Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2012

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Note 9. 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 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 the next twelve months, 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 March 31, 2012 and December 31, 2011:

			Derivative Assets			Derivative Liabilities
(Dollars in thousands)	Notional Amount		Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
At March 31, 2012
Interest rate locks with customers	$	60,669	Other Assets	$	1,301	—	$	—
Forward loan commitments		63,196	Other Assets		71	—		—
Total	$	123,865		$	1,372		$	—
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
The following table presents the notional amounts and fair values of derivatives designated as hedging instruments recorded on the consolidated balance sheets at March 31, 2012 and December 31, 2011:
			Derivative Assets			Derivative Liabilities
(Dollars in thousands)	Notional Amount		Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
At March 31, 2012
Interest rate swap – cash flow hedge	$	20,000	—	$	—	Other Liabilities	$	1,260
Total	$	20,000		$	—		$	1,260
At December 31, 2011
Interest rate swap – cash flow hedge	$	20,000	—	$	—	Other Liabilities	$	1,435
Total	$	20,000		$	—		$	1,435

For the three months ended March 31, 2012 and 2011, the amounts included in the consolidated statements of income for derivatives not designated as hedging instruments are shown in the table below:

		Three Months Ended March 31,
(Dollars in thousands)	Statement of Income Classification	2012		2011
Interest rate locks with customers	Net gain (loss) on mortgage banking activities	$	222	$	(340	)
Forward loan commitments	Net gain (loss) on mortgage banking activities		373		(273	)
Total		$	595	$	(613	)

For the three months ended March 31, 2012 and 2011, the amounts included in the consolidated statements of income for derivatives designated as hedging instruments are shown in the table below:

		Three Months Ended March 31,
(Dollars in thousands)	Statement of Income Classification	2012		2011
Interest rate swap – cash flow hedge – interest payments	Interest expense	$	108	$	117
Interest rate swap – cash flow hedge – ineffectiveness	Interest expense		—		—
Total		$	108	$	117

At March 31, 2012 and December 31, 2011, the amounts included in accumulated other comprehensive income for derivatives designated as hedging instruments are shown in the table below:

(Dollars in thousands)	Accumulated other comprehensive (loss) income	At March 31, 2012			At December 31, 2011
Interest rate swap – cash flow hedge	Fair value, net of taxes	$	(819	)	$	(932	)
Total		$	(819	)	$	(932	)