Derivative Financial Instruments

9 Months Ended

Sep. 30, 2013

Derivative Financial Instruments

Derivative Financial Instruments

Note 8.       Derivative Financial Instruments

Commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments.  See Note 7 for further information.

The Company has certain interest rate derivative positions that are not designated as hedging instruments.  Derivative assets and liabilities are recorded at fair value on the balance sheet and do take into account the effects of master netting agreements.  Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  In connection with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate.  At the same time, the Company agrees 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 the client to effectively convert a variable rate loan to a fixed rate.  Because the terms of the swaps with the customers and the other financial institutions 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 the Company’s results of operations.

At September 30, 2013 and December 31, 2012, the amounts of non-hedging derivative financial instruments are shown in the chart below:

			Asset derivatives			Liability derivatives
	Notional or		Statement of			Statement of
	contractual		Financial Condition	Fair		Financial Condition	Fair
(Dollars in thousands)	amount		classification	value		classification	value
September 30, 2013
Interest rate swap contracts	$	445,258	Other assets	$	10,902	Other liabilities	$	11,110
Loan commitments	8,497		Mortgages held for sale	82		N/A	—
Forward contracts	12,000		N/A	—		Mortgages held for sale	179
Total	$	465,755		$	10,984		$	11,289
December 31, 2012
Interest rate swap contracts	$	446,024	Other assets	$	16,126	Other liabilities	$	16,444
Loan commitments	33,961		Mortgages held for sale	220		N/A	—
Forward contracts	21,500		N/A	—		Mortgages held for sale	33
Total	$	501,485		$	16,346		$	16,477

For the three and nine months ended September 30, 2013 and 2012, the amounts included in the consolidated statements of income for non-hedging derivative financial instruments are shown in the chart below:

		Gain (loss)
		Three Months Ended						Nine Months Ended
	Statement of	September 30,						September 30,
(Dollars in thousands)	Income classification	2013			2012			2013			2012
Interest rate swap contracts	Other expense	$	(2	)	$	21		$	111		$	100
Interest rate swap contracts	Other income	169			333			567			586
Loan commitments	Mortgage banking income	(71		)	64			(138		)	205
Forward contracts	Mortgage banking income	(943		)	(350		)	(146		)	(448		)
Total		$	(847	)	$	68		$	394		$	443

At September 30, 2013 and December 31, 2012 the offsetting of financial assets and derivative assets are shown in the chart below:

	Gross		Gross Amounts		Net Amounts of		Gross amounts not offset in the
	Amounts of		Offset in the		Assets Presented in		Statement of Financial Position
	Recognized		Statement of		the Statement of		Financial		Cash Collateral
(Dollars in thousands)	Assets		Financial Position		Financial Position		Instruments		Received		Net Amount
September 30, 2013
Interest rate swaps	$	11,586	$	684	$	10,902	$	—	$	—	$	10,902
December 31, 2012
Interest rate swaps	$	17,422	$	1,296	$	16,126	$	—	$	—	$	16,126

At September 30, 2013 and December 31, 2012 the offsetting of financial liabilities and derivative liabilities are shown in the chart below:

	Gross		Gross Amounts		Net Amounts of		Gross amounts not offset in the
	Amounts of		Offset in the		Liabilities Presented in		Statement of Financial Position
	Recognized		Statement of		the Statement of		Financial		Cash Collateral
(Dollars in thousands)	Liabilities		Financial Position		Financial Position		Instruments		Pledged		Net Amount
September 30, 2013
Interest rate swaps	$	11,794	$	684	$	11,110	$	—	$	9,407	$	1,703
Repurchase agreements	110,491		—		110,491		110,491		—		—
Total	$	122,285	$	684	$	121,601	$	110,491	$	9,407	$	1,703
December 31, 2012
Interest rate swaps	$	17,740	$	1,296	$	16,444	$	—	$	15,811	$	633
Repurchase agreements	100,180		—		100,180		100,180		—		—
Total	$	117,920	$	1,296	$	116,624	$	100,180	$	15,811	$	633

If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.