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. These derivatives primarily consist of interest rate swaps, interest rate caps and floors, and foreign exchange contracts. 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. Gains and losses on customer-related derivatives are included in other noninterest income.

The Corporation utilizes interest rate swaps designated as cash flow hedges for risk management purposes to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. These interest rate swaps designated as cash flow hedges are used to manage differences in the amount, timing and duration of the Corporation's known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. The Corporation assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative instruments with the changes in cash flows of the designated hedged transactions. The effective portion of changes in fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Corporation expects the hedges to remain highly effective during the remaining terms of the swaps.

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, 2017						December 31, 2016
			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)
Risk management purposes:
Derivatives designated as hedging instruments:
Interest rate swaps	$	520,000	$	1,174	$	109	$	—	$	—	$	—
Total risk management purposes	520,000		1,174		109		—		—		—
Customer-initiated and mortgage banking derivatives:
Customer-initiated derivatives	1,059,921		8,719		9,274		600,598		4,406		4,141
Foreign exchange forwards	4,000		60		55		—		—		—
Forward contracts related to mortgage loans to be delivered for sale	180,961		660		—		140,155		635		—
Interest rate lock commitments	106,649		1,799		—		76,034		956		—
Power Equity CD	38,748		2,301		2,301		36,807		2,218		2,218
Total customer-initiated and mortgage banking derivatives	1,390,279		13,539		11,630		853,594		8,215		6,359
Total gross derivatives	$	1,910,279	$	14,713	$	11,739	$	853,594	$	8,215	$	6,359


(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 "Interest receivable and other assets" and derivative liabilities are included within "Interest payable and 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 $576 thousand at September 30, 2017 and $99 thousand at December 31, 2016.

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 "net gain on sale of loans and other 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)	2017			2016			2017			2016
Forward contracts related to mortgage loans to be delivered for sale	Net gain (loss) on sale of loans and other mortgage banking revenue	$	43		$	(156	)	$	25		$	(798	)
Interest rate lock commitments	Net gain (loss) on sale of loans and other mortgage banking revenue	(198		)	(179		)	843			307
Foreign exchange forwards	Other noninterest income	5			—			5			—
Customer-initiated derivatives	Other noninterest income	(39		)	(60		)	(820		)	(60		)
Total gain (loss) recognized in income		$	(189	)	$	(395	)	$	53		$	(551	)

The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to interest rate swaps designated as cash flow hedges for the three and nine months ended September 30, 2017.



(Dollars in thousands)	Amount of gain (loss) recognized in other comprehensive income (Effective portion)		Amount of gain (loss) reclassified from other comprehensive income to interest income or expense (Effective portion)			Amount of gain (loss) recognized in other noninterest income (Ineffective portion)
Three Months Ended September 30, 2017
Interest rate swaps designated as cash flow hedges	$	751	$	(575	)	$	(3	)
Nine Months Ended September 30, 2017
Interest rate swaps designated as cash flow hedges	$	694	$	(984	)	$	(3	)

At September 30, 2017, the Corporation expected $1.1 million of unrealized losses to be reclassified as an increase to interest expense during the following twelve months.

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 3: Fair Value Measurements.

Balance Sheet Offsetting

Certain financial instruments, including customer-initiated derivatives and interest rate swaps, 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.



							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, 2017
Offsetting derivative assets
Derivative assets	$	9,932	$	—	$	9,932	$	—	$	—	$	9,932
Offsetting derivative liabilities
Derivative liabilities	9,438		—		9,438		—		7,161		2,277
December 31, 2016
Offsetting derivative assets
Derivative assets	$	4,405	$	—	$	4,405	$	—	$	—	$	4,405
Offsetting derivative liabilities
Derivative liabilities	4,141		—		4,141		—		2,550		1,591