Derivatives and Hedging Activities

6 Months Ended

Jun. 30, 2011

Derivatives and Hedging Activities [Abstract]

DERIVATIVES AND HEDGING ACTIVITIES

NOTE 7 — DERIVATIVES AND HEDGING ACTIVITIES

     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 to manage the Company’s interest rate risk. Additionally, the Company enters into interest rate derivatives and foreign exchange contracts to accommodate the business requirements of its customers (“customer related positions”). The Company minimizes the market and liquidity risks of customer-related positions by entering into similar offsetting positions with broker-dealers.

     Derivative instruments are carried at fair value in the Company’s financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship. The Company has entered into interest rate swap contracts, as part of the Company’s interest rate risk management program, which are designated and qualify as cash flow hedges. In addition, the Company has entered into interest rate swap contracts and foreign exchange contracts with commercial banking customers and offsetting positions with banks which are not afforded hedge accounting treatment.

Asset Liability Management

     The Bank currently utilizes interest rate swap agreements as hedging instruments against interest rate risk associated with the Company’s borrowings. An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. The maximum length of time over which the Company is currently hedging its exposure to the variability in future cash flows for forecasted transactions related to the payment of variable interest on existing financial instruments is seven years. At June 30, 2011 and December 31, 2010, the Company had a total notional amount of $200.0 million and $175.0 million, respectively, of interest rate swaps outstanding.

     The following table reflects the Company’s derivative positions for the periods indicated below for those derivatives which qualify as hedges for accounting purposes:

Derivative Positions

Derivatives Designated as Hedging:

Cash Flow Hedges

As of June 30, 2011

						Receive							Fair Value at
	Notional		Trade	Effective	Maturity	(Variable)	Current Rate			Pay Fixed			June 30,
	Amount		Date	Date	Date	Index	Received			Swap Rate			2011
	(Dollars in Thousands)
Interest Rate Swaps
	$	25,000	16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR		0.25	%		5.04	%	$	(3,853	)
		25,000	16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR		0.25	%		5.04	%		(3,854	)
		25,000	8-Dec-08	10-Dec-08	10-Dec-13	3 Month LIBOR		0.25	%		2.65	%		(1,090	)
		25,000	9-Dec-08	10-Dec-08	10-Dec-13	3 Month LIBOR		0.25	%		2.59	%		(1,054	)
		25,000	9-Dec-08	10-Dec-08	10-Dec-18	3 Month LIBOR		0.25	%		2.94	%		(475	)
		50,000	17-Nov-09	20-Dec-10	20-Dec-14	3 Month LIBOR		0.25	%		3.04	%		(2,967	)
		25,000	5-May-11	10-Jun-11	10-Jun-15	3 Month LIBOR		0.25	%		1.71	%		(168	)
Total	$	200,000								Total			$	(13,461	)

As of December 31, 2010

						Receive							Fair Value at
	Notional		Trade	Effective	Maturity	(Variable)	Current Rate			Pay Fixed			December 31,
	Amount		Date	Date	Date	Index	Received			Swap Rate			2010
	(Dollars in Thousands)
Interest Rate Swaps
	$	25,000	16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR		0.30	%		5.04	%	$	(3,713	)
		25,000	16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR		0.30	%		5.04	%		(3,682	)
		25,000	8-Dec-08	10-Dec-08	10-Dec-13	3 Month LIBOR		0.30	%		2.65	%		(1,044	)
		25,000	9-Dec-08	10-Dec-08	10-Dec-13	3 Month LIBOR		0.30	%		2.59	%		(1,002	)
		25,000	9-Dec-08	10-Dec-08	10-Dec-18	3 Month LIBOR		0.30	%		2.94	%		(109	)
		50,000	17-Nov-09	20-Dec-10	20-Dec-14	3 Month LIBOR		0.30	%		3.04	%		(2,656	)
Total	$	175,000								Total			$	(12,206	)

     For derivative instruments that are designated and qualify as hedging instruments, the effective portion of the gains or losses is reported as a component of OCI, and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company expects approximately $5.6 million (pre-tax), to be reclassified to earnings from OCI, as an increase in interest expense, related to the Company’s cash flow hedges in the next twelve months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of June 30, 2011.

     The ineffective portion of the cash flow hedge is recognized directly in earnings. The Company did not recognize any ineffectiveness for the three and six months ending June 30, 2011, and recognized an immaterial amount related to hedge ineffectiveness during the three and six months ending June 30, 2010.

