Derivative Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments [Abstract]

Derivative Instruments

NOTE 5: DERIVATIVE INSTRUMENT

We have an interest rate swap agreement with a total notional amount of $25.0 million.  The interest rate swap contract was designated as a hedging instrument in cash flow hedges with the objective of protecting the overall cash flow from our quarterly interest payments on the SBI Capital Trust II preferred securities throughout the seven year period beginning February 11, 2011 and ending April 7, 2018 from the risk of variability of those payments resulting from changes in the three-month London Interbank Offered Rate (“LIBOR”).  Under the swap, we pay a fixed interest rate of 6.15% and receive a variable interest rate of three-month LIBOR plus a margin of 2.85% on a total notional amount of $25.0 million, with quarterly settlements.  The rate received by us as of September 30, 2013 was 3.12%. 

The estimated fair value of the interest rate derivative contract outstanding as of September 30, 2013 and December 31, 2012 resulted in a pre-tax loss of $2.2 million and $3.2 million, respectively, and was included in other liabilities in the unaudited consolidated statement of financial condition.  We obtained the counterparty valuation to validate its interest rate derivative contract as of September 30, 2013 and December 31, 2012.   

The effective portion of our gain or loss due to changes in the fair value of the derivative hedging instrument, a $0.6 million loss and a $0.3 million loss for the nine months ended September 30, 2013 and September 30, 2012, respectively, is included in other comprehensive income, net of tax, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other noninterest income or other noninterest expense.  No ineffectiveness related to the interest rate derivative was recognized during either reporting period.   

Net cash outflows as a result of the interest rate swap agreement were $0.6 million and $0.5 million for the nine months ended September 30, 2013 and September 30, 2012,  respectively and were included in interest expense on subordinated debentures.   

Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms.  Institutional counterparties must have an investment grade credit rating and be approved by our asset/liability management committee.  Our credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty.  Credit exposure may be reduced by the amount of collateral pledged by the counterparty.  There are no credit-risk-related contingent features associated with our derivative contract. 

The fair value of cash and securities posted as collateral by us related to the derivative contract was $4.1 million and $4.2 million at September 30, 2013 and December 31, 2012, respectively.