DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE F – DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments, currently in the form of interest rate swaps, to manage its interest rate risk. These instruments carry varying degrees of credit, interest rate, and market or liquidity risks. Derivative instruments are recognized as either assets or liabilities in the accompanying financial statements and are measured at fair value. Subsequent changes in the derivatives’ fair values are recognized in earnings unless specific hedge accounting criteria are met.

Crescent has established objectives and strategies that include interest-rate risk parameters for maximum fluctuations in net interest income and market value of portfolio equity. Interest rate risk is monitored via simulation modeling reports. The goal of the Company’s asset/liability management efforts is to maintain profitable financial leverage within established risk parameters. Crescent entered into several financial arrangements using derivatives during 2009 to add stability to interest income and to manage its exposure to interest rate movements.

Cash Flow Hedges

Through a special purpose entity (see Note H of Item 8 in Crescent’s 2010 Form 10-K) the Company issued trust preferred debentures in 2003.  In 2007, the Company entered into a subordinated term loan agreement with a non-affiliated financial institution.  These instruments, as more fully described in the Note H of Item 8 in the Company’s 2010 Form 10-K, were issued as part of its capital management strategy. These instruments are variable rate and expose the Company to interest rate risk caused by the variability of expected future interest expense attributable to changes in 3-month LIBOR. To mitigate this exposure to fluctuations in cash flows resulting from changes in interest rates, the Company entered into four pay-fixed interest rate swap agreements in June 2009.

There were two interest rate swaps entered into for each of the two instruments.  The notional amount of each instrument was split in two equal halves with one half being swapped for a three year period and the second for a four year period.  The trust preferred debentures and the subordinated loan carry contractual variable rates of interest based on the three-month London Inter Bank Offered Rate (LIBOR) plus 300 and 410 basis points respectively.  The weighted average fixed rates resulting from the swap transactions are 5.73% and 6.63%, respectively.

Based on the evaluation performed at inception, these derivative instruments qualified for cash flow hedge accounting. Therefore, the cumulative change in fair value of the interest rate swaps, to the extent that it is expected to be offset by the cumulative change in anticipated interest cash flows from the hedged trust preferred debenture and subordinated term loan, was deferred and reported as a component of other comprehensive income (“OCI”) during the period that cash flow hedge accounting remains applicable. Any hedge ineffectiveness will be charged to current earnings.

Since the floating index and reset dates are based on identical terms, management believes that the hedge relationship of the cumulative changes in expected future cash flows from the interest rate swaps and the cumulative changes in expected interest cash flows from the subordinated term loan agreement will be highly effective. Management has determined that there is no hedge ineffectiveness as of June 30, 2011 related to the subordinated term loan.

As previously disclosed, during the quarter ended June 30, 2011 we deferred the interest payments associated with our trust preferred debentures.  As such, we have determined that cash flow hedge accounting is no longer applicable for the two interest rate swaps related to the trust preferred debentures, and changes to the fair value of our interest rate swaps will be reflected within our earnings. The amount in accumulated other comprehensive income as of the date that hedge accounting was discontinued will be amortized into earnings over the period through the maturity of each interest rate swap, because it is deemed probable that future interest payments on the trust preferred debentures will resume.  Such amortization was deemed immaterial for the quarter ended June 30, 2011.

The notional amount of the debt obligations being hedged was $15.5 million and the fair value of the interest rate swap liability, which is recorded in accrued expenses and other liabilities at June 30, 2011, was an unrealized loss of $504,867.

The following tables disclose the location and fair value amounts of derivative instruments designated as hedging instruments in the consolidated balance sheets.

	June 30, 2011
				Estimated Fair
	Balance Sheet	Notional		Value of
	Location	Amount		Asset (Liability)
Trust preferred securities:
Interest rate swap	Other liabilities	$	4,000,000	$	(83,345	)
Interest rate swap	Other liabilities		4,000,000		(178,403	)
Subordinated term loan agreements:
Interest rate swap	Other liabilities		3,750,000		(76,838	)
Interest rate swap	Other liabilities		3,750,000		(166,281	)
		$	15,500,000	$	(504,867	)

	December 31, 2010
				Estimated Fair
	Balance Sheet	Notional		Value of
	Location	Amount		Asset(Liability)
Trust preferred securities:
Interest rate swap	Other liabilities	$	4,000,000	$	(111,444	)
Interest rate swap	Other liabilities		4,000,000		(188,166	)
Subordinated term loan agreements:
Interest rate swap	Other liabilities		3,750,000		(103,529	)
Interest rate swap	Other liabilities		3,750,000		(175,899	)
		$	15,500,000	$	(579,038	)

See Note G for additional information.

The following table discloses activity in accumulated Other Comprehensive Income (“OCI”) related to the interest rate swaps during the three and six month periods ended June 30, 2011.

	Three months			Six months
	ended			ended
	June 30, 2011			June 30, 2011
Accumulated OCI resulting from interest rate swaps as of January 1, 2011, net of tax	$	(306,628	)	$	(355,818	)
Other comprehensive gain recognized during the three and six month periods ended June 30, 2011, net of tax		(3,612	)		45,875
Accumulated OCI resulting from interest rate swaps as of June 30, 2011, net of tax	$	(310,240	)	$	(310,240	)

The following table discloses activity in accumulated OCI related to the interest rate swaps during the year ended December 31, 2010.

	December 31, 2010
Accumulated OCI resulting from interest rate swaps as of January 1, 2010, net of tax	$	(181,237	)
Other comprehensive loss recognized, net of tax		(174,581	)
Accumulated OCI resulting from interest rate swaps as of December 31, 2010, net of tax	$	(355,818	)

The Company monitors the credit risk of the interest rate swap counterparty.