Financial Derivative Instruments

3 Months Ended

Mar. 31, 2016

Financial Derivative Instruments [Abstract]

Financial Derivative Instruments

Note 9: Financial Derivative Instruments

As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank's interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income.

The Company recognizes its derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Bank designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Bank also assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss. Any ineffective portion is recorded in earnings. The Bank discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.

In 2014, interest rate cap agreements were purchased to limit the Bank's exposure to rising interest rates on four rolling, three-month borrowings indexed to three month LIBOR. Under the terms of the agreements, the Bank paid total premiums of $4,566 for the right to receive cash flow payments if 3-month LIBOR rises above the caps of 3.00%, thus effectively ensuring interest expense on the borrowings at maximum rates of 3.00% for the duration of the agreements. The interest rate cap agreements were designated as cash flow hedges.

At March 31, 2016, the Bank had four outstanding derivative instruments with notional amounts totaling $90,000. These derivative instruments were interest rate cap agreements. The notional amounts of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be creditworthy and by limiting the amount of exposure to each counter-party. At March 31, 2016, the Bank's derivative instrument counterparties were credit rated "AA" by the major credit rating agencies.

The details of the Bank's financial derivative instruments as of March 31, 2016 are summarized below:

Interest Rate Cap Agreements

	Notional	Termination	3-Month LIBOR			Premium		Unamortized		Fair
	Amount	Date	Strike Rate			Paid		Premium		Value
$	25,000	06/02/21	3.00	%	$	922	$	919	$	144
$	20,000	06/04/24	3.00	%	$	1,470	$	1,468	$	446
$	20,000	10/21/21	3.00	%	$	632	$	632	$	150
$	25,000	10/21/24	3.00	%	$	1,542	$	1,542	$	613

At March 31, 2016, the total fair value of the interest rate cap agreements was $1,353, compared with $2,069 at December 31, 2015. The fair values of the interest rate cap agreements are included in other assets on the Company's consolidated balance sheets. Changes in the fair value, representing unrealized gains or losses, are recorded in accumulated other comprehensive income, net of tax.

The premiums paid on the interest rate cap agreements are being recognized as increases in interest expense over the duration of the agreements using the caplet method. For the three months ended March 31, 2016, $3 of premium amortization was recorded. During the next twelve months, $86 of the total premiums will be recognized as increases to interest expense, increasing the interest expense related to the hedged borrowings.

A summary of the hedging related balances as of March 31, 2016 and December 31, 2015 follows:

		March 31, 2016
		Gross			Net of Tax
Unrealized loss on interest rate caps	$	(3,208	)	$	(2,085	)
Unamortized premium on interest rate caps		4,561			2,965
Total	$	1,353		$	880

		December 31, 2015
		Gross			Net of Tax
Unrealized loss on interest rate caps	$	(2,495	)	$	(1,621	)
Unamortized premium on interest rate caps		4,564			2,966
Total	$	2,069		$	1,345