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Derivative Instruments And Hedging Activities
 6 Months Ended
Jun. 30, 2011
Derivative Instruments And Hedging Activities  
Derivative Instruments And Hedging Activities

NOTE 10.  Derivative Instruments and Hedging Activities

 

Interest Rate Swaps

 

The Company uses interest rate swaps to reduce interest rate risk and to manage interest expense.  By entering into these agreements, the Company converts floating rate debt into fixed rate debt, or alternatively, converts fixed rate debt into floating rate debt.  Interest differentials paid or received under the swap agreements are reflected as adjustments to interest expense.  These interest rate swap agreements are derivative instruments that qualify for hedge accounting as discussed in Note 1.  The notional amounts of the interest rate swaps are not exchanged and do not represent exposure to credit loss.  In the event of default by a counterparty, the risk in these transactions is the cost of replacing the agreements at current market rates.

 

On December 4, 2008, the Company entered into an interest rate swap agreement related to the outstanding trust preferred capital notes.  The swap agreement became effective on December 1, 2008.  The notional amount of the interest rate swap was $7,000,000 and has an expiration date of December 1, 2016.  Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 2.85% and receives interest quarterly at a variable rate of three month LIBOR.  The variable rate resets on each interest payment date. 

 

The following table summarizes the fair value of derivative instruments at June 30, 2011 and December 31, 2010:

June 30, 2011

December 31, 2010

Balance Sheet

Fair

Balance Sheet

Fair

Location

Value

Location

Value

(dollars in thousands)

Derivatives designated

as hedging instruments

under GAAP

      Interest rate swap contracts

Other Liabilities

 $           282

Other Liabilities

 $               169

 

The following tables present the effect of the derivative instrument on the Consolidated Balance Sheet at June 30, 2011 and 2010 and the Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010:

 

 

Three Months Ended June 30,

Amount of Gain (Loss)

Recognized in OCI

Amount of Gain (Loss)

Derivatives in GAAP

on Derivative

Location of Gain (Loss)

Recognized in Income

Cash Flow Hedging

(Effective Portion)

Recognized in Income

(Ineffective Portion)

Relationships

2011

2010

(Ineffective Portion)

2011

2010

(dollars in thousands)

(dollars in thousands)

Interest rate swap

   contracts, net of tax

 $             (115)

 $             (215)

Not applicable

 $                   -

 $                   -

Six Months Ended June 30,

 

Amount of Gain (Loss)

Recognized in OCI

Amount of Gain (Loss)

Derivatives in GAAP

on Derivative

Location of Gain (Loss)

Recognized in Income

Cash Flow Hedging

(Effective Portion)

Recognized in Income

(Ineffective Portion)

Relationships

2011

2010

(Ineffective Portion)

2011

2010

(dollars in thousands)

(dollars in thousands)

Interest rate swap

   contracts, net of tax

 $               (75)

 $             (296)

Not applicable

 $                   -

 $                   -