Derivative Instruments

12 Months Ended

Dec. 31, 2013

Derivative Instruments [Abstract]

Derivative Instruments

Note 10:  Derivative Instruments

We have an interest rate swap agreement with a total notional amount of $25.0 million.  The interest rate swap contract was designated as a cash flow hedging instrument with the objective of protecting the overall cash flow from our quarterly interest payments on the SBI Capital Trust II preferred securities throughout the seven year period beginning February 11, 2011 and ending April 7, 2018 from the risk of variability of those payments resulting from changes in the three-month London Interbank Offered Rate (“LIBOR”).  Under the swap, we will pay a fixed interest rate of 6.15% and receive a variable interest rate of three-month LIBOR plus a margin of 2.85%  on a total notional amount of $25.0 million, with quarterly settlements.  The rate received by us as of December 31, 2013 was 3.09%.

The estimated fair value of the interest rate derivative contract outstanding as of December 31, 2013 and 2012 resulted in a pre-tax loss of $2.0  million and $3.2 million, respectively, and was included in other liabilities in the Consolidated Statement of Financial Condition. 

The effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument, a $0.7 million gain and a $0.2 million loss for the year ended December 31, 2013 and 2012, respectively, is included in other comprehensive income, net of tax, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other noninterest income or other noninterest expense.  No ineffectiveness related to the interest rate derivative was recognized during either reporting period.   

Net cash flows as a result of the interest rate swap agreement were $0.8 million  for year ended December 31, 2013 and $0.7 million for the year ended 2012, and were included in interest expense on subordinated debentures.   

Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms.  Institutional counterparties must have an investment grade credit rating and be approved by our asset/liability management committee.  Our credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty.  Credit exposure may be reduced by the amount of collateral pledged by the counterparty.  There are no credit-risk-related contingent features associated with our derivative contract. 

The fair value of cash and securities posted as collateral by us related to the derivative contract was $4.1 million and $4.2 million at December 31, 2013 and 2012, respectively.