Derivatives

6 Months Ended

Jun. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives [Text Block]

The Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The Company does not use financial instruments or derivatives for any trading or other speculative purposes.

The primary focus of the Company's asset/liability management program is to monitor the sensitivity of the Company's net portfolio value and net income under varying interest rate scenarios to take steps to control its risks. On a quarterly basis, the Company simulates the net portfolio value and net income expected to be earned over a twelve-month period following the date of simulation. The simulation is based on a projection of market interest rates at varying levels and estimates the impact of such market rates on the levels of interest-earning assets and interest-bearing liabilities during the measurement period. Based upon the outcome of the simulation analysis, the Company considers the use of derivatives as a means of reducing the volatility of net portfolio value and projected net income within certain ranges of projected changes in interest rates. The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates.

The Company has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. During the first quarter of 2009, the Company entered into a five-year interest rate derivative contract, with a notional amount of $250 million, to offset the effects of interest rate changes on an unsecured $250 million variable rate money market funding arrangement. Under this cash flow hedge relationship, the Company has structured a synthetic cap, where the objective is to offset the effect of interest rate changes, whenever funding rates are higher than the strike rate of the synthetic cap. During the third quarter of 2009, the Company paid $24.0 million to self-finance the transaction, thus securing a traditional interest rate cap. The termination date of this interest rate cap is February 16, 2014.

In March 2013, the Company entered into a forward-starting interest rate swap transaction with a notional amount of $125 million to effectively convert $125 millionof its variable-rate money market funding arrangement to fixed interest rate debt as of the forward-starting date of the swap transaction. The effective date of this interest rate swap is September 16, 2014 and the termination date is March 18, 2019. The swap transaction was designated as a cash flow hedge of the changes in cash flows attributable to changes in one-month LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on the first $125 million of the Company's variable rate money market funding arrangement, which are indexed to one-month LIBOR.

The fair value of these derivatives, which are designated as cash flow hedging instruments under ASC Topic 815: Derivatives and Hedging, is as follows (dollars in thousands):

			June 30, 2013				December 31, 2012
	Notional			Balance Sheet			Balance Sheet
	Amount			Location	Fair Value		Location	Fair Value
Interest rate cap	$	250,000		Other assets	$	10	Other assets	$	40
Interest rate swap		125,000		Other assets		2,967	N/A		-

The interest rate swap and interest rate cap instruments held by the Company are subject to master netting arrangements which contain a legally enforceable right to offset recognized amounts and settle such amounts on a net basis. The Company has elected to present the financial assets and financial liabilities associated with these arrangements on a gross basis in the Consolidated Balance Sheets. Cash collateral is posted by the counterparty with net liability positions in accordance with contract thresholds.

Information about financial instruments that are eligible for offset in the consolidated balance sheet as of June 30, 2013and December 31, 2012 is presented in the following tables (dollar amounts in thousands):

							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amount Recognized		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral	Net
June 30, 2013
Financial assets:
Interest rate cap	$	10	$	-	$	10	$	-	$	-	$	10
Interest rate swap		2,967		-		2,967		-		(2,940)		27
Total financial assets	$	2,977	$	-	$	2,977	$	-	$	(2,940)	$	37
December 31, 2012
Financial assets:
Interest rate cap	$	40	$	-	$	40	$	-	$	-	$	40

The Company has recorded a net loss of $1.7 million, net of tax, as accumulated other comprehensive loss at June 30, 2013 associated with cash flow hedging instruments and expects losses of $3.6million, net of tax, to be reclassified into earnings within the next 12 months. The following table presents the losses recorded in the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income, respectively, relating to derivative instruments designated as cash flow hedges (dollars in thousands, net of tax):

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Amount of net gain (loss) recorded in OCI (effective portion)	$	2,279	$	(135)	$	1,804	$	(266)
Amount of net loss reclassified from OCI to earnings (1)		1,434		1,152		2,789		2,331
(1) Amount recorded in interest expense on demand deposits in the Consolidated Statements of Income

The amounts included in accumulated other comprehensive income will be reclassified to interest expense should the hedges no longer be considered effective. No amount of ineffectiveness was included in net income for the six months ended June 30, 2013 and 2012. The Company will continue to assess the effectiveness of the hedges on a quarterly basis.

Counterparty Credit Risk - By entering into derivative instrument contracts, the Company exposes itself, from time to time, to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to the Company, which creates credit risk for the Company. The Company attempts to minimize this risk by selecting counterparties with investment grade credit ratings, limiting its exposure to any single counterparty and regularly monitoring its market position with each counterparty.

Credit-Risk Related Contingent Features - The Company's derivative instrument does not contain any credit-risk related contingent features.