Annual report pursuant to Section 13 and 15(d)

DERIVATIVES

v2.4.0.8
DERIVATIVES
 12 Months Ended
Dec. 31, 2013
DERIVATIVES [Abstract]  
DERIVATIVES

9.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.  At December 31, 2013, the Company pledged $3.1 million of cash as collateral for the trust swap.

 

During the third quarter of 2013, the Company entered into eight interest rate swap agreements (the “prime loan swaps”) as part of the management of interest rate risk.  The Company designated the prime loan swaps as cash flow hedges intended to protect the Company against the variability in the expected future cash flows on the designated variable rate loan products.  The prime loan swaps hedge the underlying cash flows, wherein the Company receives a fixed interest rate ranging from 4.71% to 6.09% from counterparty and pays interest based on  the Wall Street Journal prime index, with a spread of up to 1%, to the same counterparty calculated on a notional amount of $100.0 million.  Four of the eight prime loan swaps contain floor rates ranging from 4.00% to 5.00%.  The term of the prime loan swaps is six years with a fixed rate that started September 17, 2013.  The prime loan swaps were entered into with a counterparty that met the Company’s credit standards and the agreement contains collateral provision protecting the at-risk party.  The Company believes that the credit risk inherent in the contract is not significant.  At December 31, 2013, the Company pledged securities with a market value of $5.7 million as collateral for the prime loan swaps.

 

Amounts receivable or payable are recognized as accrued under the terms of the agreements.  In accordance with ASC 815, Derivatives and Hedging, the Company has designated the previously discussed derivatives as cash flow hedges, with the effective portions of the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income.  The ineffective portions of the unrealized gains or losses, if any, would be recorded in other expense.  The Company has assessed the effectiveness of each hedging relationship by comparing the changes in cash flows on the designated hedged item.  The Company’s cash flow hedges are deemed to be effective.  At December 31, 2013, the fair value of the Company’s cash flow hedges was an unrealized loss of $3.6 million, the amount the Company would have expected to pay if the contract was terminated.  The below asset and liability are 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 derivatives designated as cash flow hedges at December 31, 2013 and 2012 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

 

 

Receive

 

Pay

 

Life

   

Positions

 

Amount

 

Asset

 

Liability

 

Rate

 

Rate

 

(Years)

As of December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pay fixed - receive floating interest rate swaps

1

 

$

36,000

 

$

 -

 

$

3,046

 

0.25%

 

3.51%

 

3.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receive fixed - pay floating interest rate swaps

8

 

$

100,000

 

$

 -

 

$

516

 

5.17%

*

3.89%

*

5.72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

 

 

Receive

 

Pay

 

Life

   

Positions

 

Amount

 

Asset

 

Liability

 

Rate

 

Rate

 

(Years)

As of December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pay fixed - receive floating interest rate swaps

1

 

$

36,000

 

$

 -

 

$

4,489

 

0.31%

 

3.51%

 

4.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*This receive rate is a weighted average rate for the 8 loan swaps that have a receive rate range from 4.71% to 6.09%.  The pay rate is a weighted average rate taking into consideration the floor rates discussed above.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 December 31, 2013 and 2012 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

 

 

Receive

 

Pay

 

Life

   

Positions

 

Amount

 

Asset

 

Liability

 

Rate

 

Rate

 

(Years)

As of December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receive fixed - pay floating interest rate swaps

1

 

$

718

 

$

33

 

$

 -

 

4.58%

 

2.92%

 

8.59

Pay fixed - receive floating interest rate swaps

1

 

$

718

 

$

 -

 

$

33

 

2.92%

 

4.58%

 

8.59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

 

 

Receive

 

Pay

 

Life

   

Positions

 

Amount

 

Asset

 

Liability

 

Rate

 

Rate

 

(Years)

As of December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receive fixed - pay floating interest rate swaps

1

 

$

744

 

$

18

 

$

 -

 

4.58%

 

2.96%

 

9.59

Pay fixed - receive floating interest rate swaps

1

 

$

744

 

$

 -

 

$

18

 

2.96%

 

4.58%

 

9.59