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Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2011
Derivative Instruments and Hedging Activities [Abstract]  
Derivative Instruments and Hedging Activities
Note 13. Derivative Instruments and Hedging Activities

The Company uses derivative instruments primarily to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. These derivatives may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying asset as specified in the contract.

The primary derivatives that the Company uses are interest rate swaps and IRLCs. 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.

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 into 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 in value when interest rates decrease.

The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments as of the dates indicated:

 

                 
    December 31, 2011     December 31, 2010  
(Amounts in thousands)            

Interest rate swap

   $ —       $ 50,000  

IRLC’s

     9,155       7,566  

The Company entered into an interest rate swap derivative accounted for as a cash flow hedge in January 2006. The $50.00 million notional amount pay fixed, receive variable interest rate swap was a liability with an estimated fair value of $31 thousand at December 31, 2010. The Company paid a fixed rate of 4.34% and received a LIBOR-based floating rate from the counterparty. Any gains and losses associated with the market value fluctuations of the interest rate swap were included in OCI. The derivative expired in January 2011.

As of December 31, 2011 and 2010, the fair values of the Company’s derivatives were as follows:

 

                         
    Asset Derivatives  
    December 31, 2011     December 31, 2010  

(Amounts in thousands)

   Balance Sheet
Location		   Fair
Value		     Balance Sheet
Location		   Fair
Value		  

Derivatives not designated as hedges

                        

IRLC’s

   Other assets   $ 135     Other assets   $ 28  
       

 

 

        

 

 

  

Total

       $ 135         $ 28  
       

 

 

        

 

 

  
                         
    Liability Derivatives  
    December 31, 2011     December 31, 2010  
(Amounts in thousands)   Balance Sheet
Location		   Fair
Value		     Balance Sheet
Location		   Fair
Value		  

Derivatives designated as hedges

                        

Interest rate swap

   Other liabilities   $ —       Other liabilities   $ 31  
       

 

 

        

 

 

  

Total

       $ —           $ 31  
       

 

 

        

 

 

  
         

Derivatives not designated as hedges

                        

IRLC’s

   Other liabilities   $ 6     Other liabilities   $ 59  
       

 

 

        

 

 

  

Total

       $ 6         $ 59  
       

 

 

        

 

 

  
         

Total derivatives

       $ 6         $ 90  
       

 

 

        

 

 

  

Effect of Derivatives and Hedging Activities on the Income Statement. For the years ended December 31, 2011 and 2010, the Company 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 periods ended December 31, 2011 and 2010:

 

                     
        Amount of Gain (Loss)  

Derivatives Not

Designated as Hedging

Instruments

   Location of Gain  (Loss)
Recognized in Income on
Derivative		   Recognized in Income on Derivative  
    Year Ended December 31,  
    2011     2010  
(Amounts in thousands)                

IRLC’s

   Other income   $ 160     $ 41  
       

 

 

    

 

 

  

Total

       $ 160     $ 41  
       

 

 

    

 

 

  

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.