Derivatives and Hedging Activities

6 Months Ended

Jun. 30, 2011

Derivatives [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Derivatives and Hedging Activities

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, to a lesser extent, 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 generally 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 loan assets and variable rate borrowings.

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2011 and December 31, 2010.

	June 30, 2011							December 31, 2010
	Asset derivatives			Liability derivatives				Asset derivatives			Liability derivatives
	Balance sheet location	Fair value (2)		Balance sheet location	Fair value (2)			Balance sheet location	Fair value (2)		Balance sheet location	Fair value (2)
	(In thousands)
Derivatives designated as hedging instruments:
Interest rate products	Other assets	$	—	Other liabilities	$	(3,305	)	Other assets	$	—	Other liabilities	$	(2,342	)
Derivatives not designated as hedging instruments:
Interest rate products (1)	Other assets	4,268		Other assets	(4,389		)	Other assets	4,862		Other assets	(5,049		)
Foreign exchange contracts (1)	Other assets	187		Other assets	(187		)	Other assets	130		Other assets	(130		)
Total		$	4,455		$	(7,881	)		$	4,992		$	(7,521	)

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(1) Interest rate products and foreign exchange contracts derivative liabilities are netted with interest rate products and foreign exchange contracts derivative assets within other assets in the consolidated balance sheets.

(2) For additional details, see Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements-Note 5: Fair Value Measurements.”

Cash Flow Hedges of Interest Rate Risk

The Company's objective in using derivatives is to add stability to interest income and expense and to manage the risk related to exposure to changes in interest rates. To accomplish this objective, the Company has entered into an interest rate swap as part of its interest rate risk management strategy. The Holding Company entered into one interest rate swap in the second quarter of 2010 with a notional amount of $75 million related to the Holding Company's cash outflows associated with the subordinated debt related to trust preferred securities to protect against rising interest rates. The interest rate swap had an effective date of December 30, 2010 and a term of five years. As of December 30, 2010, the subordinated debt switched from a fixed rate of 6.25% to a variable rate of three-month LIBOR plus 1.68%. The interest rate swap effectively fixed the Holding Company's interest rate payments on the $75 million of debt at 4.45%.

The Company uses the “Hypothetical Derivative Method” described in ASC 815, Derivatives and Hedging (“ASC 815”), for quarterly prospective and retrospective assessments of hedge effectiveness, as well as for measurements of hedge ineffectiveness. Under this method, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings in interest and dividend income when the hedged transactions affect earnings. Ineffectiveness resulting from the hedge is recorded as a gain or loss in the consolidated statement of operations as part of fees and other income. The Holding Company did not have any hedge ineffectiveness recognized in earnings during the three and six month periods ended June 30, 2011. The Holding Company also monitors the risk of counterparty default on an ongoing basis.

Interest payments received from loans that prepay are included in the hedged portfolio due to the guidance in ASC 815, which allows the designated forecasted transactions to be the variable, Prime-based interest payments on a rolling portfolio of prepayable interest-bearing loans using the first-payments-received technique.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income or expense as interest payments are paid or received on the Company's variable-rate assets or liabilities. During the next twelve months, the Company estimates that $1.8 million will be reclassified as an increase in interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from two different services the Bank provides to qualified commercial clients. The Bank offers certain derivative products directly to such clients. The Bank economically hedges derivative transactions executed with commercial clients by entering into mirror-image, offsetting derivatives with third parties. Derivative transactions executed as part of these programs are not designated in ASC 815-qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. Because the derivatives have mirror-image contractual terms, the changes in fair value substantially offset through earnings. Fees earned in connection with the execution of derivatives related to this program are recognized in the consolidated statement of operations in other income. The derivative asset and liability values above include an adjustment related to the consideration of credit risk required under ASC 820 of less than $0.1 million in the three and six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011 and December 31, 2010, the Bank had 14 and 18 interest rate swaps, respectively, with aggregate notional amounts of $123.7 million and $182.3 million, respectively, related to this program. As of June 30, 2011 and December 31, 2010, the Bank also had 2 and 19 foreign currency exchange contracts, respectively, with notional amounts of $2.0 million and $8.3 million, respectively, related to this program.

The tables below present the effect of the Company's derivative financial instruments in the consolidated statement of operations for the three and six months ended June 30, 2011 and 2010.

Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) Three Months Ended June 30,						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) Three Months Ended June 30,
	2011			2010				2011			2010
(In thousands)
Interest rate products	$	(2,136	)	$	(1,578	)	Interest income	$	(467	)	$	757
							Other income / expense	—			(1		)
Total	$	(2,136	)	$	(1,578	)		$	(467	)	$	756

Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) Six Months Ended June 30,						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) Six Months Ended June 30,
	2011			2010				2011			2010
(In thousands)
Interest rate products	$	(1,888	)	$	(1,478	)	Interest income	$	(930	)	$	1,506
							Other income / expense	—			(5		)
Total	$	(1,888	)	$	(1,478	)		$	(930	)	$	1,501

Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss), Net, Recognized in Income on Derivative Three Months Ended June 30,
		2011		2010
		(In thousands)
Interest rate products	Other income/ expense	$	36	$	(61	)
Foreign exchange contracts	Other income/ expense	15		—
Total		$	51	$	(61	)

Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss), Net, Recognized in Income on Derivative Six Months Ended June 30,
		2011		2010
		(In thousands)
Interest rate products	Other income/ expense	$	67	$	(74	)
Foreign exchange contracts	Other income/ expense	27		—
Total		$	94	$	(74	)

The Holding Company and Bank have agreements with their derivative counterparties that contain provisions where, if the Holding Company or Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Holding Company or Bank could also be declared in default on their derivative obligations. The Holding Company and Bank were in compliance with these provisions as of June 30, 2011 and December 31, 2010.

The Holding Company and Bank also have agreements with certain of their derivative counterparties that contain provisions where, if the Holding Company or Bank fail to maintain their status as a well- or adequately-capitalized institution, then the counterparty could terminate the derivative positions and the Holding Company or Bank would be required to settle their obligations under the agreements. The Bank and Holding Company were in compliance with these provisions as of June 30, 2011 and December 31, 2010.

Certain of the Holding Company's and Bank's agreements with their derivative counterparties contain provisions where if specified events or conditions occur that materially change the Holding Company's or Bank's creditworthiness in an adverse manner, the Holding Company or Bank may be required to fully collateralize their obligations under the derivative instruments. The Bank and Holding Company were in compliance with these provisions as of June 30, 2011 and December 31, 2010.

As of June 30, 2011 and December 31, 2010, the fair value of derivatives in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $7.8 million and $7.6 million, respectively. The Bank has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $0.3 million as of both June 30, 2011 and December 31, 2010 against its obligations under these agreements. As of June 30, 2011 and December 31, 2010, the Holding Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $6.1 million and $6.7 million, respectively, against its obligations under these agreements.