XML 33 R17.htm IDEA: XBRL DOCUMENT

Interest Rate Swap Derivatives

12 Months Ended

Dec. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 9 — 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 rate 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 December 31, 2017 and December 31, 2016, 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 $2.3 million at December 31, 2017 compared to a net unrealized loss before income tax of $692 thousand at December 31, 2016. The gain in value at year end 2017 is due to the increase in expected net cash inflows from the swap over its remaining term due to higher market interest rates.

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 years ended December 31, 2017 and 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 year ended December 31, 2017, the Company reclassified $1.6 million related to derivatives from accumulated other comprehensive income to interest expense. During the year ended December 31, 2016, the Company reclassified $2.3 million related to derivatives from accumulated other comprehensive income to interest expense. During the next twelve months, the Company estimates (based on existing interest rates) that $89 thousand 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.

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) were in a net asset position totaling $2.3 million at December 31, 2017. The aggregate fair value of all derivative contracts with credit risk contingent features that were in net liability position totaled $692 thousand as of December 31, 2016. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. As of December 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. As of December 31, 2016, the Company posted collateral of $550 thousand against its obligations under these agreements. If the Company had breached any of these provisions at December 31, 2017 or December 31, 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 December 31, 2017 and December 31, 2016.

	Swap		Notional				Balance Sheet
December 31, 2017 (dollars in thousands)	Number		Amount		Fair Value		Category	Receive Rate	Pay Rate		Maturity
Interest rate swap	(1	)	$	75,000	$	598	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		821		Other Assets	Federal Funds Effective Rate +10 basis points	1.74	%	April 15, 2021
Interest rate swap	(3	)	75,000		837		Other Assets	1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points	1.92	%	March 31, 2022
	Total		$	250,000	$	2,256

	Swap		Notional					Balance Sheet
December 31, 2016 (dollars in thousands)	Number		Amount		Fair Value			Category	Receive Rate	Pay Rate		Maturity
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 Assets	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 years ended December 31, 2017 and December 31, 2016.

			Year Ended December 31, 2017
			Effective Portion						Ineffective Portion
					Reclassified from AOCI				Recognized in Income
			Amount of Pre-tax gain (loss) Recognized in OCI		into income				on Derivatives
	Swap Number					Amount of Gain (Loss)				Amount of
(dollars in thousands)	Swap Number				Category	Amount of Gain (Loss)			Category	Gain (Loss)
Interest rate swap	(1	)	$	394	Interest Expense	$	(400	)	Other Expense	$	—
Interest rate swap	(2	)	701		Interest Expense	(634		)	Other Expense	—
Interest rate swap	(3	)	260		Interest Expense	(560		)	Other Expense	(1		)
	Total		$	1,355		$	(1,594	)		$	(1	)

			Year Ended December 31, 2016
			Effective Portion							Ineffective Portion
						Reclassified from AOCI				Recognized in Income on Derivatives
			Amount of Pre-tax gain (loss) Recognized in OCI			into income				Recognized in Income on Derivatives
	Swap Number						Amount of Gain (Loss)				Amount of
(dollars in thousands)	Swap Number					Category	Amount of Gain (Loss)			Category	Gain (Loss)
Interest rate swap	(1	)	$	(456	)	Interest Expense	$	(628	)	Other Expense	$	—
Interest rate swap	(2	)	(730		)	Interest Expense	(880		)	Other Expense	—
Interest rate swap	(3	)	(345		)	Interest Expense	(747		)	Other Expense	1
	Total		$	(1,531	)		$	(2,255	)		$	1

Balance Sheet Offsetting: Our designated cash flow hedge interest rate swap derivatives are eligible for offset in the Consolidated Balance Sheet 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.

The following table presents the liabilities subject to an enforceable master netting arrangement as of December 31, 2017 and December 31, 2016.

Year Ended December 31, 2017

Offsetting of Derivative Assets (dollars in thousands)

					Net Amounts of Assets		Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		presented in the Balance Sheet		Financial Instruments		Cash Collateral Posted		Net Amount
Counterparty 1	$	1,619	$	—	$	1,619	$	—	$	—	$	1,619
Counterparty 2	582		—		582		—		—		582
	$	2,201	$	—	$	2,201	$	—	$	—	$	2,201

Year Ended December 31, 2016

Offsetting of Derivative Liabilities (dollars in thousands)

						Net Amounts of		Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet			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