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Derivative Financial Instruments
9 Months Ended
Sep. 30, 2011
Derivative Financial Instruments 
Derivative Financial Instruments

Note 16 - Derivative Financial Instruments

 

As of September 30, 2011, the Company had the following outstanding interest rate derivatives, all of which were designated as cash flow hedges of interest rate risk (dollars in thousands):

 

Interest Rate Derivative

 

Notional Amount

 

Fixed Interest
Rate

 

Maturity Date

 

Interest Rate Swap

 

$

9,500

 

6.50

%

December 2014

 

Interest Rate Swap

 

$

4,500

 

5.75

%

November 2020

 

Interest Rate Swap

 

$

4,000

 

4.75

%

August 2016

 

 

The following table presents the fair value of the Company’s derivatives designated as hedging instruments as of September 30, 2011 and December 31, 2010 (dollars in thousands):

 

Asset Derivatives

 

Liability Derivatives

 

As of
September 30, 2011

 

As of
December 31, 2010

 

As of
 September 30, 2011

 

As of
December 31, 2010

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Other Assets

 

$

—

 

Other Assets

 

$

126

 

Other Liabilities

 

$

899

 

Other Liabilities

 

$

302

 

 

The following table presents the effect of the Company’s derivative financial instruments on the consolidated statements of income for the three and nine months ended September 30, 2011 and September 30, 2010 (dollars in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Amount of loss recognized on derivative in Other Comprehensive Income

 

$

(687

)

$

(246

)

$

(977

)

$

(762

)

Amount of loss reclassified from Accumulated Other Comprehensive Income into Interest Expense

 

$

(92

)

$

(54

)

$

(253

)

$

(163

)

 

No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Company’s cash flow hedges during the three and nine months ended September 30, 2011 or September 30, 2010.  During the twelve months ending September 30, 2012, the Company estimates an additional $342,000 will be reclassified from other comprehensive income as an increase to interest expense.

 

The derivative agreements in effect at September 30, 2011 provide that if the wholly-owned subsidiary of the Company which is a party to the agreement defaults or is capable of being declared in default on any of its indebtedness, then a default can be declared on such subsidiary’s derivative obligation. In addition, the Company is a party to one of the derivative agreements and if there is a default by the subsidiary on the loan subject to the derivative agreement to which the Company is a party and if there are swap breakage losses on account of the derivative being terminated early, then the Company could be held liable for such swap breakage losses.

 

As of September 30, 2011, the fair value of the derivatives in a liability position including accrued interest but excluding any adjustments for nonperformance risk was approximately $971,000.  If the Company breaches any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the derivative agreements at their termination liability value of $971,000.

 

Two of the Company’s unconsolidated joint ventures, in which a wholly owned subsidiary of the Company is a 50% partner and each of the two joint ventures have the same venture partners, had a $4,000,000 interest rate swap outstanding at September 30, 2011. The swap had an interest rate of 5.81% and matures in April 2018. The Company’s 50% share of the swap is $2,000,000 and the value is $(177,000) as of September 30, 2011 and zero as of December 31, 2010 and is included in “Investment in Unconsolidated Joint Ventures” on the Company’s balance sheet. The Company’s 50% share of loss recognized in other comprehensive income was $119,000 and $206,000 for the three and nine months ended September 30, 2011 and the amount of loss reclassified from accumulated other comprehensive income into equity in earnings of unconsolidated joint ventures was $14,000 and $29,000 for the three and nine months ended September 30, 2011.