Quarterly report pursuant to Section 13 or 15(d)

Derivatives

v2.4.0.6
Derivatives
 9 Months Ended
Sep. 30, 2012
Derivatives [Abstract]  
DERIVATIVES
13. DERIVATIVES

During the second quarter of 2010, the Company entered into an interest rate swap agreement (the “trust swap”) as part of the management of interest rate risk. The Company designated the trust swap as a cash flow hedge intended to protect against the variability of cash flows associated with the aforementioned Statutory Trust II preferred capital securities. The trust swap hedges the interest rate risk, wherein the Company receives interest of LIBOR from a counterparty and pays a fixed rate of 3.51% to the same counterparty calculated on a notional amount of $36.0 million. The term of the trust swap is six years with a fixed rate that started June 15, 2011. The trust swap was entered into with a counterparty that met the Company’s credit standards and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with ASC 815 Derivatives and Hedging, the trust swap is designated as a cash flow hedge, with the effective portion of the derivative’s unrealized gain or loss recorded as a component of other comprehensive income. The ineffective portion of the unrealized gain or loss, if any, would be recorded in other expense. The Company has assessed the effectiveness of the hedging relationship by comparing the changes in cash flows on the designated hedged item. There was no hedge ineffectiveness for this trust swap. At September 30, 2012, the fair value of the trust swap agreement was an unrealized loss of $4.8 million, the amount the Company would have expected to pay if the contract was terminated. The below liability is recorded as a component of other comprehensive income recorded in the Company’s Consolidated Statements of Comprehensive Income.

 

Shown below is a summary of the derivative designated as a cash flow hedge at September 30, 2012 and December 31, 2011 (dollars in thousands):

 

                                                     
        Notional                 Receive     Pay     Life  
    Positions   Amount     Asset     Liability     Rate     Rate     (Years)  

As of September 30, 2012

                                                    

Pay fixed - receive floating

interest rate swaps

  

1

  

$

36,000

  

   $ —      

$

4,785

  

  

 

0.36

% 

  

 

3.51

% 

  

 

4.71

  
             
               
        Notional                 Receive     Pay     Life  
    Positions   Amount     Asset     Liability     Rate     Rate     (Years)  

As of December 31, 2011

                                                    

Pay fixed - receive floating

interest rate swaps

  

1

  

$

36,000

  

  

$

—  

  

  

$

4,293

  

  

 

0.58

% 

  

 

3.51

% 

  

 

5.46

  
             

During the normal course of business, the Company enters into interest rate swap loan relationships (“loan swaps”) with borrowers to meet their financing needs. Upon entering into the loan swaps, the Company enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values reported in other assets and other liabilities. Shown below is a summary regarding loan swap derivative activities at September 30, 2012 and December 31, 2011 (dollars in thousands):

 

                                                     
        Notional                 Receive     Pay     Life  
    Positions   Amount     Asset     Liability     Rate     Rate     (Years)  

As of September 30, 2012

                                                    

Receive fixed - pay floating interest rate swaps

   2   $ 2,137     $ 39     $ —         6.15 %      2.81 %      9.84  

Pay fixed - receive floating interest rate swaps

   2   $ 2,137     $ —       $ 39       2.81 %      6.15 %      9.84  
               
        Notional                 Receive     Pay     Life  
    Positions   Amount     Asset     Liability     Rate     Rate     (Years)  

As of December 31, 2011

                                                    

Receive fixed - pay floating interest rate swaps

   2   $ 4,028     $ 66     $ —         6.35 %      2.77 %      1.01  

Pay fixed - receive floating interest rate swaps

   2   $ 4,028     $ —       $ 66       2.77 %      6.35 %      1.01