Note 24.

Derivatives

The Company utilizes derivative instruments as a part of its asset-liability management program to control exposure to interest rate swings and resulting fluctuations in market values and cash flows associated with certain financial instruments. The Company accounts for derivatives in accordance with ASC 815, Derivatives and Hedging. Under current guidance, derivative transactions are classified as either cash flow hedges or fair value hedges or they are not designated as hedging instruments. The Company designates each transaction at its inception. Information concerning each of the Company's categories of derivatives as of December 31, 2012 and 2011 is presented below.

Derivatives designated as cash flow hedges

During the fourth quarter of 2010, the Company entered into an interest rate swap agreement as part of the interest rate risk management process. The swap has been designated as a cash flow hedge intended to hedge the variability of cash flows associated with the Company's trust preferred capital securities described in Note 19. "Trust-Preferred Capital Notes". The swap hedges the interest rate risk associated with the trust preferred capital notes wherein the Company receives a floating rate based on LIBOR from a counterparty and pays a fixed rate of 2.59% to the same counterparty. The swap is calculated on a notional amount of $5,155,000. The term of the swap is ten years and commenced on October 23, 2010. The swap was entered into with a counterparty that met the Company's credit standards and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. The Company has designated the interest rate swap as a cash flow hedge, with the effective portion of the derivative's unrealized gain or loss recorded as a component of other comprehensive income. The ineffective portion of the unrealized gain or loss, if any, would be recorded in other expense. The Company has assessed the effectiveness of the hedging relationship by comparing the changes in cash flows on the designated hedged item. As a result of this assessment, no hedge ineffectiveness for this swap was identified during 2012 or 2011. At December 31, 2012 and December 31, 2011, the fair value of the swap agreement was an unrealized loss of $461,000 and $314,000 respectively. The values represent the amounts the Company would have expected to pay if the contract was terminated on those dates. The amounts included in accumulated other comprehensive income as unrealized losses (market value net of tax) related to this swap as of December 31, 2012 and December 31, 2011 was $304,000 and $208,000 respectively.

Information concerning the derivative designated as a cash flow hedge at December 31, 2012 and 2011 is presented in the following tables:

	December 31, 2012
	Positions (#)	Notional Amount		Asset		Liability		Receive Rate		Pay Rate		Life (Years)
Pay fixed - receive floating interest rate swap	1	$	5,155,000	$	—	$	461,000	0.32	%	2.59	%	7.8
Total derivatives designated as cash flow hedges		$	5,155,000	$	—	$	461,000	0.32	%	2.59	%	7.8

	December 31, 2011
	Positions (#)	Notional Amount		Asset		Liability		Receive Rate		Pay Rate		Life (Years)
Pay fixed - receive floating interest rate swap	1	$	5,155,000	$	—	$	314,000	0.29	%	2.59	%	8.8
Total derivatives designated as cash flow hedges		$	5,155,000	$	—	$	314,000	0.29	%	2.59	%	8.8

Derivatives designated as fair value hedges

The Company will from time to time utilize derivatives to limit is exposure to the variability of fair market values of certain financial instruments. Information below is presented on derivatives designated as fair value hedges as of December 31, 2012.

Mortgage banking activities

As part of its mortgage banking activities, our mortgage subsidiary enters into interest rate lock commitments which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked the interest rate. The period of time between the origination of a loan commitment and closing and sale of the loan generally ranges from 60 to 120 days. Our subsidiary will either lock the loan and associated rate in with an investor and commit to deliver the loan only if settlement occurs ("best efforts delivery") or it will commit to deliver the locked loan in a binding ("mandatory") delivery program with an investor. Because of the high correlation between best efforts delivery contracts and interest rate lock commitments, no gain or loss is recognized on best efforts contracts and any resulting interest rate risk associated with these transactions is borne by the ultimate purchaser of the loan. Accordingly, the Company has not designated best efforts delivery contracts and the related interest rate lock commitments as hedging instruments (See discussion below under "Derivatives not designated as hedging instruments").

