DERIVATIVES

At December 31, 2011, BancShares had an interest rate swap (the 2011 Swap) that was designated as a cash flow hedge under US GAAP. The notional amount of the interest rate swap was $93,500 at December 31, 2011. The interest rate swap hedges interest payments through June 2016 and requires fixed-rate payments by BancShares at 5.50 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR. As of December 31, 2011, collateral with a fair value of $14,679 was pledged to secure the existing obligation under the interest rate swap. Settlement occurs quarterly.

During December 2011, an earlier swap (the 2009 Swap) was terminated following the settlement of $21,500 of the $115,000 notional amount following the purchase and retirement of a like amount of the underlying trust preferred capital securities. The 2009 Swap, which was intended to convert variable-rate exposure on outstanding debt to a fixed rate during the period July 2011 through June 2016, was designated as a cash flow hedge when it was initiated in 2009 and was fully effective until it was terminated in December 2011. As a result of this transaction a gain of $9,685 was recorded in noninterest income on the retirement of the underlying trust preferred securities and a loss of $2,824 was recorded in noninterest expense for the termination of the 2009 swap. The remaining amount of accumulated other comprehensive loss relating to the terminated swap at the date of termination was $11,002 and is being recognized over the remaining term of the hedged interest payments.

An earlier interest rate swap (the 2006 Swap) hedged interest payments on $115,000 of trust preferred capital securities from July 2006 through June 2011. The 2006 Swap required fixed-rate payments by BancShares at 7.125 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR, which is equal to the interest paid to the holders of the trust preferred capital securities.

The fair values of the 2011 Swap, the 2009 Swap and the 2006 Swap are included in other liabilities in the consolidated balance sheets and the net change in fair value is included in the change in other liabilities in the consolidated statements of cash flows. Each of the interest rate swaps is used for interest rate risk management purposes and converts variable-rate exposure on outstanding debt to a fixed rate.



	December 31, 2011				December 31, 2010
	Notional amount		Estimated fair value of liability		Notional amount		Estimated fair value of liability
2006 interest rate swap hedging variable rate exposure on trust preferred securities 2006-2011	$	—	$	—	$	115,000	$	2,873
2009 interest rate swap hedging variable rate exposure on trust preferred securities 2011	—		—		115,000		6,619
2011 interest rate swap hedging variable rate exposure on trust preferred securities 2011-2016	93,500		10,714		—		—
			$	10,714			$	9,492

For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. The ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated income statement. BancShares’ interest rate swaps have been fully effective since inception. Therefore, changes in the fair value of the interest rate swaps have had no impact on net income. For the years ended December 31, 2011, 2010 and 2009, BancShares recognized interest expense of $4,577, $5,869, and $5,234 respectively, resulting from the interest rate swaps, none of which relates to ineffectiveness. The estimated net amount in accumulated other comprehensive income at December 31, 2011 that is expected to be reclassified into earnings within the next 12 months is a net after-tax loss of $1,723.

The following table discloses activity in accumulated other comprehensive loss related to the interest rate swaps during the years ended December 31, 2011, 2010 and 2009.



	2011			2010			2009
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1	$	(9,492	)	$	(5,367	)	$	(10,668	)
Other comprehensive income (loss) recognized during year ended December 31	(1,222		)	(4,125		)	5,301
Accumulated other comprehensive loss resulting from interest rate swaps as of December 31	$	(10,714	)	$	(9,492	)	$	(5,367	)

BancShares monitors the credit risk of the interest rate swap counterparty.