Note 14 - Derivatives

3 Months Ended

Mar. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 14. DERIVATIVES

In the normal course of business the Company is subject to risk from adverse fluctuations in interest rates. To mitigate interest rate risk and market risk, we enter into interest rate swaps with counterparties. Derivative instruments are used to manage interest rate risk relating to specific groups of assets and liabilities, and are presently being used to hedge interest expenses associated with certain FHLB wholesale borrowings. The Company does not use derivative instruments for trading or speculative purposes. The counterparties to the interest rate swaps and forwards are major financial institutions.

The Company’s objective in managing exposure to market risk is to limit the impact on earnings and cash flow. The extent to which the Company uses such instruments is dependent on its access to these contracts in the financial markets.

Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties that owe us under the contract completely fail to perform under the terms of those contracts, assuming no recoveries of underlying collateral as measured by the market value of the derivative financial instrument.

ASC 815-10, Derivatives and Hedging (“ASC 815”) requires companies to recognize all derivative instruments as assets or liabilities at fair value in the Consolidated Balance Sheets. In accordance with ASC 815, the Company designates interest rate swaps as cash flow hedges of forecasted variable rate FHLB advances.

No components of the hedging instruments are excluded from the assessment of hedge effectiveness. All changes in fair value of outstanding derivatives in cash flow hedges, except any ineffective portion, are recorded in other comprehensive income until earnings are impacted by the hedged transaction. Classification of the gain or loss in the Consolidated Statements of Operations upon release from other comprehensive income is the same as that of the underlying exposure.

When the Company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, or within an additional two-month period thereafter, changes to fair value accumulated in other comprehensive income are recognized immediately in earnings.

During August 2010, the Company entered into five forward starting interest rate swap contracts (“IR”), to hedge interest rate risk associated with forecasted variable interest rate payments from FHLB advances. The hedge strategy converted the LIBOR based floating rate of interest on certain forecasted FHLB advances to fixed interest rates, thereby protecting the Company from floating interest rate variability. Contracts outstanding at February 3, 2011, had effective dates and maturities ranging from March 1, 2012 through March 1, 2017.

On February 4, 2011, the Company terminated the forward starting interest rate swap positions and realized $3.0 million in cash from the counterparty, equal to the carrying amount of the derivative at the date of termination. In addition, upon termination of the hedge contract, the Company received the full amount of the collateral posted pursuant to the hedge contract. Concurrent with the termination of the hedge contract, management removed the cash flow hedge designation, but continued to conclude the forecasted FHLB advances as probable.

The Company performed on the first three legs of the forecasted transactions by executing forecasted FHLB advances of $75.0 million, with maturities that aligned with the respective terminated IR’s. During June 2014, the Company concluded the remaining hedged forecasted FHLB advances associated with the final two legs of the IR’s were no longer probable. Accordingly, the remaining gains recorded in other comprehensive income relating to the final two legs of the IR’s were immediately recognized in earnings. As a result of the transaction, the Company reclassified $952 thousand from other comprehensive income to earnings, which was included in other noninterest income in the Consolidated Statement of Operations.

Net gains of $88 thousand were reclassified out of accumulated other comprehensive income and netted with other borrowing interest expense during the three months ended March 31, 2014.

During August 2011, the Company entered into four IR contracts, to hedge interest rate risk associated with forecasted variable rate FHLB advances. The hedge strategy converted the LIBOR based floating rate of interest on certain forecasted FHLB advances to fixed interest rates, thereby protecting the Company from floating interest rate variability.

The following table summarizes the notional amount, effective dates, maturity dates and the maximum length of time over which the existing IR contracts are outstanding with counterparties as of March 31, 2015.

(Amounts in thousands)
Description	Notional Amount		Effective Date	Maturity
Forward starting interest rate swap	$	75,000	August 1, 2014	August 3, 2015
Forward starting interest rate swap	$	75,000	August 3, 2015	August 1, 2016
Forward starting interest rate swap	$	75,000	August 1, 2016	August 1, 2017

The following table summarizes the types of derivatives, separately by assets and liabilities, their locations on the Consolidated Balance Sheets, and the fair values of such derivatives as of March 31, 2015, and December 31, 2014. See Note 15, Fair Values in these Notes to Unaudited Consolidated Financial Statements for additional detail on the valuation of the Company’s derivatives. The contracts are made with a single issuer and include the right of offset however, all of the outstanding IR contracts have a liability position as of March 31, 2015 and December 31, 2014.

		Asset Derivatives				Liability Derivatives
(Amounts in thousands)	Balance Sheet	March 31,		December 31,		March 31,		December 31,
Description	Location	2015		2014		2015		2014
Forward starting interest rate swaps (1)	Other liabilities	$	—	$	—	$	395	$	880
Forward starting interest rate swaps (1)	Other liabilities		—		—		1,496		1,298
Forward starting interest rate swaps (1)	Other liabilities		—		—		1,368		1,046
Total		$	—	$	—	$	3,259	$	3,224

(1) Designated as hedging instrument.

The following table summarizes the types of derivatives, their locations within the Consolidated Statements of Operations, and the (loss) gains recorded for the three months ended March 31, 2015 and 2014:

(Amounts in thousands)		Three Months Ended March 31,
Description	Consolidated Statement of Operations Location	2015			2014
Forward starting interest rate swaps (1)	Interest on Federal Home Loan Bank of San Francisco	$	(295	)	$	—
Forward starting interest rate swaps (2)	Interest on Federal Home Loan Bank of San Francisco		—			150
Total		$	(295	)	$	150

(1) Cash flow hedge designation. Loss represents net settlement on active interest rate swap.

(2) Cash flow hedge designation removed. Gains represent tax adjusted amounts reclassified from accumulated OCI pertaining to the terminated forward starting interest rate swap.

The following table summarizes the derivatives that have a right of offset as of March 31, 2015 and December 31, 2014.

						Gross Amounts Not Offset In The Consolidated Balance Sheets
(Amounts in thousands)	Gross Amounts of Recognized Assets / (Liabilities)			Gross Amounts Offset In The Consolidated Balance Sheets		Net Amounts of Assets / (Liabilities) Presented In The Consolidated Balance Sheets			Collateral Posted		Net Amount
March 31, 2015
Derivative liabilities
Interest rate swaps	$	(3,259	)	$	—	$	(3,259	)	$	4,339	$	1,080
December 31, 2014
Derivative liabilities
Interest rate swaps	$	(3,224	)	$	—	$	(3,224	)	$	3,533	$	309

The Company has agreements with its derivative counterparties that contain a provision where 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. Similarly, the Company could be required to settle its obligations under certain of its agreements if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels. 

The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has been required to post collateral against its obligations under these agreements of $3.3 million as of March 31, 2015. Accordingly, the Company pledged three mortgage backed securities with an aggregate par value of $4.1 million and an aggregate fair value of $4.3 million. If the Company had breached any of these provisions at March 31, 2015, it could have been required to settle its obligations under the agreements at the termination value. The collateral posted by the Company exceeds the aggregate fair value of additional assets that would be required to be posted as collateral if the instrument were to be settled immediately.