DERIVATIVE INSTRUMENTS AND HEDGING

9 Months Ended

Sep. 30, 2012

DERIVATIVE INSTRUMENTS AND HEDGING

NOTE 9 -DERIVATIVE INSTRUMENTS AND HEDGING

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 debt funding and 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  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 payments principally related to the Company’s borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2012, such derivatives were used to hedge the variable cash flows associated with variable-rate debt.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.  During the three and nine months ended September 30, 2012, the Company recorded $775 and $1,787, respectively, of hedge ineffectiveness in earnings due to slight mismatches in timing of payments.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $228,000 will be reclassified from accumulated other comprehensive income as an increase to interest expense.

As of September 30, 2012, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands):

Interest Rate Derivative	Number of Instruments		Notional Amount
Interest Rate Swaps		3	$	29,280

The maximum length of time over which the Company is hedging its exposure to the transactions related to the payment of variable interest on the existing derivative instruments is approximately seven years.  The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheet as of September 30, 2012 (amounts in thousands).  The Company had no active derivatives as of December 31, 2011.

	September 30, 2012
Derivative designated as hedging instruments:
Interest Rate Swaps, liability	$	(523	)

The table below details the location in the financial statements of the loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2012 (amounts in thousands).  The Company had no active derivatives for the three and nine months ended September 30, 2011.

	Three months ended 9/30/12			Nine months ended 9/30/12
Amount of gain (loss) recognized in accumulated
other comprehensive income on interest rate
derivatives (effective portion)	$	(291	)	$	(587	)
Amount of gain (loss) reclassified from accumulated
other comprehensive income into income as interest
expense (effective portion)	$	(50	)	$	(66	)
Amount of gain (loss) recognized in income on
derivative instruments (ineffective portion and amounts
excluded from effectiveness testing)	$	(1	)	$	(2	)

Credit-risk-related Contingent Features

The Company has agreements with its derivative counterparties that contain provisions whereby, if the Company either defaults or can be declared in default on any of its indebtedness, the Company can also be declared in default on its derivative obligations.

As of September 30, 2012, the fair value of derivatives in a net liability position including any adjustment for nonperformance risk related to these agreements was $522,564. As of September 30, 2012, the Company has not posted any collateral related to this agreement and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at its aggregate termination value of approximately $546,780 at September 30, 2012.