Derivatives and Hedging Activities

12 Months Ended

Dec. 31, 2011

Derivatives and Hedging Activities [Abstract]

DERIVATIVES AND HEDGING ACTIVITIES

(12)    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 does not enter into proprietary trading positions for any derivatives.

Asset Liability Management

The Company 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 eight years.

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

As of December 31, 2011
Notional Amount		Trade Date		Effective Date		Maturity Date		Receive (Variable) Index	Current Rate Received			Pay Fixed Swap Rate			Fair Value at December 31, 2011
(Dollars in Thousands)
$	25,000		16-Feb-06		28-Dec-06		28-Dec-16	3 Month LIBOR		0.55	%		5.04	%	$	(4,745	)
	25,000		16-Feb-06		28-Dec-06		28-Dec-16	3 Month LIBOR		0.55	%		5.04	%		(4,745	)
	25,000		8-Dec-08		10-Dec-08		10-Dec-13	3 Month LIBOR		0.54	%		2.65	%		(941	)
	25,000		9-Dec-08		10-Dec-08		10-Dec-13	3 Month LIBOR		0.54	%		2.59	%		(913	)
	25,000		9-Dec-08		10-Dec-08		10-Dec-18	3 Month LIBOR		0.54	%		2.94	%		(2,349	)
	50,000		17-Nov-09		20-Dec-10		20-Dec-14	3 Month LIBOR		0.56	%		3.04	%		(3,316	)
	25,000		5-May-11		10-Jun-11		10-Jun-15	3 Month LIBOR		0.54	%		1.71	%		(704	)
	40,000		18-Aug-11		2-Apr-12		10-Mar-19	3 Month LIBOR		TBD			1.89	%		(550	)(1)
$	240,000														$	(18,263	)
As of December 31, 2010
Notional Amount		Trade Date		Effective Date		Maturity Date		Receive (Variable) Index	Current Rate Received			Pay Fixed Swap Rate			Fair Value at December 31, 2010
(Dollars in Thousands)
$	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	)
$	175,000														$	(12,206	)

(1) In August 2011, the Company entered into a forward starting swap with a notional amount of $40.0 million, with the intention of hedging $40.0 million of a future FHLB advance to be originated in April 2012.

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 $5.3 million (pre-tax), to be reclassified to interest expense from OCI, 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 December 31, 2011.

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 noninterest expense and reclassified $107,000 from interest expense to noninterest 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, 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 table below presents the net amortization income recognized as an offset to interest expense related to previously terminated swaps for the periods indicated:

	For the Years Ended December 31,
	2011		2010		2009
	(Dollars in Thousands)
Net Amortization Income (Expense)	$	244	$	222	$	(496	)

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.

Foreign exchange contracts offered to commercial borrowers through the Bank’s derivative program do not qualify as hedges for accounting purposes. The Bank 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 Bank enters into similar offsetting positions.

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

	Number of Positions		Notional Amount Maturing
			2011		2012		2013		2014		Thereafter		Total		Fair Value
			(Dollars in Thousands)
As of December 31, 2011
Loan Level Swaps
Receive fixed, pay variable		101	$	—		—		19,197		80,234		283,991	$	383,422	$	24,478
Pay fixed, receive variable		101	$	—		—		19,197		80,234		283,991	$	383,422	$	(24,535	)
Foreign Exchange Contracts
Buys foreign exchange, sells US currency		15	$	—		21,657		—		—		—	$	21,657	$	(1,081	)
Buys US currency, sells foreign exchange		15	$	—		21,657		—		—		—	$	21,657	$	1,098
As of December 31, 2010
Loan Level Swaps
Receive fixed, pay variable		72	$	—		—		21,624		83,051		202,275	$	306,950	$	7,673
Pay fixed, receive variable		72	$	—		—		21,624		83,051		202,275	$	306,950	$	(7,835	)
Foreign Exchange Contracts
Buys foreign exchange, sells US currency		18	$	41,706		—		—		—		—	$	41,706	$	1,301
Buys US currency, sells foreign exchange		18	$	41,706		—		—		—		—	$	41,706	$	(1,286	)

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
	Balance Sheet Location		Fair Value at December 31, 2011		Fair Value at December 31, 2010		Balance Sheet Location		Fair Value at December 31, 2011		Fair Value at December 31, 2010
	(Dollars In Thousands)						(Dollars In Thousands)
Derivatives designated as hedges:
Interest rate swaps		Other Assets	$	—	$	—		Other Liabilities	$	18,263	$	12,206
Derivatives not designated as hedges:
Customer Related Positions:
Loan level swaps		Other Assets	$	24,478	$	9,813		Other Liabilities	$	24,535	$	9,975
Foreign exchange contracts		Other Assets		1,098		1,655		Other Liabilities		1,081		1,640
TOTAL			$	25,576	$	11,468			$	25,616	$	11,615

The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:

	For the Years Ended December 31,
	2011			2010			2009
	(Dollars in Thousands)
Derivatives designated as hedges:
Gain/(Loss) in OCI on Derivative (Effective Portion),
Net of Tax	$	(7,021	)	$	(7,894	)	$	6,995
Gain/(Loss) Reclassified from OCI into Income (Effective Portion)
Interest Expense	$	(5,472	)	$	(3,829	)	$	(1,714	)
Other Income		—			—			937
TOTAL	$	(5,472	)	$	(3,829	)	$	(777	)
Loss Recognized in Income on Derivative (Ineffective Portion & Amount Excluded from Effectiveness Testing)
Interest Expense	$	—		$	—		$	(61	)
Other Expense		—			(154	)		—
TOTAL	$	—		$	(154	)	$	(61	)
Derivatives not designated as hedges:
Changes in Fair Value of Customer Related Positions
Other Income	$	164		$	56		$	302
Other Expense		(56	)		(341	)		(128	)
TOTAL	$	108		$	(285	)	$	174

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 has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well capitalized institution, then the Company could be required to terminate any outstanding derivatives with the counterparty. The Company had no exposure relating to interest rate swaps with institutional counterparties at December 31, 2011 or 2010, as all such swaps were in a liability position. The Company’s exposure relating to customer related positions was approximately $25.1 million and $8.1 million at December 31, 2011 and 2010, respectively. 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 table below presents information relating to credit-risk contingent instruments as of the dates indicated:

	As of December 31,
	2011		2010
	(Dollars in Thousands)
Notional Amount	$	623.4	$	482.0
Aggregate Fair Value	$	42.8	$	20.0
Collateral Assigned	$	47.6	$	30.8

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 December 31, 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.

Mortgage Derivatives

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 one-to-four 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 at the periods indicated:

	As of December 31,
	2011			2010
	(Dollars in Thousands)
Interest Rate Lock Commitments	$	265		$	(459	)
Forward Sales Agreements	$	(528	)	$	1,052
Loans Held for Sale Fair Value Adjustment	$	263		$	(593	)

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

	For the Years Ended December 31,
	2011			2010			2009
	(Dollars in Thousands)
Interest Rate Lock Commitments	$	724		$	64		$	(861	)
Forward Sales Agreements		(1,580	)		285			738
Loans Held for Sale Fair Value Adjustment		856			(593	)		—
TOTAL CHANGE IN FAIR VALUE	$	—		$	(244	)	$	(123	)