     During the first quarter of 2010, one of the Company’s $25.0 million interest rate swaps failed to qualify for hedge accounting. The Company ceased hedge accounting on January 6, 2010, which was the last date the interest rate swap qualified for hedge accounting. As a result, the Company recognized a loss of $238,000 directly in earnings as part of non-interest expense and reclassified $107,000 from interest expense to non-interest expense within the first quarter of 2010. Additionally, a gain of $191,000 which was previously deferred in OCI was immediately recognized in income during the first quarter of 2010, based on the Company’s anticipation of the hedged forecasted transaction no longer being probable to occur. The Company terminated the swap in June 2010 as a result of management’s decision to pay down the underlying borrowing and recognized $792,000 in earnings through the date of termination.

     The Company recognized net amortization income of $61,000 and $122,000, respectively, recorded as an offset to interest expense during the three and six months ended June 30, 2011, and $64,000 and $100,000, respectively, of net amortization income for the three and six months ended June 30, 2010, related to previously terminated swaps.

Customer Related Positions

     Interest rate derivatives, primarily interest rate swaps, offered to commercial borrowers through the Bank’s loan level derivative program do not qualify as hedges for accounting purposes. The Bank believes that its exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an offsetting dealer transaction. The commercial customer derivative program allows the Bank to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. At June 30, 2011 and December 31, 2010 the Company had eighty-nine and seventy-two customer-related positions and offsetting dealer transactions with dealer banks, respectively. At June 30, 2011 and December 31, 2010 the Bank had a total notional amount of $346.2 million and $307.0 million, respectively, of interest rate swap agreements with commercial borrowers and an equal notional amount of dealer transactions.

     Foreign exchange contracts offered to commercial borrowers through the Bank’s derivative program do not qualify as hedges for accounting purposes. The Company acts as a seller and buyer of foreign exchange contracts to accommodate its customers. To mitigate the market and liquidity risk associated with these derivatives, the Company enters into similar offsetting positions with bank counterparties. At June 30, 2011 and December 31, 2010 the Company had thirteen and eighteen foreign exchange contracts and offsetting dealer transactions, respectively. As of June 30, 2011 and December 31, 2010 the Company had a total notional amount of $31.2 million and $41.7 million, respectively, of foreign exchange contracts with commercial borrowers and an equal notional amount of dealer transactions.

     The Company does not enter into proprietary trading positions for any derivatives.

     The following table reflects the Company’s derivative positions for the periods indicated below for those derivatives not designated as hedging:

Derivative Positions

Derivatives Not Designated as Hedging:

	Notional Amount Maturing
As of June 30, 2011	2011		2012		2013		2014		Thereafter		Total		Fair Value
	(Dollars in Thousands)
Customer Related Positions
Loan Level Swaps
Receive fixed, pay variable	$	—		—		20,411		81,649		244,166	$	346,226	$	11,798
Pay fixed, receive variable	$	—		—		20,411		81,649		244,166	$	346,226	$	(11,906	)
Foreign Exchange Contracts
Buys foreign exchange, sells US currency	$	23,723		7,509		—		—		—	$	31,232	$	778
Buys US currency, sells foreign exchange	$	23,723		7,509		—		—		—	$	31,232	$	(765	)

	Notional Amount Maturing
As of December 31, 2010	2011		2012		2013		2014		Thereafter		Total		Fair Value
	(Dollars in Thousands)
Customer Related Positions
Loan Level Swaps
Receive fixed, pay variable	$	—		—		21,624		83,051		202,275	$	306,950	$	7,673
Pay fixed, receive variable	$	—		—		21,624		83,051		202,275	$	306,950	$	(7,835	)
Foreign Exchange Contracts
Buys foreign exchange, sells US currency	$	41,706		—		—		—		—	$	41,706	$	1,301
Buys US currency, sells foreign exchange	$	41,706		—		—		—		—	$	41,706	$	(1,286	)

     Changes in the fair value of customer related positions are recorded directly in earnings as they are not afforded hedge accounting treatment. The Company recorded a net increase in fair value of $32,000 and $53,000, respectively, for the three and six months ended June 30, 2011 and a net decrease in fair value of $86,000 and $146,000 respectively, for the three and six months ended June 30, 2010.

