Derivatives

At March 31, 2013, BancShares had an interest rate swap entered into during 2011 that qualifies as a cash flow hedge under GAAP. For all periods presented, the fair value of the outstanding derivative is included in other liabilities in the consolidated balance sheets, and the net change in fair value is included in the consolidated statements of cash flows under the caption of net change in other liabilities.

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 2011 interest rate swap has a notional amount of $93,500, representing the amount of variable rate trust preferred capital securities issued during 2006 and still outstanding at the swap inception date. The 2011 interest rate swap hedges interest payments 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 the three-month LIBOR, which is equal to the interest paid to the holders of the trust preferred capital securities. Settlement of the swap occurs quarterly. As of March 31, 2013, collateral with a fair value of $9,656 was pledged to secure the existing obligation under the interest rate swap.



	March 31, 2013				December 31, 2012				March 31, 2012
	Notional amount		Estimated fair value of liability		Notional amount		Estimated fair value of liability		Notional amount		Estimated fair value of liability
2011 interest rate swap hedging variable rate exposure on trust preferred securities 2011-2016	$	93,500	$	9,583	$	93,500	$	10,398	$	93,500	$	10,325

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 three-month periods ended March 31, 2013 and 2012, BancShares recognized interest expense of $813 and $749, respectively, resulting from incremental interest paid to the interest rate swap counterparty, none of which related to ineffectiveness. The estimated net amount in accumulated other comprehensive income at March 31, 2013, that is expected to be reclassified into earnings within the next 12 months is a net after-tax loss of $1,951.

The following table discloses activity in accumulated other comprehensive income (loss) related to the interest rate swaps during the three-month periods ended March 31, 2013, and 2012.



	2013			2012
Accumulated other comprehensive loss resulting from interest rate swaps as of January 1	$	(10,398	)	$	(10,714	)
Other comprehensive income recognized during the three-month period ended March 31	815			389
Accumulated other comprehensive loss resulting from interest rate swaps as of March 31	$	(9,583	)	$	(10,325	)

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