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Note 6 - Interest Rate Swap Derivatives | 3 Months Ended
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Mar. 31, 2017
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 designated as cash flow hedges 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 designated as cash flow hedges 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’s intent is to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments. As of March 31, 2017, the Company had three forward starting designated cash flow hedge interest rate swap transactions outstanding that had an aggregate notional amount of $250 million associated with the Company’s variable rate deposits. The net unrealized gain before income tax on the swaps was $463 thousand at March 31, 2017 compared to a net unrealized loss before income tax of $692 thousand at December 31, 2016. The net unrealized gain at March 31, 2017 compared to the net unrealized loss at December 31, 2016 is due to the increase in expected spreads between short and longer term interest rates for the remaining term of the designated cash flow hedge interest rate swap. 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 three month period ended March 31, 2017. The Company did not recognize any hedge ineffectiveness in earnings during the three month period ended March 31, 2016. Amounts reported in accumulated other comprehensive income related to designated cash flow hedge 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 March 31, 2017, the Company reclassified $578 thousand related to designated cash flow hedge derivatives from accumulated other comprehensive income to interest expense. During the next twelve months, the Company estimates (based on existing interest rates) that $1.2 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 designated cash flow hedge interest rate swap agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party’s exposure; 2) 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; 3) if the Company fails to maintain its status as a well/adequately 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 March 31, 2017, the aggregate fair value of all designated cash flow hedge 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 asset position totaled $463 thousand. As of March 31, 2017, the Company was not required to post collateral with its derivative counterparties against its obligations under these agreements because these agreements were in a net asset position. If the Company had breached any provisions under the agreements at March 31, 2017, it could have been required to settle its obligations under the agreements at the termination value. The Company entered into a cancelable interest rate swap in March 2017 as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the fair value of an interest rate lock on a multi-family loan. The cancelable swap is a free-standing derivative and is not designated as a hedge under ASC 815. Accordingly, any change in fair value of the derivative is recognized in earnings during the current period. As March 31, 2017, this cancelable interest rate swap had an aggregate notional amount of $8 million associated with an interest-rate lock on a multi-family loan. As of March 31, 2017, the Company recognized $29 thousand in Other Expenses to adjust the fair value of the cancelable interest rate swap to market value. As of March 31, 2017, the cancelable interest rate swap was in a liability position of $29 thousand inclusive of accrued interest. The table below identifies the balance sheet category and fair values of the Company’s designated cash flow hedge derivative instruments as of March 31, 2017 and December 31, 2016.
|  | Swap |  |  | Notional |  |  |  |  |  | Balance Sheet |  |  |  |  |  |  |
March 31, 2017 |  | Number |  |  | Amount |  |  | Fair Value |  | Category |  | Receive Rate |  | Pay Rate |  | Maturity
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  |  | (1 | ) |  | $ | 75,000 |  |  | $ | 100 |  | Other Assets |  | 1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points |  |  | 1.71 | % | March 31, 2020
Interest rate swap |  |  | (2 | ) |  |  | 100,000 |  |  |  | 35 |  | Other Assets |  | Federal Funds Effective Rate +10 basis points |  |  | 1.74 | % | April 15, 2021
Interest rate swap |  |  | (3 | ) |  |  | 75,000 |  |  |  | 328 |  | Other Assets |  | 1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points |  |  | 1.92 | % | March 31, 2022
|  | Total |  |  | $ | 250,000 |  |  | $ | 463 |  |  |  |  |  |  |  |  |
|  | Swap |  |  | Notional |  |  |  |  |  | Balance Sheet |  |  |  |  |  |  |
December 31, 2016 |  | Number |  |  | Amount |  |  | Fair Value |  | Category |  | Receive Rate |  | Pay Rate |  | Maturity
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  |  | (1 | ) |  | $ | 75,000 |  |  | $ | (197 | ) | 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 |  |  |  | (514 | ) | Other Liabilities |  | Federal Funds Effective Rate +10 basis points |  |  | 1.74 | % | April 15, 2021
Interest rate swap |  |  | (3 | ) |  |  | 75,000 |  |  |  | 19 |  | Other Liabilities |  | 1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points |  |  | 1.92 | % | March 31, 2022
|  | Total |  |  | $ | 250,000 |  |  | $ | (692 | ) |  |  |  |  |  |  |  |
The table below presents the pre-tax net gains (losses) of the Company’s cash flow hedges for the three months ended March 31, 2017 and for the year ended December 31, 2016.
