Note 19 - Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2011

Derivative Instruments and Hedging Activities Disclosure [Text Block]

19.   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The significant accounting policies related to derivative instruments and hedging activities are presented in Note 1, “Summary of Significant Accounting Policies.”

During 2010 and 2011, the Company hedged the fair value of fixed rate commercial real estate loans through the use of pay fixed, receive variable interest rate swaps. These derivative contracts were designated as fair value hedges and are valued using observable market prices, if available, or third party cash flow projection models. The valuations and expected lives presented in the following table are based on yield curves, forward yield curves, and implied volatilities that were observable in the cash and derivatives markets as of December 31, 2011 and December 31, 2010.

Interest Rate Derivatives Portfolio

(Dollar amounts in thousands)

	December 31,
	2011			2010
Fair Value Hedges
Related to fixed rate commercial loans
Notional amount outstanding	$	16,947		$	17,994
Weighted-average interest rate received		2.19	%		2.17	%
Weighted-average interest rate paid		6.39	%		6.40	%
Weighted-average maturity (in years)		5.76			6.76
Derivative liability fair value	$	(2,459	)	$	(1,833	)
Cash pledged to collateralize net unrealized losses with counterparties (1)	$	2,516		$	1,836
Aggregate fair value of assets needed to settle the instruments immediately (if the credit risk-related contingent features were triggered)	$	2,492		$	1,868

(1)   No other collateral was required to be pledged.

Hedge Ineffectiveness and Gains Recognized

(Dollar amounts in thousands)

	Years ended December 31,
	2011			2010			2009
Net hedge ineffectiveness recognized in noninterest income:
Change in fair value of swaps	$	(626	)	$	(588	)	$	1,383
Change in fair value of hedged items		624			585			(1,389	)
Net hedge ineffectiveness (1)	$	(2	)	$	(3	)	$	(6	)
Gains recognized in net interest income (2)	$	-		$	-		$	120

(1)	Included in other noninterest income in the Consolidated Statements of Income. No gains or losses were recognized related to components of derivative instruments that were excluded from the assessment of hedge ineffectiveness during the years presented.
(2)	The gain represents the fair value on discontinued fair value hedges in connection with our subordinated fixed rate debt that were being amortized through earnings over the remaining life of the hedged item (debt). In addition to these amounts, interest accruals on fair value hedges are also reported in net interest income.

Derivative instruments are inherently subject to credit risk.Credit risk occurs when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing the aggregate amount of net unrealized gains in agreements, monitoring the size and the maturity structure of the derivatives, and applying uniform credit standards for all activities with credit risk. Under Company policy, credit exposure to any single counterparty cannot exceed 2.5% of stockholders’ equity. In addition, the Company established bilateral collateral agreements with its primary derivative counterparties that provide for exchanges of marketable securities or cash to collateralize either party’s net gains above an agreed-upon minimum threshold. In determining the amount of collateral required, gains and losses on derivative instruments are netted with the same counterparty. On December 31, 2011, these collateral agreements covered 100% of the fair value of the Company’s outstanding interest rate swaps. Net losses with counterparties must be collateralized with either cash or U.S. government or U.S. government-sponsored agency securities. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.

As of December 31, 2011 and December 31, 2010, all of the Company’s derivative instruments contained provisions that require the Company’s debt to remain above a certain credit rating by each of the major credit rating agencies. If the Company’s debt were to fall below that credit rating, it would be in violation of those provisions, and the counterparties to the derivative instruments could terminate the swap transaction and demand cash settlement of the derivative instrument in an amount equal to the derivative liability fair value. For the year ended December 31, 2011, the Company was not in violation of these provisions.

The Company’s derivative portfolio also includes derivative instruments not designated in a hedge relationship consisting of commitments to originate 1-4 family mortgage loans and foreign exchange contracts. The amount of these instruments was not material for any period presented. The Company had no other derivative instruments as of December 31, 2011 or December 31, 2010. The Company does not enter into derivative transactions for purely speculative purposes.