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Derivatives and Hedging Activities
 6 Months Ended
Jun. 30, 2011
Derivatives and Hedging Activities [Abstract]  
Derivatives and Hedging Activities
Note 13. Derivatives and Hedging Activities
The Company, through its mortgage banking and risk management operations, is party to various derivative instruments that are used for asset and liability management and customers’ financing needs. Derivative assets and liabilities are recorded at fair value on the balance sheet.
The primary derivatives that the Company uses are interest rate swaps and interest rate lock commitments (“IRLC’s”). Generally, these instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors, such as interest rates, market-driven loan rates and prices or other economic factors.
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments as of the dates indicated:
                         
    June 30, 2011     December 31, 2010     June 30, 2010  
(In Thousands)                        
Interest rate swap
  $ —     $ 50,000     $ 50,000  
IRLC’s
    3,500       7,566       6,823  
As of June 30, 2011, December 31, 2010, and June 30, 2010, the fair values of the Company’s derivatives were as follows:
                                                 
    Asset Derivatives  
    June 30, 2011     December 31, 2010     June 30, 2010  
    Balance Sheet     Fair     Balance Sheet     Fair     Balance Sheet     Fair  
(In Thousands)   Location     Value     Location     Value     Location     Value  
Derivatives not designated as hedges
                                               
IRLC’s
  Other assets   $ 39     Other assets   $ 28     Other assets   $ 52  
 
                                   
Total
          $ 39             $ 28             $ 52  
 
                                   
                                                 
    Liability Derivatives  
    June 30, 2011     December 31, 2010     June 30, 2010  
    Balance Sheet     Fair     Balance Sheet     Fair     Balance Sheet     Fair  
    Location     Value     Location     Value     Location     Value  
(In Thousands)                                                
Derivatives designated as hedges
                                               
Interest rate swap
  Other liabilities   $ —     Other liabilities   $ 31     Other liabilities   $ 1,093  
 
                                   
Total
          $ —             $ 31             $ 1,093  
 
                                   
 
                                               
Derivatives not designated as hedges
                                               
IRLC’s
  Other liabilities   $ 7     Other liabilities   $ 59     Other liabilities   $ 22  
 
                                   
Total
          $ 7             $ 59             $ 22  
 
                                   
 
                                               
Total derivatives
          $ 7             $ 90             $ 1,115  
 
                                   
Interest Rate Swaps. The Company uses interest rate swap contracts to modify its exposure to interest rate risk. The Company had a derivative interest rate swap instrument that ended in January 2011. The Company employed a cash flow hedging strategy to effectively convert certain floating-rate liabilities into fixed-rate instruments. The interest rate swap was accounted for under the “short-cut” method as required by the Derivatives and Hedging Topic 815 of the ASC. Changes in fair value of the interest rate swap were reported as a component of other comprehensive income. The Company does not currently employ fair value hedging strategies.
Interest Rate Lock Commitments. In the normal course of business, the Company sells originated mortgage loans into the secondary mortgage loan market. During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in interest rates associated with mortgage loans that are in the “mortgage pipeline.” A pipeline loan is one on which the potential borrower has set the interest rate for the loan by entering into an IRLC. Once a mortgage loan is closed and funded, it is included within loans held for sale and awaits sale and delivery into the secondary market. During the term of an IRLC, the Company has the risk that interest rates will change from the rate quoted to the borrower.
The Company’s balance of mortgage loans held for sale is subject to changes in fair value due to fluctuations in interest rates from the loan closing date through the date of sale of the loan into the secondary market. Typically, the fair value of these loans declines when interest rates increase and rises when interest rates decrease.
Effect of Derivatives and Hedging Activities on the Income Statement
For the quarters ended June 30, 2011 and 2010, the Company has determined there was no amount of ineffectiveness on cash flow hedges. The following table details gains and losses recognized in income on non-designated hedging instruments for the three- and six-month periods ended June 30, 2011 and 2010.
                                         
                    Amount of Gain (Loss)          
Derivatives Not   Location of Gain (Loss)     Recognized in Income on Derivative  
Designated as Hedging   Recognized in Income on     Three Months Ended June 30,     Six Months Ended June 30,  
Instruments   Derivative     2011     2010     2011     2010  
(In Thousands)                                        
IRLC’s
  Other income   $ (18 )   $ 79     $ 63     $ 102  
 
                             
Total
          $ (18 )   $ 79     $ 63     $ 102  
 
                             
Counterparty Credit Risk. Like other financial instruments, derivatives contain an element of “credit risk.” Credit risk is the possibility that the Company will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee. The Company reviews its counterparty risk regularly and has determined that, as of June 30, 2011, there is no significant counterparty credit risk.