18. Derivative Financial Instruments

The Company is exposed to interest rate risk relating to its ongoing business operations. In connection with its asset/liability management objectives, the Company has entered into interest rate swaps.

During the fourth quarter 2009 and first quarter 2010, the Bank entered into four interest rate swaps totaling $45.0 million, using a receive-fixed swap to mitigate the exposure to changes in the fair value attributable to the benchmark interest rate (3-month LIBOR) of the hedged items (FHLB advances) from the effective date to the maturity date of the hedged instruments. As structured, the pay-variable, receive-fixed swaps are evaluated as fair value hedges and are considered highly effective. As highly effective hedges, all fair value designated hedges and the underlying hedged instrument are recorded on the balance sheet at fair value with the periodic changes of the fair value reported in the income statement.

For the three- and six-month periods ended June 30, 2011, the interest rate swaps designated as a fair value hedge resulted in decreased interest expense of $229,000 and $454,300, respectively, on FHLB advances than would otherwise have been recognized for the liability. The fair value of the swaps at June 30, 2011 was recorded on the Consolidated Balance Sheets as an asset in the amount of $1.6 million.

Net gains recognized on the fair value swaps were $169,000 at June 30, 2011 and $94,600 at June 30, 2010.

Mortgage banking derivatives used in the ordinary course of business consist of mandatory forward sales contracts (forward contracts) and rate lock loan commitments. The fair value of the Company's derivative instruments is measured primarily by obtaining pricing from broker-dealers recognized to be market participants. These operations discontinued in March 2011.

The table below provides data about the carrying values of derivative instruments:


	As of June 30, 2011						As of December 31, 2010
	Assets		(Liabilities)				Assets		(Liabilities)
(dollars in thousands)	Carrying Value		Carrying Value		Derivative Net Carrying Value		Carrying Value		Carrying Value			Derivative Net Carrying Value
Derivatives designated as hedging instruments:
Interest rate swap contracts - trust preferred (1)	$	—	$	—	$	—	$	—	$	—		$	—
Interest rate swap contracts - FHLB advances (1)		1,574		—		1,574		1,415		—			1,415

Derivatives not designated as hedging instruments:
Mortgage loan rate lock commitments (2)	$	—	$	—	$	—	$	—	$	(55	)	$	(55	)
Mortgage loan forward sales and MBS (3)		—		—		—		44		—			44

(1)

Included in "Other assets" on the Company's Consolidated Balance Sheets.

(2)

Included in "Liabilities from discontinued operations" on the Company's Consolidated Balance Sheets.

(3)

Included in "Assets from discontinued operations" on the Company's Consolidated Balance Sheets.

The following table provides data about the amount of gains and losses related to derivative instruments designated as hedges included in the Accumulated other comprehensive loss section of Shareholders' Equity on the Company's Consolidated Balance Sheets, and in Other income in the Company's Consolidated Statements of Operations:


	Loss, Net of Tax Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
(dollars in thousands)	As of June 30, 2011		As of June 30, 2010
Derivatives designated as hedging instruments:
Interest rate swap contracts - trust preferred	$	—	$	(111	)


	Gain Net of Tax Recognized in Income
(dollars in thousands)	As of June 30, 2011		As of June 30, 2010
Derivatives designated as hedging instruments:
Interest rate swap contracts - FHLB advances	$	102	$	57


	Gain/(Loss) During Six Months Ended
(dollars in thousands)	June 30, 2011			June 30, 2010
Derivatives not designated as hedging instruments:
Mortgage loan rate lock commitments (1)	$	55		$	161
Mortgage loan forward sales and MBS (1)		(44	)		(468	)

Total	$	11		$	(307	)

(1)

Recognized in "Net loss from discontinued operations" in the Company's Consolidated Statements of Operations.