Derivative - Interest Rate Swap Agreements

12 Months Ended

Dec. 31, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative - Interest Rate Swap Agreements

18. Derivative - Interest Rate Swap Agreements

During 2013, the Company entered into a delayed interest rate swap to manage exposure against the variability in the expected future cash flows attributed to changes in the benchmark interest rate on a portion of its variable-rate debt. The Company entered this interest rate swap agreement to convert a portion of its variable- rate debt to a fixed rate, which is a cash flow hedge of a forecasted transaction. The total notional amount of the derivative contract is $150 million. The Company will receive payments from the counterparty at three-month LIBOR and make payments to the counterparty at a fixed rate of 4.165% on the notional amount. The cash flow payments on the derivative begin December 2016 and terminate September 2023.

Also, in 2013, the Company entered into four interest rate swaps to manage exposure against the variability in the expected future cash flows on the designated Prime, Prime plus 1%, Prime plus 1% floored at 5% and Prime plus 1% floored at 5.5% pools of its floating rate loan portfolio. The Company entered into the interest rate swap agreements to hedge the cash flows from these pools of its floating rate loan portfolio, which is expected to offset the variability in the expected future cash flows attributable to the fluctuations in the daily weighted average Wall Street Journal Prime index, which is a cash flow hedge of a forecasted transaction. The notional amount of the contracts are Prime tranche of $30 million, Prime plus 1% tranche of $40 million, Prime plus 1% floored at 5% of $100 million, and Prime plus 1% floored at 5.5% tranche of $80 million for a total notional of $250 million. The Company will receive payments from the counterparty at a fixed rate of interest and pay the counterparty at the Prime rate associated with each tranche on its notional amount. The Prime tranche will receive payments at a fixed rate of 4.70% and pay the counterparty at Prime on the notional amount. The Prime plus 1% tranche will receive payments at a fixed rate of 5.70% and pay the counterparty at Prime plus 1% on the notional amount. The Prime plus 1% floored at 5% tranche will receive payments at a fixed rate of 6.01% and pay the counterparty at Prime plus 1%, floored at 5% on the notional amount. The Prime plus 1% floored at 5.5% tranche will receive payments at a fixed rate of 6.26% and pay the counterparty at Prime plus 1% floored at 5.5% on the notional amount. The cash flow payments on the derivatives began September 2013 and terminate September 2019.

For the year ended December 31, 2013 a loss of $2.8 million (net of income taxes) has been recognized on the prime hedges and delayed interest rate swaps in other comprehensive income. The fair value of the derivative liabilities were $2.0 million for the delayed interest rate swap and $2.3 million for the prime swaps as of December 31, 2013 and have been recognized in other liabilities in the accompanying consolidated balance sheets. No amounts of gains or losses have been reclassified from accumulated comprehensive income nor have any amounts of gains or losses been recognized due to ineffectiveness of a portion of the derivative.

Pursuant to the interest rate swap agreement, described above, the Company pledged collateral to the counterparties in the form of investment securities totaling $9.6 million (with a fair value at December 31, 2013 of $9.6 million), which has been presented gross in the Company’s consolidated balance sheet.

During 2012, as part of its activities to manage interest rate risk due to interest rate movements, the Company entered into a delayed interest rate swap to manage exposure to future interest rate risk through modification of the Company’s net interest sensitivity to levels deemed to be appropriate. The Company entered this interest rate swap agreement to convert a portion of its forecasted variable-rate debt to a fixed rate, which is a cash flow hedge of a forecasted transaction. The notional amount in the derivative contract is $115 million. The Company will receive payments from the counterparty at three-month LIBOR and make payments to the counterparty at a fixed rate on 2.88% on the notional amount. The cash flow payments on the derivative begin January 2015 and terminate January 2022.

Because the swap agreement used to manage interest rate risk has been designated as hedging exposure to variable cash flows of a forecasted transaction, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings or when the hedge is terminated. The ineffective portion of the gain or loss is reported in earnings immediately.

In applying hedge accounting for derivatives the Company establishes a method for assessing the effectiveness of the hedging derivative by utilizing the dollar offset approach and a measurement approach for determining the ineffective aspect of the hedge through the variable cash flows methods upon the inception of the hedge. These methods are consistent with Company’s approach to managing risk.

For interest rate swap agreements that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately.

For the years ended December 31, 2013 and 2012, respectively, the Company has not reclassified into earnings any gain or loss as a result of the discontinuance of cash flow hedges because it was probable the original forecasted transaction would not occur by the end of the originally specified term.

At December 31, 2013, no amount of the derivative will mature within the next 12 months. The Company does not expect to reclassify any amount from accumulated other comprehensive income into interest income over the next 12 months for derivatives that will be settled.

For the year ended December 31, 2013 a gain of $5.2 million (net of income taxes) has been recognized in other comprehensive income and for the year ended December 31, 2012 a loss of $4.5 million (net of income taxes) has been recognized in other comprehensive income. The fair value of the derivative asset of $1.2 million as of December 31, 2013 has been recognized in other assets in the accompanying consolidated balance sheets. The fair value of the derivative liability of $6.9 million as of December 31, 2012 has been recognized in other liabilities in the accompanying consolidated balance sheets. No amounts of gains or losses have been reclassified from accumulated comprehensive income nor have any amounts of gains or losses been recognized due to ineffectiveness of a portion of the derivative.

Pursuant to the interest rate swap agreement, entered into in 2012, the Company pledged collateral to the counterparties in the form of investment securities totaling $12.7 million (with a fair value at December 31, 2013 of $12.1 million), which has been presented gross in the Company’s balance sheet. There was no collateral posted from the counterparties to the Company as of December 31, 2013.