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Note 6 - Interest Rate Swap Derivatives | 9 Months Ended
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Sep. 30, 2015
Interest Rate Swap [Member] |
Note 6 - Interest Rate Swap Derivatives [Line Items] |
Discussion of Hybrid Instruments and Embedded Derivatives [Text Block] | Note 6. Interest Rate Swap Derivatives The Company uses interest rate swap agreements to assist in its interest rate risk management. The notional amounts of the interest rate swaps do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties. The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from counterparty in exchange for the Company making fixed payments. As of September 30, 2015, the Company had three forward starting interest rate swap transactions outstanding that had a notional amount of $250 million associated with the Company’s variable rate deposits. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company did not recognize any hedge ineffectiveness in earnings during the period ended September 30, 2015. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of ten months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments) and as such existing hedges are deemed forward starting swaps and no net settlements of cash flows is occurring. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the quarter ended September 30, 2015, the Company did not have any reclassifications to interest expense. During the next twelve months, the Company estimates (based on existing interest rates) that $1.46 million will be reclassified as an increase in interest expense. The Company is exposed to credit risk in the event of nonperformance by the interest rate swap counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate swaps. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815, “Derivatives and Hedging.” In addition, the interest rate swap agreements contain language outlining collateral-pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits. The table below identifies the balance sheet category and fair values of the Company’s derivative instruments designed as cash flow hedges as of September 30, 2015. There were no derivative instruments as of December 31, 2014 or September 30, 2014.
September 30, |  | Swap |  |  | Notional |  |  | Fair |  |  | Balance Sheet |  |  |  |  |  |  |  |
2015 |  | Number |  |  | Amount |  |  | Value |  |  | Category |  | Receive Rate |  | Pay Rate |  |  | Maturity
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  |  | (1 | ) |  | $ | 75,000 |  |  | $ | (996 | ) |  | Other Liabilities |  | 1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points |  |  | 1.71 | % |  | March 31, 2020
Interest rate swap |  |  | (2 | ) |  |  | 100,000 |  |  |  | (1,435 | ) |  | Other Liabilities |  | Federal Funds Effective Rate +10 basis points |  |  | 1.74 | % |  | April 15, 2021
Interest rate swap |  |  | (3 | ) |  |  | 75,000 |  |  |  | (1,014 | ) |  | Other Liabilities |  | 1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points |  |  | 1.92 | % |  | March 31, 2022
The table below presents the pre-tax net gains (losses) of the Company’s cash flow hedges for the nine months ended September 30, 2015. Since all transactions are forward starting swaps all amounts are balance sheet related (AOCI), and no amounts were recorded in the income statement.
|  |  |  |  |  | Nine Months Ended September 30, 2015 |
|  |  |  |  |  | Effective Portion |  |  | Ineffective Portion |
|  |  |  |  |  |  |  |  |  | Reclassified from AOCI |  |  | Recognized in Income |
|  |  |  |  |  | Amount of |  |  | into income |  |  | on Derivatives |
|  | Swap |  |  | Pre-tax gain (loss) |  |  |  |  | Amount of |  |  |  |  |  |  | Amount of |
|  | Number |  |  | Recognized in OCI |  |  | Category |  | Gain (Loss) |  |  | Category |  |  | Gain (Loss) |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  |  | (1 | ) |  | $ | (996 | ) |  |  |  | $ | - |  |  |  |  |  |  | $ | - |
Interest rate swap |  |  | (2 | ) |  |  | (1,435 | ) |  |  |  |  | - |  |  |  |  |  |  |  | - |
Interest rate swap |  |  | (3 | ) |  |  | (1,014 | ) |  |  |  |  | - |  |  |  |  |  |  |  | - |

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