10.

Derivative Financial Instruments and Hedging Activities

As part of our asset and liability management strategy, the Company may enter into derivative financial instruments, such as interest rate swaps, caps and floors, with the overall goal of minimizing the impact of interest rate fluctuations on our net interest margin. Interest rate swaps and caps involve the exchange of fixed-rate and variable-rate interest payment obligations without the exchange of the underlying notional amounts.

During the first quarter of 2010, the Company entered into a three-year interest rate cap agreement with an aggregate notional amount of $50 million. Under this cap agreement, the Company receives quarterly payments from the counterparty when the quarterly resetting 3 Month London-Interbank Offered Rate exceeds the strike level of 2.00%. The upfront fee paid to the counterparty in entering into this interest rate cap agreement was $890 thousand.

These interest rate cap agreements are considered "free-standing" due to non-designation of a hedge relationship to any of its financial assets or liabilities. Under FASB ASC 815, valuation gains or losses on interest rate caps not designated as hedging instruments are recognized in earnings. At March 31, 2012, the aggregate fair value of the outstanding interest rate caps was $1 thousand, and we recognized mark-to-market losses on valuation of $8 thousand for the three months ended March 31, 2012.

At March 31, 2012 and December 31, 2011, summary information about these interest-rate caps is as follows:


	March 31, 2012		December 31, 2011
Notional amounts	$	50.0 million	$	50.0 million
Weighted average pay rates		N/A		N/A
Weighted average receive rates		N/A		N/A
Weighted average maturity		0.91 years		1.16 years
Fair value of combined interest rate caps	$	1 thousand	$	9 thousand

The effect of derivative instruments on the Consolidated Statement of Income for the three months ended March 31, 2012 and 2011 are as follows:


			Three Months Ended
			March 31, 2012			March 31, 2011
	Location of Gain or (Loss) Recognized in Income on Derivatives		(In thousands) Amount of Gain or (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments under FASB ASC 815:
Interest rate contracts (1)		Other income	$	(8	)	$	(22	)

(1)	Includes amounts representing the net interest payments as stated in the contractual agreements and the valuation gains or (losses) on interest rate contracts not designated as hedging instruments.