Derivatives

6 Months Ended

Jun. 30, 2011

Derivatives

Derivatives

4. Derivatives

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 borrowings and fixed rate assets. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company's assets or liabilities. The Company manages in order to minimize its net risk exposure resulting from such transactions.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value (in thousands) of the Company's derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2011 and December 31, 2010.

	Tabular Disclosure of Fair Values of Derivative Instruments
		Asset Derivatives								Liability Derivatives
	As of June 30, 2011			As of December 31, 2010				As of June 30, 2011				As of December 31, 2010
	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	$	158		Other assets	$	—		Other liabilities	$	—		Other liabilities	$	—
Total derivatives designated as hedging instruments		$	158			$	—			$	—			$	—
Derivatives not designated as hedging instruments
Interest rate products	Other assets	$	8,481		Other assets	$	2,952		Other liabilities	$	8,716		Other liabilities	$	2,952
Total derivatives not designated as hedging instruments		$	8,481			$	2,952			$	8,716			$	2,952

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. For hedges of the Company's variable-rate borrowings, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. As of June 30, 2011, the Company had one interest rate swap with an aggregate notional amount of $140.0 million that was designated as a cash flow hedge associated with the Company's variable-rate borrowing.

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 ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2011, such derivatives were used to hedge the forecasted variable cash outflows associated with existing term loan agreements beginning June 2012. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness was recognized during the three and six months ended June 30, 2011. The Company did not have any cash flow hedges outstanding at June 30, 2010. Amounts reported in AOCI 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 $22,296 will be reclassified as a decrease to interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. As of June 30, 2011, the Company had interest rate derivatives with an aggregate notional amount of $448.3 million related to this program.

Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company's derivative financial instruments (in thousands) on the Income Statement for the three and six months ended June 30, 2011.

Derivatives in FASB ASC 815 Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)								Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)								Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010			2011		2010		2011		2010			2011		2010		2011		2010
Interest Rate Products	$	158	$	—	$	158	$	—	Interest income Other non-interest income	$	—	$	—	$	—	$	—	Other non-interest income	$	—	$	—	$	—	$	—
Total	$	158	$	—	$	158	$	—		$	—	$	—	$	—	$	—		$	—	$	—	$	—	$	—

		Amount of Gain or (Loss) Recognized in Income on Derivative
		Three Months Ended June 30,				Six Months Ended June 30,
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	2011		2010		2011		2010
Interest Rate Products	Other non-interest income	$	36	$	—	$	36	$	—
Total		$	36	$	—	$	36	$	—

Credit-risk-related Contingent Features

The Company has agreements with each 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.

The Company has agreements with its derivative counterparties that contain provisions that require the Company's debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Company's credit rating is reduced below investment grade then the Company could be forced to terminate its derivatives at the then current fair value.

The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well / adequate capitalized institution as well as maintain multiple capital ratios, then the Company could be forced to terminate its derivatives at the then current fair value.

As of June 30, 2011 the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $6.0 million. The Company has been required to post no collateral at this time against its obligations under these agreements. If the Company had breached any of these provisions at June 30, 2011, it could have been required to settle its obligations under the agreements at the termination value.