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Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2016
Derivative Instruments and Hedging Activities
Note 12. Derivative Instruments and Hedging Activities

As of December 31, 2016, 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 December 31, 2016. The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

 

     December 31,  
     2016      2015  
(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

    $ 4,835      $ —        $ 167      $ 5,151      $ —        $ 251  
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 4,835      $ —        $ 167      $ 5,151      $ —        $ 251  
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

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

 

     Year Ended December 31,         
(Amounts in thousands)      2016          2015          2014       

Income Statement Location

  

Derivatives designated as hedges

            

Interest rate swaps

    $ 116      $ 122      $ 162        Interest and fees on loans  
  

 

 

     

 

 

     

 

 

     

Total derivatives

    $ 116      $ 122      $ 162