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Interest Rate Swap Derivatives | 9 Months Ended
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Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Interest Rate Swap Derivatives | 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 better 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 September 30, 2018, 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 $6.4 million at September 30, 2018 compared to a net unrealized gain before income tax of $2.3 million at December 31, 2017. The unrealized gain in value since 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, changes in the fair value of the derivative are initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects 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. 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 three and nine months ended September 30, 2018, the Company reclassified $214 and $230 thousand, respectively, related to designated cash flow hedge derivatives from accumulated other comprehensive income to decrease interest expense. During the three and nine months ended September 30, 2017, the Company reclassified $307 and $1.3 million, respectively, related to designated cash flow hedge derivatives from accumulated other comprehensive income to increase interest expense. During the next twelve months, the Company estimates (based on existing interest rates) that $2.1 million will be reclassified as a decrease 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 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, 2018, 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 $5.8 million (none of these contracts were in a net liability position as of September 30, 2018). The Company has minimum collateral posting thresholds with certain of its derivative counterparties. As of September 30, 2018, 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 September 30, 2018, it could have been required to settle its obligations under the agreements at the termination value. During the third quarter of 2018, the Company entered into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. These derivatives are not designated as hedges, are not speculative, and have a notional value of $27.5 million as of September 30. 2018. The changes in fair value for these contracts are recognized directly in earnings. The table below identifies the balance sheet category and fair values of the Company’s designated cash flow hedge derivative instruments and non-designated hedges as of September 30, 2018 and December 31, 2017.
|  |  |  |  | September 30, 2018 |  | December 31, 2017
|  | Swap |  |  | Notional |  |  |  |  |  | Balance Sheet |  | Notional |  |  |  |  |  | Balance Sheet
|  | Number |  |  | Amount |  |  | Fair Value |  |  | Category |  | Amount |  |  | Fair Value |  |  | Category
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  |  | (1 | ) |  | $ | 75,000 |  |  | $ | 1,240 |  |  | Other Assets |  | $ | 75,000 |  |  | $ | 598 |  |  | Other Assets
Interest rate swap |  |  | (2 | ) |  |  | 100,000 |  |  |  | 2,539 |  |  | Other Assets |  |  | 100,000 |  |  |  | 821 |  |  | Other Assets
Interest rate swap |  |  | (3 | ) |  |  | 75,000 |  |  |  | 2,648 |  |  | Other Assets |  |  | 75,000 |  |  |  | 837 |  |  | Other Assets
|  |  | Total |  |  | $ | 250,000 |  |  | $ | 6,427 |  |  |  |  | $ | 250,000 |  |  | $ | 2,256 |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other Contracts |  |  | (1 | ) |  |  | 27,500 |  |  |  | 29 |  |  | Other Liabilities |  |  | — |  |  |  | — |  |  | Other Liabilities
|  |  | Total |  |  | $ | 27,500 |  |  | $ | 29 |  |  |  |  | $ | — |  |  | $ | — |  |  |
The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the three and nine months ended September 30, 2018 and 2017.
