Note 21 - Derivatives

12 Months Ended

Dec. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 21. DERIVATIVES

We use 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, we utilize 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”). We do not use derivative instruments for trading or speculative purposes.

For derivative financial instruments accounted for as hedging instruments, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which the effectiveness of the hedge will be assessed. We formally assess both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in cash flows of the related underlying exposures. Any ineffective portion of the changes in cash flow 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, we designated our 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 our 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. We discontinue 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 we discontinue 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, we concluded that certain forecasted Federal Home Loan Bank of San Francisco advances were no longer probable. The forward starting interest rate swaps that were in place to hedge the forecasted advances were terminated and gains of $952 thousand in accumulated other comprehensive income were immediately recognized in earnings.

At December 31, 2015, we have one active interest rate swap, and one forward starting interest rate swap 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 our interest rate swap contracts with counterparties outstanding at December 31, 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		2.64	%		0.33	%	$	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 three 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 December 31, 2015, and December 31, 2014.

(Amounts in thousands)		Asset Derivatives				Liability Derivatives
		December 31,				December 31,
Description	Balance Sheet Location	2015		2014		2015		2014
Interest rate swap - matured	Cash flow hedge	$	—	$	—	$	—	$	880
Interest rate swap - active #1	Cash flow hedge		—		—		869		1,298
Forward starting interest rate swaps #2	Cash flow hedge		—		—		1,500		1,046
Total		$	—	$	—	$	2,369	$	3,224

The following table summarizes the gains (losses) recorded during the years ended December 31, 2015, 2014 and 2013 and their locations within the Consolidated Statements of Operations.

(Amounts in thousands)		December 31,
Description	Consolidated Statement of Operations Location	2015			2014		2013
Interest rate swap (1)	Interest on term debt	$	(1,435	)	$	—	$	—
Forward starting interest rate swap (2)	Interest on term debt		—			283		600
Forward starting interest rate swaps (3)	Other noninterest income (expense)		—			1,617		(503	)
Total		$	(1,435	)	$	1,900	$	97

⁽¹⁾ Loss represents tax effected amounts reclassified from accumulated other comprehensive income pertaining to net settlement recorded during the period on active interest rate swaps.
⁽²⁾ Gains represent tax effected amounts reclassified from accumulated other comprehensive income pertaining to the terminated forward starting interest rate swap.
⁽³⁾ Gains represent tax effected 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 years ended December 31, 2015, 2014 and 2013.

(Amounts in thousands)	December 31,
Description	2015			2014		2013
Interest rate swaps	$	(843	)	$	1,118	$	57

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 hedged instrument.

(Amounts in thousands)	Interest Rate Shock
Description	Flat		+100bp		+200bp
Reclassifications from accumulated other comprehensive income	$	1,127	$	685	$	244

The following table summarizes the derivatives that have a right of offset as of December 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
December 31, 2015
Derivative Liabilities
Interest rate swaps	$	(2,369	)	$	—	$	(2,369	)	$	4,008	$	1,639
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 we fail to maintain our status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements. Similarly, we could be required to settle our obligations under certain of our agreements if specific regulatory events occur, such as if we were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels.

We were required to post collateral against the obligations of $2.4 million at December 31, 2015. Accordingly, we pledged three mortgage backed securities with an aggregate par value of $3.8 million and an aggregate fair value of $4.0 million.