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Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2013
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
10. DERIVATIVE FINANCIAL INSTRUMENTS

The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of June 30, 2013, the Bank entered into 87 interest-rate swap agreements with customers and 87 with a counterparty bank. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

The structure of the swaps is as follows. The Bank enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Bank enters into a swap with the counterparty bank to allow the Bank to pass on the interest-rate risk associated with fixed rate loans. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations. Our interest rate swap derivatives are subject to a master netting arrangement with one counterparty bank. None of our derivative assets and liabilities are offset in the balance sheet.

 

We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurance in this regard since the performance of our swaps is subject to market and counterparty risk.

Balance Sheet Classification of Derivative Financial Instruments

As of June 30, 2013, and December 31, 2012, the total notional amount of the Company’s swaps was $234.0 million, and $240.1 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the table below:

 

    

June 30, 2013

  
    

Asset Derivatives

     

Liability Derivatives

  
    

Balance Sheet
Location

    Fair
Value		     

Balance Sheet
Location

    Fair
Value		  
     (Dollars in thousands)  

Derivatives not designated as hedging instruments:

            

Interest rate swaps

    Other assets    $ 12,830      Other liabilities    $ 12,830  
     

 

 

        

 

 

  

Total derivatives

       $ 12,830         $ 12,830  
     

 

 

        

 

 

  
    

December 31, 2012

  
    

Asset Derivatives

     

Liability Derivatives

  
    

Balance Sheet
Location

    Fair
Value		     

Balance Sheet
Location

    Fair
Value		  
     (Dollars in thousands)  

Derivatives not designated as hedging instruments:

            

Interest rate swaps

    Other assets    $ 23,966      Other liabilities    $ 23,966  
     

 

 

        

 

 

  

Total derivatives

       $ 23,966         $ 23,966  
     

 

 

        

 

 

  

The Effect of Derivative Financial Instruments on the Consolidated Statements of Earnings

The following table summarizes the effect of derivative financial instruments on the consolidated statements of earnings for the three and six months ended June 30, 2013, and 2012:

 

Derivatives Not

Designated as Hedging Instruments

   

Location of Gain

Recognized in Income on

Derivative Instruments

    Amount of Gain Recognized in Income on
Derivative Instruments		  
          For the Three Months Ended June 30,  
          2013      2012  
          (Dollars in thousands)  

Interest rate swaps

    Other income    $ —         $ 189   
     

 

 

     

 

 

  

Total

       $ —         $ 189   
     

 

 

     

 

 

  

Derivatives Not

Designated as Hedging Instruments

   

Location of Gain

Recognized in Income on

Derivative Instruments

    Amount of Gain Recognized in Income
on Derivative Instruments		  
          For the Six Months Ended June 30,  
          2013      2012  
          (Dollars in thousands)  

Interest rate swaps

    Other income    $ —         $ 692   
     

 

 

     

 

 

  

Total

       $ —         $ 692