Mandatory delivery of mortgage loans

For the portion of interest rate lock commitments that are designated to be delivered under a mandatory delivery method, the Company bears the risk of changes in value of the commitment from the time a rate is locked with the mortgage customer until a loan is closed and and ultimately sold to an investor. To mitigate this risk, the company enters into forward sales contracts of mortgage backed securities ("MBS") with similar characteristics to the rate lock commitments. Both the rate lock commitments and the associated forward sales contracts have been designated as fair value hedges by the Company.

Rate lock commitments and forward sales contracts of MBS are recorded at fair value with changes in fair value recorded through noninterest income on the statement of operations.

The notional amount of interest rate lock commitments related to mandatory delivery methods totaled $8.8 million and $0 at December 31, 2012 and 2011, respectively. This represented a total of 41 open interest rate lock commitments under mandatory delivery at December 31, 2012. There were no open interest rate lock commitments under mandatory delivery at December 31, 2011. The fair value of the open interest rate lock commitments under mandatory delivery at December 31, 2012 was $35,000.

At December 31, 2012 and 2011, the mortgage subsidiary had open forward sales contracts of MBS with a notional value of $9.1 million and $0.0, respectively. At December 31, 2012 , the mortgage subsidiary had 11 open forward sales contracts of MBS. The fair value of these open forward sales contracts was $39,000. Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. We do not expect any counterparty to fail to meet its obligations. Additional risks inherent in mandatory delivery programs include the risk that if the mortgage subsidiary does not close the loans subject to interest rate lock commitments, they will be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the mortgage subsidiary could incur significant costs in acquiring replacement loans or MBS.

Derivatives not designated as hedging instruments

Best efforts delivery mortgage banking derivatives

Interest rate lock commitments under best efforts delivery and the resulting commitments to deliver loans to investors on a best efforts basis are considered derivatives. For loans to be delivered under a best efforts delivery method, the Company mitigates any risk from changes in interest rates through the use of best effort forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the investor has assumed interest rate risk on the loan. As a result, the Company is not exposed to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitment and the best efforts contracts is very high.

As of December 31, 2012 and 2011, the notional amount of open best efforts interest rate lock commitments was $93.8 million and $90.4 million respectively. The related notional amounts of open forward sales commitments to investors as of December 31, 2012 and 2011 was $167.2 million and $182.9 million respectively.

The market value of best effort rate lock commitments and best efforts forward delivery contracts is not readily ascertainable with

precision because the rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments.

Since the time between when a loan is locked under a best efforts contract and delivery of that loan to an investor is short, and the investor has committed to purchase the loan at an agreed-upon price, if it settles, we have concluded that the difference between the fair value of the loans and the fair value of the best efforts commitments is not expected to be material.

Two-way client loan swaps

During the fourth quarter of 2012, we entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which we enter into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on an identical notional amount at a fixed interest rate. At the same time, we agree to pay the counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our clients to effectively convert a variable rate loan into a fixed rate loan. Because we act as an intermediary for our customers, changes in the fair value of the underlying derivatives contracts offset each other and do not significantly impact our results of operations. The aggregate notional amount of these swap agreements with counterparties was $4.5 million as of December 31, 2012. The Company had no undesignated interest rate swaps at December 31, 2011.

Certain additional risks arise from interest rate swap contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. We do not expect any counterparty to fail to meet its obligations.

Information concerning two-way client interest rate swaps not designated as either fair value or cash flow hedges at December 31, 2012 is presented in the following table:

	December 31, 2012
	Positions (#)	Notional Amount		Asset		Liability		Receive Rate		Pay Rate		Life (Years)
Pay fixed - receive floating interest rate swap	1	$	4,459,209	$	—	$	80,000	'1 Mo. LIBOR plus 200 BP		3.90	%	14.9
Pay floating - receive fixed interest rate swap	1	$	4,459,209	$	80,000			3.90	%	'1 Mo. LIBOR plus 200 BP		14.9
Total derivatives not designated		$	8,918,418	$	80,000	$	80,000					14.9