Derivatives

At September 30, 2011, BancShares had one interest rate swap that qualifies as a cash flow hedge under US GAAP. An additional interest rate swap that qualified as a cash flow hedge matured on June 30, 2011. The fair value of the derivative is included in other liabilities in the consolidated balance sheets and the net change in fair value for both derivatives is included in other liabilities in the consolidated statements of cash flows.

The interest rate swaps are used for interest rate risk management purposes and convert variable-rate exposure on outstanding debt to a fixed rate. The interest rate swaps each have a notional amount of $115,000, representing the amount of variable-rate trust preferred capital securities issued during 2006. The 2006 interest rate swap hedged interest payments through June 2011 and required fixed-rate payments by BancShares at 7.125 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR, which is equal to the interest paid to the holders of the trust preferred capital securities. The 2009 interest rate swap hedges interest payments from July 2011 through June 2016 and requires fixed-rate payments by BancShares at 5.50 percent in exchange for variable-rate payments of 175 basis points above 3-month LIBOR. As of September 30, 2011, collateral with a fair value of $14,665 was pledged to secure the existing obligation under the interest rate swaps. For both swaps, settlement occurs quarterly.



			Estimated fair value of liability
	Notional amount for all periods		September 30, 2011		December 31, 2010		September 30, 2010
2006 interest rate swap hedging variable rate exposure on trust preferred capital securities 2006-2011	$	115,000	$	—	$	2,873	$	4,304
2009 interest rate swap hedging variable rate exposure on trust preferred capital securities 2011-2016	115,000		13,531		6,619		9,959
			$	13,531	$	9,492	$	14,263

For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated income statement. BancShares’ interest rate swaps have been fully effective since inception. Therefore, changes in the fair value of the interest rate swaps have had no impact on net income. For the nine month periods ended September 30, 2011 and 2010, BancShares recognized interest expense of $3,961 and $4,374, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness.

The following table discloses activity in accumulated other comprehensive income (loss) related to the interest rate swaps during the nine month periods ended September 30, 2011 and 2010.



	2011			2010
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1	$	(9,492	)	$	(5,367	)
Other comprensive income (loss) recognized during nine month period ended September 30	(4,039		)	(8,896		)
Accumulated other comprehensive loss resulting from interest rate swaps as of September 30	$	(13,531	)	$	(14,263	)

BancShares monitors the credit risk of the interest rate swap counterparty.