|  |  |  |  |  | Three Months Ended March 31, 2017 |
|  |  |  |  | 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 | ) |  | $ | 100 |  |  | Interest Expense |  |  | $ | (154 | ) |  | Other Expense |  |  | $ | - |
Interest rate swap |  |  | (2 | ) |  |  | 35 |  |  | Interest Expense |  |  |  | (231 | ) |  | Other Expense |  |  |  | - |
Interest rate swap |  |  | (3 | ) |  |  | 328 |  |  | Interest Expense |  |  |  | (193 | ) |  | Other Expense |  |  |  | (1 | )
|  | Total |  |  | $ | 463 |  |  |  |  |  | $ | (578 | ) |  |  |  |  | $ | (1 | )
|  |  |  |  |  | Year Ended December 31, 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 | ) |  | $ | (197 | ) |  | Interest Expense |  |  | $ | (628 | ) |  | Other Expense |  |  | $ | - |
Interest rate swap |  |  | (2 | ) |  |  | (514 | ) |  | Interest Expense |  |  |  | (880 | ) |  | Other Expense |  |  |  | - |
Interest rate swap |  |  | (3 | ) |  |  | 19 |  |  | Interest Expense |  |  |  | (747 | ) |  | Other Expense |  |  |  | 1 |
|  | Total |  |  | $ | (692 | ) |  |  |  |  | $ | (2,255 | ) |  |  |  |  | $ | 1 |
Balance Sheet Offsetting : Our designated cash flow hedge interest rate swap derivatives are eligible for offset in the Consolidated Balance Sheets and are subject to master netting arrangements. Our derivative transactions with counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. The Company generally offsets such financial instruments for financial reporting purposes.
Three Months Ended March 31, 2017 |
Offsetting of Derivative Assets (dollars in thousands) |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Balance Sheet |
|  | Gross Amounts of Recognized Assets |  |  | Gross Amounts Offset in the Balance Sheet |  |  | Net Amounts of Assets presented in the Balance Sheet |  |  | Financial Instruments |  |  | Cash Collateral Posted |  |  | Net Amount |
Counterparty 1 |  | $ | 363 |  |  | $ | - |  |  | $ | 363 |  |  | $ | - |  |  | $ | - |  |  | $ | 363 |
Counterparty 2 |  |  | 100 |  |  |  | - |  |  |  | 100 |  |  |  | - |  |  |  | - |  |  |  | 100 |
|  | $ | 463 |  |  | $ | - |  |  | $ | 463 |  |  | $ | - |  |  | $ | - |  |  | $ | 463 |
Year Ended December 31, 2016 |
Offsetting of Derivative Liabilities (dollars in thousands) |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Balance Sheet |
|  | Gross Amounts of Recognized Liabilities |  |  | Gross Amounts Offset in the Balance Sheet |  |  | Net Amounts of Liabilities presented in the Balance Sheet |  |  | Financial Instruments |  |  | Cash Collateral Posted |  |  | Net Amount |
Counterparty 1 |  | $ | 514 |  |  | $ | (19 | ) |  | $ | 495 |  |  | $ | - |  |  | $ | (380 | ) |  | $ | 115 |
Counterparty 2 |  |  | 197 |  |  |  | - |  |  |  | 197 |  |  |  | - |  |  |  | (170 | ) |  |  | 27 |
|  | $ | 711 |  |  | $ | (19 | ) |  | $ | 692 |  |  | $ | - |  |  | $ | (550 | ) |  | $ | 142 |

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- Definition The entire disclosure for hybrid instruments and embedded derivatives, including discussion of the process used in evaluating whether a hybrid instrument in the form of a share constitutes a debt or equity security, and on what basis an embedded derivative was deemed to be separable or inseparable from the host instrument. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 15 -URI http://asc.fasb.org/subtopic&trid=2229187 + Details
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