Derivative Financial Instruments

12 Months Ended

Dec. 31, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS

At December 31, 2011 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 are 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 2011, 2010 or 2009. The fair value of ($1.41) million and ($1.22) million was reflected in Other Comprehensive Income in the accompanying Consolidated Balance Sheets at December 31, 2011 and December 31, 2010, respectively.

At December 31, 2011 we had one interest rate derivative position, with a notional amount of $14.80 million that was not designated as a hedging instrument. This derivative position 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 no significantly impact our results of operations. There were no non-hedging derivative financial instruments outstanding at December 31, 2010. The fair value of $206 thousand was reflected in other assets and other liabilities in the accompanying Consolidated Balance Sheets at December 31, 2011. We assessed our counterparty risk at December 31, 2011 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 16 to these Consolidated Financial Statements.