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Derivative Instruments and Hedging Activities
 3 Months Ended
Mar. 31, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 10 – Derivative Instruments and Hedging Activities

 

Accounting guidance under GAAP defines derivatives, requires that derivatives be carried at fair value on the balance sheet and provides for hedge accounting when certain conditions are met. Changes in the fair values of derivative instruments designated as “cash flow” hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of taxes. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings. The net interest settlement on cash flow hedges is treated as an adjustment of the interest income or interest expense of the hedged assets or liabilities. The Company uses derivative instruments to hedge its exposure to changes in interest rates. The Company does not use derivatives for any trading or other speculative purposes.

 

During the second quarter of 2009, the Company purchased interest rate caps for $7.1 million to effectively fix the interest rate at 2.97% for five years on $70 million of the Company’s money market deposit accounts. These money market deposit accounts are associated with the Promontory Insured Network Deposits Program (the “IND Program”) in which the Company participates. The aggregate fair value of the interest rate caps was a derivative asset of $14 thousand at both March 31, 2013 and December 31, 2012. Because the interest rate caps qualified for hedge accounting, during the first quarter of 2013 the balances of these derivative assets increased $416 thousand to reflect unrealized holding gains, and decreased by the same amount to reflect the charge to interest expense associated with the hedged money market deposit accounts. The comparable amounts for the first quarter of 2012 were $359 thousand and $460 thousand, respectively.

 

In December 2012, the Company decided to partially exit the IND Program in an effort to reduce its excess liquidity and, as a result, the deposits related to this program, which totaled $90 million at the end of 2012, declined to $28 million at the end of the first quarter of 2013. As such, the ineffective portion of the interest rate caps used to hedge the interest rates on these deposits was terminated. By terminating a portion of the interest rate caps, the interest expense related to the hedged money market deposit accounts declined from $460 thousand for the first quarter of 2012 to $416 thousand for the first quarter of 2013. The rate paid on interest-bearing liabilities decreased from 1.20% for the first quarter of 2012 to 1.02% for the first quarter of 2013 partially due to the lower interest expense related to the hedged money market deposits. The Company expects that the charge to interest expense associated with the hedged deposits over the next 12 months will be approximately $1.4 million, which is $1.1 million less than if a portion of the cash flow hedge had not been terminated.

 

By entering into derivative instrument contracts, the Company exposes itself, from time to time, to counterparty credit risk. Counterparty credit risk is the risk that the counterparty will fail to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to the Company, which creates credit risk for the Company. The Company attempts to minimize this risk by selecting counterparties with investment grade credit ratings, limiting its exposure to any single counterparty and regularly monitoring its market position with each counterparty. Collateral required by the counterparties, recorded in other liabilities, was $428 thousand at both March 31, 2013 and December 31, 2012.