Note 22 - Derivatives

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE

22.

DERIVATIVES

During

2015

and the

first

quarter of

2016

we utilized interest rate swaps (the “hedging instrument”) with another major financial institutions (counterparty) 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.

During

March

of

2016,

we paid off the

$75.0

million Federal Home Loan Bank of San Francisco borrowing (the “hedged instrument”) and terminated all of our interest rate swaps (active and forward starting). Prior to the time of termination, a

$2.3

million unrealized pretax loss on swaps was carried in

Other

Liabilities

in our

Consolidated Balance Sheets

.

At termination, we immediately reclassified the loss to noninterest expense.

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 Income

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 recorded in accumulated other comprehensive income are recognized immediately in earnings.

The following table summarizes our interest rate swap contracts with counterparties outstanding at

December

31,

2015.

The interest rate swap contracts were made with a single issuer and included the right of offset.

(Amounts in thousands)
Description	We Pay Fixed			We Receive Variable (1)			Notional Amount		Effective Date	Maturity Date
Interest rate swap		2.64	%		0.33	%	$	75,000	August 3, 2015	August 1, 2016
Forward starting interest rate swap		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 individually lists the active and forward starting interest rate swap derivatives that were in a liability (loss) position and the fair value of such derivatives at

December

31,

2016,

and

December

31,

2015.

There were

no

interest rate swap derivatives that were in an asset (gain) position at

December

31,

2016,

or at

December

31,

2015.

(Amounts in thousands)		Liability Derivatives
		December 31,
Description	Balance Sheet Location	2016		2015
Interest rate swap	Cash flow hedge		—		869
Forward starting interest rate swap	Cash flow hedge		—		1,500
Total		$	—	$	2,369

The following table summarizes the (gains) losses recorded during the years ended

December

31,

2016,

2015

and

2014

and their locations within the

Consolidated

Statements of Income

.

(Amounts in thousands)		December 31,
Description	Consolidated Statement of Operations	2016		2015		2014
Interest rate swap (1)	Interest on term debt	$	396	$	1,435	$	—
Forward starting interest rate swap - terminated (2)	Other noninterest expense (Interest on term debt)		2,325		—		(283	)
Forward starting interest rate swaps (3)	Other noninterest (income)		—		—		(1,617	)
Total		$	2,721	$	1,435	$	(1,900	)

(1)

Losses represent 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,

2016,

2015

and

2014.

(Amounts in thousands)	December 31,
Description	2016			2015			2014
Interest rate swaps	$	(1,601	)	$	(843	)	$	1,118

The following table summarizes the derivatives that had a right of offset at

December

31,

2015.

						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

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. In

March

of

2016,

upon termination of all of our interest rate swaps the securities were returned to us.