Derivative Financial Instruments

6 Months Ended

Jun. 30, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 10: Derivative Financial Instruments

At June 30, 2012, we held interest rate swaps with a combined notional amount of $20 million that were designated as cash flow hedges. The swaps were used to convert the floating rate interest on our trust preferred issuance to a fixed rate of interest.  The purpose of the hedge was to protect us from the risk of variability arising from the floating rate interest on the debentures.  The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges is reported in other comprehensive income and reclassified to earnings if gains or losses are realized.  Each quarter, we assess the effectiveness of the hedging relationships by comparing the changes in cash flows of the derivative hedging instruments with the changes in cash flows of the designated hedged item.  The ineffective portion of changes in the fair value of the derivatives is recognized directly in earnings.  There was no ineffective portion recognized in earnings during the second quarter of 2012 or 2011.  The fair values of the effective portion of the hedges of $(1.28) million and $(1.41) million were reflected in Other Comprehensive Income in the accompanying Consolidated Balance Sheets at June 30, 2012 and December 31, 2011, respectively.

At June 30, 2012, we had two interest rate derivative positions, with a combined notional amount of $29.12 million that were not designated as hedging instruments.  These derivative positions related to a transaction in which we entered into an interest rate swap with a customer while at the same time entering into an offsetting rate swap with another financial institution.  In connection with the transaction, we agreed to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate.  At the same time, we agreed to pay another financial institution 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 customers to effectively convert a variable-rate loan to a fixed-rate loan.  Because the terms of the swap with our customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact our results of operations.  The fair value of $488 thousand and $206 thousand at June 30, 2012 and December 31, 2011, respectively, was reflected in other assets and other liabilities in the accompanying Consolidated Balance Sheets. We assessed our counterparty risk at June 30, 2012 and determined any credit risk inherent in our derivative contracts was insignificant. Information about the fair value of derivative financial instruments can be found in Footnote 9 to these Consolidated Financial Statements.