Derivative Instruments

9 Months Ended

Sep. 30, 2012

Derivative Instruments [Abstract]

Derivative Instruments

Note K – Derivative Instruments

(In Thousands)

The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. In the first quarter of 2011, the Company began entering into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At September 30, 2012, the Company had notional amounts of $68,913 on interest rate contracts with corporate customers and $68,913 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts and certain fixed-rate loans.

In March and April 2012, the Company entered into two interest rate swap agreements effective September 30, 2014 and March 17, 2014, respectively. Beginning on the respective effective date, the Company will receive a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pay a fixed rate of interest. The agreements, which both terminate in March 2022, are accounted for as cash flow hedges to reduce the variability in cash flows resulting from changes in interest rates on $32,000 of the Company’s junior subordinated debentures. The interest rate swaps had a total fair value of $(2,234) at September 30, 2012.

In May 2010, the Company terminated two interest rate swaps, each designated as a cash flow hedge, designed to convert the variable interest rate on an aggregate of $75,000 of loans to a fixed rate. As of the termination date, there were $1,679 of deferred gains related to the swaps, which are being amortized into interest income over the designated hedging periods ending in August 2012 and August 2013, respectively. Deferred gains amortized into net interest income were $115 and $154 for the three months ended September 30, 2012 and 2011, respectively, and $419 and $457 for the nine months ended September 30, 2012 and 2011, respectively.

The Company enters into interest rate lock commitments with its customers to mitigate the interest rate risk associated with the commitments to fund fixed-rate residential mortgage loans. The notional amount of commitments to fund fixed-rate mortgage loans was $80,109 and $56,217 at September 30, 2012 and December 31, 2011, respectively. The Company also enters into forward commitments to sell residential mortgage loans to secondary market investors. The notional amount of commitments to sell residential mortgage loans to secondary market investors was $116,513 and $42,074 at September 30, 2012 and December 31, 2011, respectively.

The following table provides details on the Company’s derivative financial instruments:

	September 30, 2012			December 31, 2011
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivative assets:
Not designated as hedging instruments:
Interest rate contracts	Other Assets	$	3,360	Other Assets	$	2,132
Interest rate lock commitments	Other Assets		2,862	Other Assets		1,197
Totals		$	6,222		$	3,329
Derivative liabilities:
Designated as hedging instruments:
Interest rate swap	Other Liabilities	$	2,234	Other Liabilities	$	—
Totals		$	2,234		$	—
Not designated as hedging instruments:
Interest rate contracts	Other Liabilities	$	3,340	Other Liabilities	$	2,063
Forward commitments	Other Liabilities		1,819	Other Liabilities		427
Totals		$	5,159		$	2,490

Gains (losses) included in the Consolidated Statements of Income related to the Company’s derivative financial instruments were as follows:

	Three Months  Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Derivatives designated as hedging instruments:
Interest rate swaps (terminated May 2010):
Included in interest income on loans	$	115		$	154		$	419		$	457
Total	$	115		$	154		$	419		$	457
Derivatives not designated as hedging instruments:
Interest rate contracts:
Included in interest income on loans	$	583		$	203		$	1,466		$	363
Included in other noninterest expense		(14	)		—			20			—
Interest rate lock commitments:
Included in gains on sales of mortgage loans held for sale		1,145			1,324			1,667			1,478
Forward commitments
Included in gains on sales of mortgage loans held for sale		(2,684	)		(808	)		(3,626	)		(839	)
Total	$	(970	)	$	719		$	(473	)	$	1,002