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Note 6 - Interest Rate Swap Derivatives | 9 Months Ended
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Sep. 30, 2016
Interest Rate Swap [Member] |
Notes to Financial Statements |
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 Company’s objective in using interest rate derivatives is to add stability to interest 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 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 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. The Company is hedging its exposure to the variability in potential future interest rate conditions on existing financial instruments. As of September 30, 2016, the Company had three forward starting interest rate swap transactions outstanding that had a notional amount of $250.0 million associated with the Company’s variable rate deposits. The net unrealized loss before income tax on the swaps was $9.0 million at September 30, 2016 and $1.4 million at December 31, 2015. The unrealized loss is due to the increase in expected spreads between short and longer term interest rates between the date the forward starting swap was entered into and September 30, 2016. 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 recognized an immaterial amount in earnings due to hedge ineffectiveness during the nine month period ended September 30, 2016. The Company did not recognize any hedge ineffectiveness in earnings during the nine month period ended September 30, 2015. 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, 2016, the Company reclassified $776 thousand related to derivatives from accumulated other comprehensive income to interest expense. During the next twelve months, the Company estimates (based on interest rates as of September 30, 2016) that $2.6 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 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 September 30, 2016, 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 $9.0 million. As of September 30, 2016, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $9.6 million against its obligations under these agreements. If the Company had breached any of these provisions at September 30, 2016, 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 derivative instruments (all of which are designated as cash flow hedges) as of September 30, 2016 and December 31, 2015.
|  | Swap |  |  | Notional |  |  |  |  |  | Balance Sheet |  |  |  |  |  |  |
September 30, 2016 |  | Number |  |  | Amount |  |  | Fair Value |  | Category |  | Receive Rate |  | Pay Rate |  | Maturity
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  |  | (1 | ) |  | $ | 75,000 |  |  | $ | (1,877 | ) | 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 |  |  |  | (3,901 | ) | Other Liabilities |  | Federal Funds Effective Rate +10 basis points |  |  | 1.74 | % | April 15, 2021
Interest rate swap |  |  | (3 | ) |  |  | 75,000 |  |  |  | (3,252 | ) | Other Liabilities |  | 1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points |  |  | 1.92 | % | March 31, 2022
|  | Total |  |  |  | 250,000 |  |  |  | (9,030 | ) |  |  |  |  |  |  |  |
|  | 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
|  | Total |  |  |  | 250,000 |  |  |  | (1,417 | ) |  |  |  |  |  |  |  |
The table below presents the pre-tax net gains (losses) of the Company’s cash flow hedges for the nine months ended September 30, 2016 and for the year ended December 31, 2015.
|  |  |  |  |  | Nine Months Ended September 30, 2016 |
|  |  |  |  |  | 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 | ) |  | $ | (1,877 | ) | Interest Expense |  | $ | (429 | ) | Other Expense |  | $ | - |
Interest rate swap |  |  | (2 | ) |  |  | (3,901 | ) | Interest Expense |  |  | (581 | ) | Other Expense |  |  | - |
Interest rate swap |  |  | (3 | ) |  |  | (3,252 | ) | Interest Expense |  |  | (508 | ) | Other Expense |  |  | - |
|  | Total |  |  | $ | (9,030 | ) |  |  | $ | (1,518 | ) |  |  | $ | - |
|  |  |  |  |  | Year Ended December 31, 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 | ) |  | $ | (368 | ) |  |  | $ | - |  |  |  | $ | - |
Interest rate swap |  |  | (2 | ) |  |  | (665 | ) |  |  |  | - |  |  |  |  | - |
Interest rate swap |  |  | (3 | ) |  |  | (384 | ) |  |  |  | - |  |  |  |  | - |
|  | Total |  |  | $ | (1,417 | ) |  |  | $ | - |  |  |  | $ | - |

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