Derivative Instruments

6 Months Ended

Jun. 30, 2016

Derivative Instruments [Abstract]

Derivative Instruments

NOTE 5: DERIVATIVE INSTRUMENTS

We utilize derivatives instruments to manage exposure to various types of interest rate risk for us and our customers within our policy guidelines. All derivative instruments are carried at fair value and credit risk is considered in determining fair value.

Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by our asset/liability management committee. Our credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps with each counterparty.Access to collateral in the event of default is reasonably assured. Therefore, credit exposure may be reduced by the amount of collateral pledged by the counterparty.

Customer Risk Management Interest Rate Swaps

Our qualified customers have the opportunity to participate in our interest rate swap program for the purpose of managing interest rate risk on their variable rate loans with us. If we enter into such agreements with customers, then offsetting agreements are executed between us and approved dealer counterparties to minimize our market risk from changes in interest rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to us by the dealer counterparty and the collateral requirements. These interest rate swaps carry varying degrees of credit, interest rate and market or liquidity risks. The fair value of derivative instruments is recognized as either assets or liabilities in the consolidated statements of financial condition. 

We have entered into ninecustomer interest rate swap agreements that effectively convert the loan interest rate from floating rate based on LIBOR or prime rate to a fixed rate for the customer. As of June 30, 2016, these loans had an outstanding balance of  $98.3 million. We have entered into offsetting agreements with dealer counterparties.  The following table summarizes the fair values of derivative contracts recorded as “non-hedge derivative assets” and “non-hedge derivative liabilities” in the consolidated statements of financial condition:

	As of June 30, 2016				At December 31, 2015
(Dollars in thousands)	Notional		Fair Value		Notional		Fair Value
Non-hedge derivative assets	$	98,318	$	5,163	$	101,629	$	1,793
Non-hedge derivative liabilities		98,318		5,163		101,629		1,793

The marginrates to us in connection with these instruments are a contractual percentage over the one-month LIBOR or a minimal percentage under the prime rate. We had posted $7.4 million of collateral to dealer counterparties as of June 30, 2016. We posted securities to cover the collateral required. These interest rate swaps are not designated as hedging instruments.

Interest Rate Swap

We have an interest rate swap agreement with a total notional amount of $25.0 million. The interest rate swap contract was designated as a hedging instrument in cash flow hedges with the objective of protecting the overall cash flow from our quarterly interest payments on the SBI Capital Trust II preferred securities throughout the seven-year period beginning February 11, 2011 and ending April 7, 2018 from the risk of variability of those payments resulting from changes in the three-month London Interbank Offered Rate (“LIBOR”). Under the swap, we pay a fixed interest rate of 6.15% and receive a variable interest rate of three-month LIBOR plus a margin of 2.85% on a total notional amount of $25.0 million, with quarterly settlements. The rate received by us as of June 30, 2016 was 3.48%. 

The estimated fair value of the interest rate swap contract outstanding as of June 30, 2016 and December 31, 2015 resulted in a pre-tax loss of $1.2 million and $1.4 million, respectively, and was included in other liabilities in the consolidated statements of financial condition. We obtained the counterparty valuation to validate the interest rate derivative contract as of June 30, 2016 and December 31, 2015.   

The effective portion of our gain or loss due to changes in the fair value of the interest rate swap contract, a $0.1 million loss and a $0.1million gain for the six months ended June 30, 2016 and June 30, 2015, respectively, is included in other comprehensive income, net of tax, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other noninterest income or other noninterest expense. No ineffectiveness related to the interest rate derivative was recognized during either reporting period.   

Net cash outflows as a result of the interest rate swap contract were $0.3 million and $0.4 million for the six months ended June 30, 2016 and June 30, 2015, respectively, and were included in interest expense on subordinated debentures.

The fair value of cash and securities posted as collateral by us related to the interest rate swap contract was $2.1 million at June 30, 2016 and December 31, 2015.

There are no credit-risk-related contingent features associated with our derivative contract.