Note 14 - Derivatives

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 14. DERIVATIVES

The Company uses derivatives to hedge the risk of changes in market interest rates to limit the impact on earnings and cash flows relating to specific groups of assets and liabilities. Presently, the Company utilizes interest rate swaps (the “hedging instrument”) with other major financial institutions (counterparties) to hedge interest expenses associated with certain Federal Home Loan Bank of San Francisco borrowings (the “hedged instrument”). The Company does not use derivative instruments for trading or speculative purposes.

For derivative financial instruments accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which effectiveness of the hedge will be assessed. The Company formally assesses both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in fair value of the instruments is recognized immediately into earnings.

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 designated its interest rate swaps as cash flow hedges of certain active and forecasted variable rate Federal Home Loan Bank of San Francisco advances. Changes in the fair value of the hedging instrument, except any ineffective portion, are recorded in accumulated other comprehensive income until earnings are impacted by the hedged instrument. No components of the Company’s hedging instruments are excluded from the assessment of hedge effectiveness in hedging exposure to variability in cash flows.

Classification of the gain or loss in the Consolidated Statements of Operations upon release from accumulated other comprehensive income is the same as that of the underlying exposure. The Company discontinues the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. 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 that were in accumulated other comprehensive income are recognized immediately in earnings.

During June 2014, the Company concluded that certain forecasted Federal Home Loan Bank of San Francisco advances were no longer probable. The forward starting interest rate swaps that were related to these forecasted advances were terminated and gains of $952 thousand in accumulated other comprehensive income were immediately recognized in earnings.

At June 30, 2015 the Company has one active interest rate swap, and two forward starting interest rate swaps to hedge interest rate risk associated with current and forecasted variable rate Federal Home Loan Bank of San Francisco advances. The hedge strategy converts LIBOR based variable rate of interest on active and forecasted Federal Home Loan Bank of San Francisco advances to fixed interest rates.

The following table summarizes the Company’s interest rate swap contracts with counterparties outstanding at June 30, 2015. The interest rate swap contracts are made with a single issuer and include the right of offset.

(Amounts in thousands)
Description	We Pay Fixed			We Receive Variable (1)			Notional Amount		Effective Date	Maturity Date
Interest rate swap - active		1.84	%		0.278	%	$	75,000	August 1, 2014	August 3, 2015
Forward starting interest rate swap #1		2.64	%	Variable			$	75,000	August 3, 2015	August 1, 2016
Forward starting interest rate swap #2		3.22	%	Variable			$	75,000	August 1, 2016	August 1, 2017

⁽¹⁾ Rate floats to 3 month LIBOR payable quarterly on February 1, May 1, August 1, and November 1.

The following table lists the active and forward starting interest rate swap derivatives separately by asset (gains) and liabilities (losses), and the fair value of such derivatives at June 30, 2015, and December 31, 2014.

		Asset Derivatives				Liability Derivatives
(Amounts in thousands)		June 30,		December 31,		June 30,		December 31,
Description	Designation	2015		2014		2015		2014
Interest rate swap - active	Cash flow hedge	$	—	$	—	$	107	$	880
Forward starting interest rate swap #1	Cash flow hedge		—		—		1,578		1,298
Forward starting interest rate swap #2	Cash flow hedge		—		—		1,405		1,046
Total		$	—	$	—	$	3,090	$	3,224

The following table summarizes the gains (losses) recorded during the three and six months ended June 30, 2015 and 2014, and their location within the Consolidated Statements of Operations.

(Amounts in thousands)		Three Months Ended June 30,					Six Months Ended June 30,
Description	Consolidated Statement of Operations Location	2015			2014		2015			2014
Interest rate swap - active (1)	Interest on Federal Home Loan Bank of San Francisco borrowings	$	(292	)	$	—	$	(587	)	$	—
Forward starting interest rate swap (2)	Interest on Federal Home Loan Bank of San Francisco borrowings		—			111		—			261
Forward starting interest rate swap (3)	Other noninterest income		—			1,617		—			1,617
Total		$	(292	)	$	1,728	$	(587	)	$	1,878

⁽¹⁾ Loss represents net settlement on active interest rate swap.
⁽²⁾ Gains represent tax adjusted amounts reclassified from accumulated other comprehensive income pertaining to the terminated forward starting interest rate swap.
⁽³⁾ Gains represent tax adjusted amounts reclassified from accumulated other comprehensive income immediately upon cancellation of forecasted Federal Home Loan Bank of San Francisco borrowings.

The following table summarizes the gains and (losses) on all derivative instruments (active and forward starting) designated as cash flow hedges recorded in accumulated other comprehensive income and reclassified into earnings during the three and six months ended June 30, 2015 and June 30, 2014.

(Amounts in thousands)	Three Months Ended June 30,					Six Months Ended June 30,
Description	2015			2014		2015			2014
Interest rate swaps	$	(177	)	$	1,017	$	(350	)	$	1,105

The following table summarizes management’s estimate of the amount of existing losses on derivative instruments recorded in accumulated other comprehensive income that are expected to reclassified into earnings within the next 12 months, assuming various rate shock scenarios. In each scenario, the impact to net income as a result of the increase in interest rates paid on the hedged instrument would remain unchanged because the derivative instrument is effectively offsetting changes in cash flows of the underlying hedged instrument.

(Amounts in thousands)	Interest Rate Shock
Description	Flat		+100bp		+200bp
Reclassifications from accumulated OCI	$	1,013	$	572	$	130

The following table summarizes the derivatives that have a right of offset at June 30, 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) Included In The Consolidated Balance Sheets			Fair Value of Collateral Posted		Net Amount
June 30, 2015
Derivative liabilities
Interest rate swaps	$	(3,090	)	$	—	$	(3,090	)	$	4,051	$	961
December 31, 2014
Derivative liabilities
Interest rate swaps	$	(3,224	)	$	—	$	(3,224	)	$	3,533	$	309

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

The contracts with the derivative counterparties 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 was required to post collateral against the obligations of $3.1 million at June 30, 2015. Accordingly, the Company pledged three mortgage backed securities with an aggregate par value of $3.8 million and an aggregate fair value of $4.1 million.