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Derivative Instruments and Hedging Activities
 9 Months Ended
Sep. 30, 2012
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 asset to the other party based on a notional amount and an underlying asset as specified in the contract. Derivative assets and liabilities are recorded at fair value on the balance sheet.

 

Like other financial instruments, derivatives contain an element of credit risk due to the possibility the Company may incur a loss if a counterparty 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 primary derivative instrument the Company uses is interest rate lock commitments (“IRLCs”). Generally, this instrument helps 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, prices, or other economic factors.

IRLC: In the normal course of business, the Company sells originated mortgage loans into the secondary mortgage loan market. The Company enters into IRLCs to provide potential borrowers an interest rate guarantee. 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. From the loan closing date through the date of sale into the secondary market, the Company has exposure to interest rate movement resulting from the risk that interest rates will change from the rate quoted to the borrower. Due to these interest rate fluctuations, the Company’s balance of mortgage loans held for sale is subject to changes in fair value. Typically, the fair value of these loans decline when interest rates increase and rise when interest rates decrease.

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

 

                         
(Amounts in thousands)   September 30,
2012		     December 31,
2011		     September 30,
2011		  

Derivatives not designated as hedges

                        

IRLCs

   $ 14,747     $ 9,155     $ 10,421  

The following table presents the fair value of derivative financial instruments as of the dates indicated:

 

                                     
   

September 30, 2012

    

December 31, 2011

    

September 30, 2011

  
    Balance Sheet   Fair     Balance Sheet   Fair     Balance Sheet   Fair  
(Amounts in thousands)  

Location

   Value    

Location

   Value    

Location

   Value  

Asset derivatives

                                    

Derivatives not designated as hedges

                                    

IRLCs

   Other assets   $ 301     Other assets   $ 135     Other assets   $ 122  
       

 

 

        

 

 

        

 

 

  

Total

       $ 301         $ 135         $ 122  
       

 

 

        

 

 

        

 

 

  
             

Liability derivatives

                                    

Derivatives not designated as hedges

                                    

IRLCs

   Other liabilities   $ 2     Other liabilities   $ 6     Other liabilities   $ 9  
       

 

 

        

 

 

        

 

 

  

Total

       $ 2         $ 6         $ 9  
       

 

 

        

 

 

        

 

 

  

For the quarters ended September 30, 2012 and 2011, the Company determined there was no amount of ineffectiveness on cash flow hedges. The following table details gains recognized in income on derivatives for the dates indicated:

 

                                     
    Income Statement   Three Months Ended
September 30,		     Nine Months Ended
September 30,		  
(Amounts in thousands)  

Location

   2012     2011     2012     2011  

Derivatives not designated as hedges

                                    

IRLCs

   Other income   $ 94     $ 81     $ 170     $ 144  
       

 

 

    

 

 

    

 

 

    

 

 

  

Total

       $ 94     $ 81     $ 170     $ 144