |  | Other Income (Expense)
Total amounts of income and expense line items presented in the |  |  |  |  |  |  |  |  |  |  |  |
statement of financial performance in which the effects of fair value or |  |  |  |  |  |  |  |  |  |  |  |
cash flow hedges are recorded |  | $ | (74) |  | $ | - |  | $ | (211) |  | $ | -
The effects of fair value and cash flow hedging: |  |  |  |  |  |  |  |  |  |  |  |
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 |  |  |  |  |  |  |  |  |  |  |  |
Interest contracts |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other |  |  | (74) |  |  | - |  |  | (211) |  |  | -
comprehensive income into income |  |  |  |  |  |  |  |  |  |  |  |
Disclosure of the Effect of Derivatives Not Designated as Hedging Instruments on the Income Statement The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement as of March 31, 2018, and December 31, 2017.
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 |  |  |  |  |  |  |
| Location of Gain or (Loss) Recognized in Income on Derivative |  |  | Amount of Gain or (Loss) Recognized in Income on Derivative
|  |  |  | Quarter Ended March 31, |  |  | Year Ended December 31,
|  |  |  | 2018 |  |  | 2017
Interest Rate Products | Other income / (expense) |  | $ | - |  | $ | -
Other Contracts | Other income / (expense) |  |  | 6 |  |  | 161
Total |  |  | $ | 6 |  | $ | 161
Fee Income | Other income / (expense) |  | $ | - |  | $ | -
Credit-risk-related Contingent Features For derivative transactions involving counterparties who are lending customers of the Company, the derivative credit exposure is managed through the normal credit review and monitoring process, which may include collateralization, financial covenants and/or financial guarantees of affiliated parties. Agreements with such customers require that losses associated with derivative transactions receive payment priority from any funds recovered should a customer default and ultimate disposition of collateral or guarantees occur. Credit exposure to broker/dealer counterparties is managed through agreements with each derivative counterparty that require collateralization of fair value gains owed by such counterparties. Some small degree of credit exposure exists due to timing differences between when a gain may occur and the subsequent point in time that collateral is delivered to secure that gain. This is monitored by the Company and procedures are in place to minimize this exposure. Such agreements also require the Company to collateralize counterparties in circumstances wherein the fair value of the derivatives result in loss to the Company. Other provisions of such agreements include the definition of certain events that may lead to the declaration of default and/or the early termination of the derivative transaction(s):
| · |  | if the Company either defaults or is capable of being declared in default on any of its indebtedness (exclusive of deposit obligations), then the Company could also be declared in default on its derivative obligations.
| · |  | if a merger occurs that materially changes the Company's creditworthiness in an adverse manner.
| · |  | If certain specified adverse regulatory actions occur, such as the issuance of a Cease and Desist Order, or citations for actions considered Unsafe and Unsound or that may lead to the termination of deposit insurance coverage by the Federal Deposit Insurance Corporation.
As of March 31, 2018, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0. As of March 31, 2018, the Company has not posted any collateral related to these agreements. The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers. In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO. The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2018, and December 31, 2017. The following table is a summary of letter of credit commitments (in thousands):
|  | March 31, 2018 |  | December 31, 2017 |
|  | Fixed |  | Variable |  | Total |  | Fixed |  | Variable |  | Total |
Letters of credit: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Borrower: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial standby |  | $ | 292 |  | $ | 4,152 |  | $ | 4,444 |  | $ | 177 |  | $ | 3,770 |  | $ | 3,947 |
Commercial standby |  |  | - |  |  | 354 |  |  | 354 |  |  | - |  |  | 354 |  |  | 354 |
Performance standby |  |  | 241 |  |  | 7,092 |  |  | 7,333 |  |  | 241 |  |  | 7,594 |  |  | 7,835 |
|  |  | 533 |  |  | 11,598 |  |  | 12,131 |  |  | 418 |  |  | 11,718 |  |  | 12,136 |
Non-borrower: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performance standby |  |  | - |  |  | 142 |  |  | 142 |  |  | - |  |  | 142 |  |  | 142 |
Total letters of credit |  | $ | 533 |  | $ | 11,740 |  | $ | 12,273 |  | $ | 418 |  | $ | 11,860 |  | $ | 12,278 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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