Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2011

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Note 16. Derivative Instruments and Hedging Activities

The Corporation may use interest-rate swap agreements to modify the interest rate characteristics from variable to fixed or fixed to floating in order to reduce the impact of interest rate changes on future net interest income. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. The Corporation’s credit exposure on interest rate swaps includes fair value and any collateral that is held by a third party. Changes in the fair value of derivative instruments designated as hedges of future cash flows are recognized in equity until the underlying forecasted transactions occur, at which time the deferred gains and losses are recognized in income. For a qualifying fair value hedge, the gain or loss on the hedging instrument is recognized in earnings, and the change in fair value on the hedge item to the extent attributable to the hedged risk adjusts the carrying amount of the hedge item and is recognized in earnings.

Derivative loan commitments represent agreements for delayed delivery of financial instruments in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified instrument at a specified price or yield. The Corporation’s derivative loan commitments are commitments to sell loans secured by 1-to-4 family residential properties whose predominant risk characteristic is interest rate risk. The fair values of these derivative loan commitments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Loans held for sale are included as forward loan commitments.

On March 24, 2009, the Corporation entered into a $22.0 million notional interest rate swap, which had been classified as a fair value hedge on a real estate-commercial loan. Under the terms of the swap agreement, the Corporation paid a fixed rate of 6.49% and received a floating rate which is based on the one month LIBOR with a 357 basis point spread and a maturity date of April 1, 2019. The Corporation performed an assessment of the hedge at inception, and at re-designation. During the fourth quarter of 2009, the Corporation participated $5.0 million of the hedged real estate-commercial loan and de-designated the hedge relationship. During the first quarter of 2010, the Corporation re-designated $17.0 million of the interest rate swap. Upon re-designation, $17.0 million of the swap had some ineffectiveness and the $5.0 million remained undesignated. During the third quarter of 2010, the Corporation terminated the swap. The underlying commercial loan had a positive fair value adjustment on the termination date of $859 thousand which is being amortized through a reduction of interest income over the remaining life.

On December 23, 2008, the Corporation entered into a cash flow hedge with a notional amount of $20.0 million that had the effect of converting the variable rates on trust preferred securities to a fixed rate. Under the terms of the swap agreement, the Corporation pays a fixed rate of 2.65% and receives a floating rate based on the three month LIBOR with a maturity date of January 7, 2019. The Corporation expects that there will be no ineffectiveness in 2012, and therefore anticipates no portion of the net loss in accumulated other comprehensive loss will be reclassified to interest expense within the next twelve months.

The following table presents the notional amounts and fair values of derivatives not designated as hedging instruments recorded on the consolidated balance sheets at December 31, 2011 and 2010:

	Derivative Assets					Derivative Liabilities
	Notional		Balance Sheet	Fair		Balance Sheet	Fair
(Dollars in thousands)	Amount		Classification	Value		Classification	Value
At December 31, 2011
Interest rate locks with customers	$	35,934	Other Assets	$	1,079	—	$	—
Forward loan commitments		39,080	—		—	Other Liabilities		302
Total	$	75,014		$	1,079		$	302
At December 31, 2010
Interest rate locks with customers	$	37,691	Other Assets	$	530	—	$	—
Forward loan commitments		41,842	Other Assets		269	—		—
Total	$	79,533		$	799		$	—

The following table presents the notional amounts and fair values of derivatives designated as hedging instruments recorded on the consolidated balance sheets at December 31, 2011 and 2010:

	Derivative Assets					Derivative Liabilities
	Notional		Balance Sheet	Fair		Balance Sheet	Fair
(Dollars in thousands)	Amount		Classification	Value		Classification	Value
At December 31, 2011
Interest rate swap — cash flow hedge	$	20,000	—	$	—	Other Liabilities	$	1,435
Total	$	20,000		$	—		$	1,435
At December 31, 2010
Interest rate swap — cash flow hedge	$	20,000	Other Assets	$	492	—	$	—
Total	$	20,000		$	492		$	—

For the years ended December 31, 2011, 2010 and 2009, the amounts included in the consolidated statements of income for derivatives not designated as hedging instruments are shown in the table below:

	Statement of Income	Years Ended December 31,
(Dollars in thousands)	Classification	2011			2010		2009
Interest rate locks with customers	Net gain (loss) on mortgage banking activities	$	549		$	506	$	24
Forward loan commitments	Net gain (loss) on mortgage banking activities		(572	)		138		132
Total		$	(23	)	$	644	$	156

For the years ended December 31, 2011, 2010 and 2009, the amounts included in the consolidated statements of income for derivatives designated as hedging instruments are shown in the table below:

	Statement of Income	Years Ended December 31,
(Dollars in thousands)	Classification	2011			2010			2009
Interest rate swap — fair value hedge — interest payments	Interest income	$	—		$	(374	)	$	(454	)
Interest rate swap — fair value hedge	Net (loss) gain on interest rate swap	$	—			(1,072	)	$	641
Interest rate swap — cash flow hedge — interest payments	Interest expense		(475	)		(468	)		(377	)
Interest rate swap — cash flow hedge — ineffectiveness	Interest expense		—			—			—
Total		$	(475	)	$	(1,914	)	$	(190	)

For the years ended December 31, 2011, 2010 and 2009, the amounts included in accumulated other comprehensive income for derivatives designated as hedging instruments are shown in the table below:

	Accumulated other
	comprehensive (loss)	At December 31,
(Dollars in thousands)	income	2011			2010		2009
Interest rate swap — cash flow hedge	Fair value, net of taxes	$	(932	)	$	320	$	1,150
Total		$	(932	)	$	320	$	1,150