|  |  |  |  | Three Months Ended September 30, 2018 |  |  | Three Months Ended September 30, 2017 |
|  |  |  |  | Amount of |  |  | Reclassified from AOCI into Income |  |  | Amount of |  |  | Reclassified from AOCI into Income |
|  | Swap |  |  | Pre-tax gain |  |  |  |  | Amount of |  |  | Pre-tax (loss) |  |  |  |  | Amount of |
|  | Number |  |  | Recognized in OCI |  |  | Category |  | Gain (Loss) |  |  | Recognized in OCI |  |  | Category |  | (Loss) |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  |  | (1 | ) |  | $ | 111 |  |  | Interest Expense |  | $ | 90 |  |  | $ | 26 |  |  | Interest Expense |  | $ | (72 | )
Interest rate swap |  |  | (2 | ) |  |  | 426 |  |  | Interest Expense |  |  | 73 |  |  |  | (8 | ) |  | Interest Expense |  |  | (122 | )
Interest rate swap |  |  | (3 | ) |  |  | 312 |  |  | Interest Expense |  |  | 51 |  |  |  | (56 | ) |  | Interest Expense |  |  | (113 | )
|  |  | Total |  |  | $ | 849 |  |  |  |  | $ | 214 |  |  | $ | (38 | ) |  |  |  | $ | (307 | )
|  |  |  |  |  | Nine Months Ended September 30, 2018 |  |  | Nine Months Ended September 30, 2017 |
|  |  |  |  |  |  |  | Reclassified from AOCI into Income |  |  |  |  |  | Reclassified from AOCI into Income |
|  |  | Swap Number |  |  | Amount of Pre-tax gain Recognized in OCI |  | Category |  | Amount of Gain (Loss) |  |  | Amount of Pre-tax (loss) Recognized in OCI |  |  | Category |  | Amount of (Loss) |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  |  | (1 | ) |  | $ | 791 |  |  | Interest Expense |  | $ | 148 |  |  | $ | (26 | ) |  | Interest Expense |  | $ | (338 | )
Interest rate swap |  |  | (2 | ) |  |  | 1,769 |  |  | Interest Expense |  |  | 51 |  |  |  | (35 | ) |  | Interest Expense |  |  | (525 | )
Interest rate swap |  |  | (3 | ) |  |  | 1,841 |  |  | Interest Expense |  |  | 31 |  |  |  | (400 | ) |  | Interest Expense |  |  | (458 | )
|  |  | Total |  |  | $ | 4,401 |  |  |  |  | $ | 230 |  |  | $ | (461 | ) |  |  |  | $ | (1,321 | )
The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017.
|  | Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships |
|  | Three Months Ended September 30, 2018 |  | Three Months Ended September 30, 2017 |
(dollars in thousands) |  | Interest Income (Expense) |  |  | Other Income (Expense) |  |  | Interest Income (Expense) |  |  | Other Income (Expense) |
Total amounts of income and expense line items presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded |  | $ | 214 |  |  | $ | — |  |  | $ | (307 | ) |  | $ | — |
The effects of cash flow hedging: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income |  | $ | 214 |  |  | $ | — |  |  | $ | (307 | ) |  | $ | — |
|  | Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships |
|  | Nine Months Ended September 30, 2018 |  |  | Nine Months Ended September 30, 2017 |
(dollars in thousands) |  | Interest Income (Expense) |  |  | Other Income (Expense) |  |  | Interest Income (Expense) |  |  | Other Income (Expense) |
Total amounts of income and expense line items presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded |  | $ | 230 |  |  | $ | — |  |  | $ | (1,321 | ) |  | $ | — |
The effects of cash flow hedging: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income |  | $ | 230 |  |  | $ | — |  |  | $ | (1,321 | ) |  | $ | — |
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. The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s cash flow hedge derivatives as of September 30, 2018 and December 31, 2017.
As of September 30, 2018
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 |  | $ | 5,220 |  |  | $ | — |  |  | $ | 5,220 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,220 |
Counterparty 2 |  |  | 1,270 |  |  |  | — |  |  | $ | 1,270 |  |  |  | — |  |  |  | — |  |  | $ | 1,270 |
Counterparty 3 |  |  | (29 | ) |  |  | — |  |  | $ | (29 | ) |  |  | — |  |  |  | — |  |  | $ | (29 | )
|  | $ | 6,461 |  |  | $ | — |  |  | $ | 6,461 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,461 |
As of December 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 |  | $ | 1,619 |  |  | $ | — |  |  | $ | 1,619 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,619 |
Counterparty 2 |  |  | 582 |  |  |  | — |  |  |  | 582 |  |  |  | — |  |  |  | — |  |  |  | 582 |
|  | $ | 2,201 |  |  | $ | — |  |  | $ | 2,201 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,201 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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