     The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet at the periods indicated:

Fair Values of Derivative Instruments

	Asset Derivatives						Liability Derivatives
	June 30,			December 31,			June 30,			December 31,
	2011			2010			2011			2010
	Balance Sheet			Balance Sheet			Balance Sheet			Balance Sheet
	Location	Fair Value		Location	Fair Value		Location	Fair Value		Location	Fair Value
					(Dollars In Thousands)
Derivatives designated as hedges:
Interest rate swaps	Other Assets	$	—	Other Assets	$	—	Other Liabilities	$	13,461	Other Liabilities	$	12,206
Derivatives not designated as hedges:
Customer Related Positions:
Loan level swaps	Other Assets	$	12,231	Other Assets	$	9,813	Other Liabilities	$	12,339	Other Liabilities	$	9,975
Foreign exchange contracts	Other Assets		861	Other Assets		1,655	Other Liabilities		847	Other Liabilities		1,640
Total		$	13,092		$	11,468		$	13,186		$	11,615

     The table below presents the effect of the Company’s derivative financial instruments included in Other Comprehensive Income and current earnings:

Amount of Derivative Gain/(Loss) Recognized/Reclassified
(Dollars in Thousands)

	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2011			2010		2011			2010
Gain/(Loss) in OCI on Derivative (Effective Portion), Net of Tax	$	(2,711	)	$	9,172	$	(2,407	)	$	6,943
Gain/(Loss) Reclassified from OCI into Interest Income (Effective Portion)	$	(1,366	)	$	3,046	$	(2,692	)	$	1,978
Gain/(Loss) Recognized in Interest Income on Derivative (Ineffective Portion & Amount Excluded from Effectiveness Testing)	$	—		$	—	$	—		$	—

     Derivative contracts involve the risk of dealing with derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s Board of Directors. The Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company had no exposure relating to interest rate swaps with institutional counterparties at June 30, 2011 or December 31, 2010. The Company’s exposure relating to customer related positions was approximately $12.8 million and $10.2 million at June 30, 2011 and December 31, 2010, respectively, which is inclusive of exposure to both customers and institutional counter parties. Credit exposure may be reduced by the amount of collateral pledged by the counterparty.

     The Company currently holds derivative instruments that contain credit-risk related contingent features that are in a net liability position, which require the Company to assign collateral. The notional amount of these instruments as of June 30, 2011 and December 31, 2010 was $546.2 million and $482.0 million, respectively. The aggregate fair value of these instruments at June 30, 2011 and December 31, 2010 were $25.4 million and $20.0 million, respectively. The Company has collateral assigned to these derivative instruments amounting to $31.5 million and $30.8 million, respectively. Collateral legally required to be maintained at dealer banks by the Company is monitored and adjusted as necessary. Per a review completed by management of these instruments at June 30, 2011 it was determined that no additional collateral would have to be posted to immediately settle these instruments.

     The Company does not offset fair value amounts recognized for derivative instruments. The Company does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement.

     Forward sale contracts of residential mortgage loans, considered derivative instruments for accounting purposes, are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans intended for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments are executed, under which the Company agrees to deliver whole mortgage loans to various investors. The interest rate lock commitments and forward sales commitments are recorded at fair value, with changes in fair value recorded in current period earnings. Effective July 1, 2010, pursuant to FASB ASC Topic No. 825, “Financial Instruments,” the Company elected to carry newly originated closed loans held for sale at fair value. As such, the change in fair value of loans held for sale is recorded in current period earnings.

     The table below summarizes the fair value of residential mortgage loans commitments, forward sales agreements, and loans held for sale:

	Fair Value at
	June 30,			December 31,
	2011			2010
	(Dollars in Thousands)
Interest Rate Lock Commitments	$	(27	)	$	(459	)
Forward Sales Agreements	$	(27	)	$	1,052
Loans Held for Sale Fair Value Adjustment	$	53		$	(593	)

	Change for the Three Months						Change for the Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
Interest Rate Lock Commitments	$	(3	)	$	463		$	432		$	1,050
Forward Sales Agreements		(5	)		(792	)		(1,079	)		(1,514	)
Loans Held for Sale Fair Value Adjustment		8			—			647			—
Total Change in Fair Value (1)	$	—		$	(329	)	$	—		$	(464	)

(1) Changes in these fair values are recorded as a component of Mortgage Banking Income.