Derivative Financial Instruments

9 Months Ended

Sep. 30, 2012

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.  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, 2012 and December 31, 2011, 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, 2012
Interest rate swap contracts	$	460,471	Other assets	$	17,171	Other liabilities	$	17,520
Loan commitments	46,402		Mortgages held for sale	394		N/A	—
Forward contracts	43,000		N/A	—		Mortgages held for sale	666
Total	$	549,873		$	17,565		$	18,186
December 31, 2011
Interest rate swap contracts	$	453,428	Other assets	$	17,496	Other liabilities	$	17,945
Loan commitments	38,209		Mortgages held for sale	189		N/A	—
Forward contracts	21,247		N/A	—		Mortgages held for sale	218
Total	$	512,884		$	17,685		$	18,163

For the three and nine months ended September 30, 2012 and 2011, 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	2012			2011			2012			2011
Interest rate swap contracts	Other expense	$	21		$	230		$	100		$	47
Interest rate swap contracts	Other income	333			182			586			351
Loan commitments	Mortgage banking income	64			191			205			240
Forward contracts	Mortgage banking income	(350		)	(259		)	(448		)	(718		)
Total		$	68		$	344		$	443		$	(80	)