Note 4. Derivatives

Risk Management Objective of Using Derivatives

The Company enters into derivative financial instruments to manage risks related to differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments, currently related to our variable rate borrowing and fixed rate loans. The Company has also entered into interest rate derivative agreements as a service to certain qualifying customers. The Company manages a matched book with respect to its customer derivatives in order to minimize its net risk exposure resulting from such agreements.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value (in thousands) of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of December 31, 2011 and December 31, 2010.


Tabular Disclosure of Fair Values of Derivative Instruments
	Asset Derivatives							Liability Derivatives
	As of December 31, 2011			As of December 31, 2010				As of December 31, 2011				As of December 31, 2010
	Balance Sheet Location	Fair Value		Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Interest rate products	Other assets	$	—		Other assets	$	—		Other liabilities	$	107		Other liabilities	$	—

Total derivatives designated as hedging instruments		$	—			$	—			$	107			$	—

Derivatives not designated as hedging instruments
Interest rate products	Other assets	$	14,952		Other assets	$	2,952		Other liabilities	$	15,536		Other liabilities	$	2,952

Total derivatives not designated as hedging instruments		$	14,952			$	2,952			$	15,536			$	2,952

Cash Flow Hedges of Interest Rate Risk

The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of the Company's variable-rate borrowings, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. As of December 31, 2011, the Company had one interest rate swap with an aggregate notional amount of $140.0 million that was designated as a cash flow hedge of the Company's forecasted variable cash flows under a variable-rate term loan agreement. The Company did not have any cash flow hedges outstanding at December 31, 2010 or during 2010.

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The impact on AOCI during 2011 was insignificant, and the impact of reclassifications on earnings during 2012 is expected to also be insignificant. The ineffective portion of the change in fair value of derivatives is recognized directly in earnings. No hedge ineffectiveness was recognized during the year ended December 31, 2011.

Derivatives Not Designated as Hedges

Derivatives not designated as hedges are not speculative and result from a service the Banks provide to certain customers. The Banks execute interest rate derivatives, primarily rate swaps, with commercial banking customers to facilitate their risk management strategies. The Banks simultaneously enter into offsetting agreements with unrelated financial institutions, thereby minimizing its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. As of December 31, 2011, the Banks had entered into interest rate derivatives, including both customer and offsetting agreements, with an aggregate notional amount of $541.8 million related to this program.

Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company's derivative financial instruments (in thousands) on the income statement for the years ended December 31, 2011 and December 31, 2010, respectively.


Derivatives in FASB ASC 815 Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) Year Ended					Gain or (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Year Ended				Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) Year Ended




	31-Dec-11			31-Dec-10			31-Dec-11		31-Dec-10			31-Dec-11		31-Dec-10
Interest Rate Products	$	(107	)	$	—	Interest income Other non- interest income	$	—	$	—	Other non-interest income	$	—	$	—

Total	$	(107	)	$	—		$	—	$	—		$	—	$	—


Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Year Ended




		31-Dec-11			31-Dec-10
Interest Rate Products	Other non-interest income	$	(315	)	$	—

Total		$	(315	)	$	—

Credit Risk-Related Contingent Features

Certain of the Banks' derivative instruments contain provisions allowing the financial institution counterparty to terminate the contracts in certain circumstances, such as the downgrade of the Banks' credit ratings below specified levels, a default by the Bank on its indebtedness, or the failure of a Bank to maintain specified minimum regulatory capital ratios or its regulatory status as a well-capitalized institution. These derivative agreements also contain provisions regarding the positing of collateral by each party. The aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a liability position on December 31, 2011 was $12.2 million, for which the Bank's had posted collateral of $11.6 million.