Derivatives

At September 30, 2012, BancShares had an interest rate swap entered into during 2011 that qualifies as a cash flow hedge under US GAAP. BancShares had two earlier interest rate swaps that were entered into in 2006 and 2009. The 2006 swap matured on June 30, 2011, while the 2009 swap was terminated in December 2011. Both of the earlier interest rate swaps qualified as cash flow hedges during the period of time they were in effect. For all periods presented, the fair value of the outstanding derivatives is included in other liabilities in the consolidated balance sheets, and the net change in fair value is included in other liabilities in the consolidated statements of cash flows.

The interest rate swaps are used for interest rate risk management purposes and convert variable-rate exposure on outstanding debt to a fixed rate. The 2011 interest rate swap has a notional amount of $93,500, representing the amount of variable rate trust preferred capital securities issued during 2006 and still outstanding at the swap inception date. The 2011 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 the three-month LIBOR, which is equal to the interest paid to the holders of the trust preferred capital securities. Settlement of the swap occurs quarterly. As of September 30, 2012, collateral with a fair value of $14,653 was pledged to secure the existing obligation under the interest rate swap.

The 2006 interest rate swap hedged interest payments through June 2011 and required fixed-rate payments by BancShares at 7.125 percent in exchange for variable-rate payments of 175 basis points above the three-month LIBOR, which is equal to the interest paid to the holders of the 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, required fixed-rate payments by BancShares at 5.50 percent in exchange for variable-rate payments of 175 basis points above the three-month LIBOR. The 2009 interest rate swap was terminated in December 2011 due to the purchase of $21,500 of the underlying trust preferred capital securities, and the amount of accumulated other comprehensive loss at the date of termination is being recognized over the remaining term of the hedged interest payments.



	September 30, 2012			December 31, 2011			September 30, 2011
	Notional amount	Estimated fair value of liability		Notional amount	Estimated fair value of liability		Notional amount	Estimated fair value of liability
2009 interest rate swap hedging variable rate exposure on trust preferred securities 2011	—	—		—	—		115,000	13,531
2011 interest rate swap hedging variable rate exposure on trust preferred securities 2011-2016	93,500	11,170		93,500	10,714		—	—
		$	11,170		$	10,714		$	13,531

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, while 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 three-month periods ended September 30, 2012 and 2011, BancShares recognized interest expense of $769 and $1,030, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness. For the nine-month periods ended September 30, 2012 and 2011, BancShares recognized interest expense of $2,294 and $3,961, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness.

The following table discloses activity in accumulated other comprehensive income (loss) related to the interest rate swaps during the nine-month periods ended September 30, 2012 and 2011.



	2012			2011
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1	$	(10,714	)	$	(9,492	)
Other comprehensive income (loss) recognized during nine month period ended September 30	(456		)	(4,039		)
Accumulated other comprehensive loss resulting from interest rate swaps as of September 30	$	(11,170	)	$	(13,531	)

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