DERIVATIVES AND HEDGING ACTIVITY

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES AND HEDGING ACTIVITY

NOTE 13—DERIVATIVES AND HEDGING ACTIVITY

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable-rate loan assets and borrowings. The Company does not use derivatives for trading or speculative purposes.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheets as of December 31, 2012 and December 31, 2011.

	Tabular Disclosure of Fair Values of Derivative Instruments
	Asset Derivatives						Liability Derivatives
	As of December 31, 2012			As of December 31, 2011			As of December 31, 2012			As of December 31, 2011
(in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate products	Other Assets	$	30	Other Assets	$	175	Other Liabilities	$	—	Other Liabilities	$	—
Total derivatives designated as hedging instruments		$	30		$	175		$	—		$	—
Derivatives not designated as hedging instruments
Interest rate products	Other Assets	$	76	Other Assets	$	291	Other Liabilities	$	—	Other Liabilities	$	—
Total derivatives not designated as hedging instruments		$	76		$	291		$	—		$	—

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate caps as part of its interest rate risk management strategy. For hedges of the Company’s variable-rate borrowings, interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. As of December 31, 2012 and 2011, the Company had three interest rate caps with a notional amount of $37.1 million that were designated as cash flow hedges associated with the Company’s variable-rate borrowings. One of the caps is forward-starting and was not effective during the years ended December 31, 2012 and 2011.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During 2012 and 2011, such derivatives were used to hedge the forecasted variable cash outflows associated with subordinated debt related to trust preferred securities. No hedge ineffectiveness was recognized during the years ended December 31, 2012 and 2011.

Amounts reported in Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company estimates that an additional $125,634 will be reclassified as an addition to interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and are utilized as part of the Company’s overall interest rate risk management strategy. During 2011 and 2012, the Bank purchased twelve interest rate caps with an aggregate notional amount of $240 million and hedge accounting has not been designated; therefore, all changes in the fair value of the caps are recognized in earnings each period.

Effect of Derivative Instruments on the Statement of Operations

The tables below present the effect of the Company’s derivative financial instruments on the statement of operations for the years ended December 31, 2012, 2011 and 2010.

									Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)								Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)									Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)								Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Derivatives in Cash Flow Hedging Relationships
	Year Ended December 31,									Year Ended December 31,								Year Ended December 31,
	2012			2011			2010			2012			2011		2010			2012		2011		2010
Interest Rate Products	$	(11	)	$	(278	)	$	47	Interest expense	$	(73	)	$	(25)	$	—	Other non- interest income	$	—	$	—	$	—
Total	$	(11	)	$	(278	)	$	47		$	(73	)	$	(25)	$	—		$	—	$	—	$	—

Derivatives not Designated as Hedging Relationships	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative Year Ended December 31,
			2012			2011		2010
Interest Rate Products	Other non-interest income	$	(536	)	$	(84)	$	—
Total		$	(536	)	$	(84)	$	—

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. Similarly, the Company could be required to settle its obligations under certain of its agreements if the Company fails to maintain its status as a well or adequately capitalized institution. As of December 31, 2012 and 2011, the Company did not have any derivatives that were in a net liability position related to these agreements.

The Company has no derivatives payable, so consideration of the Company’s own credit risk is not applicable.