Derivative Instruments

12 Months Ended

Dec. 31, 2016

Derivative Instruments [Abstract]

Derivative Instruments

Note 12:  Derivative Instruments

We utilize derivatives instruments to manage exposure to various types of interest rate risk for us and our customers within policy guidelines. All derivative instruments are carried at fair value, in which 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 and executive loan committees. 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. 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 in terms of notional amounts, interest rates, and maturity dates, except for a fixed pricing spread or fee paid to us by the dealer counterparty. These interest rate swaps carry varying degrees of credit, interest rate and market or liquidity risks. The fair value of these derivative instruments are recognized as either non-hedge derivative assets or liabilities in the Consolidated Statements of Financial Condition. 

We have entered into nine customer interest rate swap agreements that effectively convert the loan interest rate from floating rate based on LIBOR to a fixed rate for the customer. As of December 31, 2016, these loans had an outstanding balance of $124.0 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 December 31,2016				As of December 31,2015
(Dollars in thousands)	Notional		Fair Value		Notional		Fair Value
Non-hedge derivative assets	$	123,953	$	1,235	$	101,629	$	1,793
Non-hedge derivative liabilities		123,953		1,235		101,629		1,793

The floating rate paid in connection with these interest rate swap agreements is a contractual percentage rate spread to one-month LIBOR or to the Prime rate as of December 31, 2016. From time to time it may be necessary to post collateral with our dealer counterparties to secure the market values of these contracts. As of December 31, 2016, there was no collateral requirement with any of our dealer counterparties given the current market values of these contracts. These interest rate swaps are not designated as hedging instruments.

Interest Rate Swap on Trust Preferred Securities

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 cash flow hedging instrument 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 LIBOR. Under the swap, we will 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 December 31, 2016  was 3.73%.

The estimated fair value of the interest rate derivative contract outstanding as of December 31, 2016 and 2015 resulted in a pre-tax loss of $0.7 million and $1.4 million, respectively, and was included in other liabilities in the Consolidated Statements of Financial Condition. 

The effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument, a  $0.4 million gain and a $0.1 million gain for the year ended December 31, 2016 and 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 flows as a result of the interest rate swap agreement were $0.7 million for the year ended December 31, 2016 and $0.8 million for each of the years ended December 31, 2015and 2014 and were included in interest expense on subordinated debentures.   

We posted cash collateral with our counterparty related to the derivative contract in excess of the required $0.7 million and $1.4 million at December 31, 2016 and 2015, respectively.

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