Derivative Instruments and Balance Sheet Offsetting

In the normal course of business, the Corporation enters into various transactions involving derivative instruments to manage exposure to fluctuations in interest rates and to meet the financing needs of customers (customer-initiated derivatives). These financial instruments involve, to varying degrees, elements of market and credit risk. Market and credit risk are included in the determination of fair value.

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Corporation’s practice to enter into forward commitments for the future delivery of mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans.

The Corporation enters into interest rate derivatives to provide a service to certain qualifying customers to help facilitate their respective risk management strategies, customer-initiated derivatives, and, therefore, are not used for interest rate risk management purposes. The Corporation generally takes offsetting positions with dealer counterparts to mitigate the inherent risk. Income primarily results from the spread between the customer derivative and the offsetting dealer positions.

The Corporation additionally has written and purchased option derivatives consisting of instruments to facilitate an equity-linked time deposit product (the “Power Equity CD”). The Power Equity CD is a time deposit that provides the purchaser a guaranteed return of principal at maturity plus a potential equity return (a written option), while the Corporation receives a known stream of funds based on the equity return (a purchased option). The written and purchased options are mirror derivative instruments which are carried at fair value on the Consolidated Statements of Financial Position.

The following table presents the notional amount and fair value of the Corporation’s derivative instruments held or issued in connection with customer-initiated and mortgage banking activities.



	September 30, 2016						December 31, 2015
			Fair Value						Fair Value
(Dollars in thousands)	Notional Amount (1)		Gross Derivative Assets (2)		Gross Derivative Liabilities (2)		Notional Amount (1)		Gross Derivative Assets (2)		Gross Derivative Liabilities (2)
Customer-initiated and mortgage banking derivatives:
Customer-initiated derivatives	$	559,458	$	12,250	$	12,787	$	—	$	—	$	—
Forward contracts related to mortgage loans to be delivered for sale	197,874		89		944		33,787		144		57
Interest rate lock commitments	157,743		2,674		56		23,421		42		90
Power Equity CD	36,372		2,183		2,183		33,703		1,832		1,832
Total gross derivatives	$	951,447	$	17,196	$	15,970	$	90,911	$	2,018	$	1,979


(1)	Notional or contract amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the Consolidated Statements of Financial Position.


(2)	Derivative assets are included within “Other assets” and derivative liabilities are included within “Other liabilities” on the Consolidated Statements of Financial Position. Included in the fair value of the derivative assets are credit valuation adjustments for counterparty credit risk totaling $745 thousand at September 30, 2016 and $0 at December 31, 2015.

In the normal course of business, the Corporation may decide to settle a forward contract rather than fulfill the contract. Cash received or paid in this settlement manner is included in “Mortgage banking revenue” in the Consolidated Statements of Income and is considered a cost of executing a forward contract.

The following table presents the net gains (losses) related to derivative instruments reflecting the changes in fair value.



		Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	Location of Gain (Loss)	2016			2015			2016			2015
Forward contracts related to mortgage loans to be delivered for sale	Mortgage banking revenue	$	(156	)	$	(384	)	$	(798	)	$	(24	)
Interest rate lock commitments	Mortgage banking revenue	(179		)	308			307			39
Power Equity CD	Other noninterest income	—			—			—			—
Customer-initiated derivatives	Other noninterest income	(60		)	—			(60		)	—
Total gain (loss) recognized in income		$	(395	)	$	(76	)	$	(551	)	$	15

Methods and assumptions used by the Corporation in estimating the fair value of its forward contracts, interest rate lock commitments and customer-initiated derivatives are discussed in Note 9: Fair Value Measurements.

Balance Sheet Offsetting

Certain financial instruments, including customer-initiated derivatives, may be eligible for offset in the Consolidated Statements of Financial Position and/or subject to master netting arrangements or similar agreements. The Corporation is party to master netting arrangements with its financial institution counterparties; however, the Corporation does not offset assets and liabilities under these arrangements for financial statement presentation purposes based on an accounting policy election. The tables below present information about the Corporation’s financial instruments that are eligible for offset. There were no financial instruments eligible for offset as of December 31, 2015.



							Gross amounts not offset in the statements of financial position
(Dollars in thousands)	Gross amounts recognized		Gross amounts offset in the statements of financial condition		Net amounts presented in the statements of financial position		Financial instruments		Collateral (received)/posted		Net Amount
September 30, 2016
Offsetting derivative assets
Derivative assets	$	12,247	$	—	$	12,247	$	—	$	—	$	12,247
Offsetting derivative liabilities
Derivative liabilities	12,785		—		12,785		—		12,530		255