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Note 10 - Interest Rate Swap Derivatives
 12 Months Ended
Dec. 31, 2015
Interest Rate Swap [Member]  
Note 10 - Interest Rate Swap Derivatives [Line Items]  
Discussion of Hybrid Instruments and Embedded Derivatives [Text Block]

Note 10 – 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 entered into forward starting interest rate swaps in April 2015 as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds. The interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from two counterparties in exchange for the Company making fixed payments beginning in April 2016. As of December 31, 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. The net unrealized loss before income tax on the swaps was $1.4 million at December 31, 2015. The unrealized loss is due to the increase in spread between short and longer term interest rates between the date the forward starting swap was entered into and year end 2015. There were no interest rate swap derivative instruments as of December 31, 2014.


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 interest rate swap 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 year ended December 31, 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 interest rate swap derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the year ended December 31, 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 $1.8 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 interest rate swap 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.”


The interest rate swap agreements detail: the requirement that collateral be posted when the market value exceeds certain threshold limits associated with the secured party’s exposure; that if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; and that if the Company fails to maintain its status as a well/adequate capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.


As of December 31, 2015, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our capital status) that were in a net liability position totaled $1.4 million. As of December 31, 2015, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $2.9 million against its obligations under these agreements. If the Company had breached any of these provisions at December 31, 2015, it could have been required to settle its obligations under the agreements at the termination value.


The table below identifies the balance sheet category and fair values of the Company’s interest rate swap derivative instruments designated as cash flow hedges as of December 31, 2015. There were no interest rate swap derivative instruments as of December 31, 2014.


   

Swap

    

Notional

         

Balance Sheet

              

December 31, 2015

  

Number

   

Amount

    

Fair Value

  

Category

  

Receive Rate

  

Pay Rate

  

Maturity
                                         

(dollars in thousands)

                                        

Interest rate swap

    (1)     $ 75,000     $ (368 )

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       (665 )

Other Liabilities

  

Federal Funds Effective Rate +10 basis points

     1.74 %

April 15, 2021

Interest rate swap

    (3)       75,000       (384 )

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 year ended December 31, 2015. Since all transactions are forward starting swaps all amounts are balance sheet related (“AOCI”), and no amounts were recorded in the income statement.


           

Year Ended December 31, 2015

  
           

Effective Portion

    

Ineffective Portion

  
            Amount of    

Reclassified from AOCI

   

Recognized in Income

  
           

Pre-tax gain

    

into income

    

on Derivatives

  
   

Swap

    

 (loss) Recognized

            

Amount of

            

Amount of

  
   

Number

   

 in OCI

    

Category

    

Gain (Loss)

    

Category

    

Gain (Loss)

  
                                                 

(dollars in thousands)

                                                

Interest rate swap

    (1)     $ (368 )           $ -             $ -  

Interest rate swap

    (2)       (665 )             -               -  

Interest rate swap

    (3)       (384 )             -               -