NOTE 21. DERIVATIVES

The Company may use derivatives to hedge the risk of changes in the fair values of interest rate lock commitments, residential mortgage loans held for sale, and mortgage servicing rights. None of the Company's derivatives are designated as hedging instruments. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in income. The Company primarily utilizes forward interest rate contracts in its derivative risk management strategy.

The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates ("MBS TBAs") in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments. Credit risk associated with forward contracts is limited to the replacement cost of those forward contracts in a gain position. There were no counterparty default losses on forward contracts in 2011, 2010 or 2009. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Bank limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the Company completes the transaction by either paying or receiving a fee to or from the broker/dealer equal to the increase or decrease in the market value of the forward contract. At December 31, 2011, the Bank had commitments to originate mortgage loans held for sale totaling $143.5 million and forward sales commitments of $182.7 million.

The Company's mortgage banking derivative instruments do not have specific credit risk-related contingent features. The forward sales commitments do have contingent features that may require transferring collateral to the broker/dealers upon their request. However, this amount would be limited to the net unsecured loss exposure at such point in time and would not materially affect the Company's liquidity or results of operations.

Effective in the second quarter of 2011, the Bank began executing interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting the interest rate swaps that the Bank executes with a third party, such that the Bank minimizes its net risk exposure. As of December 31, 2011, the Bank had 38 interest rate swaps with an aggregate notional amount of $194.3 million related to this program.

In connection with the interest rate swap program with commercial customers, the Bank has agreements with its derivative counterparties that contain a provision where if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations.

The Bank also has agreements with its derivative counterparties that contain a provision where if the Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and the Bank would be required to settle its obligations under the agreements. Similarly, the Bank could be required to settle its obligations under certain of its agreements if specific regulatory events occur, such as if the Bank were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels.

As of December 31, 2011, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $6.6 million. The Bank has minimum collateral posting thresholds with certain of its derivative counterparties, and has been required to post collateral against its obligations under these agreements of $5.8 million as of December 31, 2011. If the Bank had breached any of these provisions at December 31, 2011, it could have been required to settle its obligations under the agreements at the termination value.

The following tables summarize the types of derivatives, separately by assets and liabilities, their locations on the Consolidated Balance Sheets, and the fair values of such derivatives as of December 31, 2011 and 2010:

(in thousands)


Derivatives not designated as hedging instrument	Balance Sheet Location	Asset Derivatives				Liability Derivatives
Derivatives not designated as hedging instrument	Balance Sheet Location	December 31, 2011		December 31, 2010		December 31, 2011		December 31, 2010
Interest rate lock commitments	Other assets/Other liabilities	$	1,752	$	306	$	3	$	170
Interest rate forward sales commitments	Other assets/Other liabilities		—		754		90		191
Interest rate swaps	Other assets/Other liabilities		6,203		—		6,416		—

Total		$	7,955	$	1,060	$	6,509	$	361

The following table summarizes the types of derivatives, their location on the Consolidated Statements of Operations, and the losses recorded in 2011, 2010 and 2009:


(in thousands)

Derivatives not designated as hedging instrument	Income Statement Location	2011			2010			2009
Interest rate lock commitments	Mortgage banking revenue	$	1,613		$	146		$	(1,176	)
Interest rate forward sales commitments	Mortgage banking revenue		(10,579	)		(3,034	)		(255	)
Interest rate swaps	Other income		(187	)		—			—

Total		$	(9,153	)	$	(2,888	)	$	(1,431	)