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Derivative Financial Instruments and Hedging Activities
 3 Months Ended
Mar. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Hedging Activities
Derivative Financial Instruments and Hedging Activities

We have entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates.

Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.

As of March 31, 2017, we had five interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, August 2037 and October 2037. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled $12 thousand and $13 thousand as of March 31, 2017 and December 31, 2016, respectively.
Information on our derivatives follows:
 
Asset derivatives
 
Liability derivatives
(in thousands)
March 31, 2017
December 31, 2016
 
March 31, 2017
December 31, 2016
Fair value hedges:
 
 
 
 
 
Interest rate contracts notional amount
$
4,168

$
4,217

 
$
15,324

$
15,495

Interest rate contracts fair value1
$
70

$
55

 
$
837

$
933


 
Three months ended
(in thousands)
March 31, 2017
March 31, 2016
Increase (decrease) in value of designated interest rate swaps due to LIBOR interest rate movements recognized in interest income
$
111

$
(876
)
Payment on interest rate swaps recorded in interest income
(98
)
(174
)
(Decrease) increase in value of hedged loans recognized in interest income
(113
)
1,050

Decrease in value of yield maintenance agreement recognized against interest income
(4
)
(12
)
Net loss on derivatives recognized against interest income 2
$
(104
)
$
(12
)
 
 
 
1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology.
2 Includes hedge ineffectiveness loss of $6 thousand and gain of $162 thousand for the quarters ended March 31, 2017 and March 31, 2016, respectively. Changes in value of swaps were included in the assessment of hedge effectiveness. Hedge ineffectiveness is the measure of the extent to which the change in the fair value of the hedging instruments does not exactly offset the change in the fair value of the hedged items from period to period.

Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes.

Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:
Offsetting of Financial Assets and Derivative Assets
 
 
Gross Amounts
Net Amounts of
Gross Amounts Not Offset in
 
 
Gross Amounts
Offset in the
Assets Presented
the Statements of Condition
 
 
of Recognized
Statements of
in the Statements
Financial
Cash Collateral
 
(in thousands)
Assets1
Condition
of Condition1
Instruments
Received
Net Amount
March 31, 2017
 
 
 
 
 
 
Derivatives by Counterparty:
 
 
 
 
 
 
Counterparty A
$
70

$
—

$
70

$
(70
)
$
—

$
—

December 31, 2016
 
 
 
 
 
 
Derivatives by Counterparty:
 
 
 
 
 
 
Counterparty A
$
55

$
—

$
55

$
(55
)
$
—

$
—

1 Amounts exclude accrued interest totaling $1 thousand at both March 31, 2017 and December 31, 2016, respectively.
Offsetting of Financial Liabilities and Derivative Liabilities
 
 
Gross Amounts
Net Amounts of
Gross Amounts Not Offset in
 
 
Gross Amounts
Offset in the
Liabilities Presented
the Statements of Condition
 
 
of Recognized
Statements of
in the Statements
Financial
Cash Collateral
 
(in thousands)
Liabilities2
Condition
of Condition2
Instruments
Pledged
Net Amount
March 31, 2017
 
 
 
 
 
 
Derivatives by Counterparty:
 
 
 
 
 
 
Counterparty A
$
837

$
—

$
837

$
(70
)
$
(767
)
$
—

December 31, 2016
 
 
 
 
 
 
Derivatives by Counterparty:
 
 
 
 
 
 
Counterparty A
$
933

$
—

$
933

$
(55
)
$
(878
)
$
—



2 Amounts exclude accrued interest totaling $11 thousand and $12 thousand at March 31, 2017 and December 31, 2016, respectively.

For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 2016 Form 10-K filed with the SEC on March 14, 2017.