Derivative Financial Instruments

6 Months Ended

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

			Asset derivatives			Liability derivatives
(Dollars in thousands)	Notional or contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification	Fair value
June 30, 2013
Interest rate swap contracts	$	423,397	Other assets	$	10,740	Other liabilities	$	10,945
Loan commitments	14,438		Mortgages held for sale	153		N/A	—
Forward contracts	19,600		Mortgages held for sale	764		N/A	—
Total	$	457,435		$	11,657		$	10,945
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 six months ended June 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)
	Statement of	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	Income classification	2013			2012			2013			2012
Interest rate swap contracts	Other expense	$	83		$	4		$	113		$	79
Interest rate swap contracts	Other income	204			214			398			253
Loan commitments	Mortgage banking income	(111		)	(72		)	(67		)	141
Forward contracts	Mortgage banking income	780			(374		)	797			(98		)
Total		$	956		$	(228	)	$	1,241		$	375

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

	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Assets Presented in		Gross Amounts Not Offset in the Statement of Financial Position
(Dollars in thousands)	Recognized Assets		Statement of Financial Position		the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
June 30, 2013
Interest Rate Swaps	$	11,523	$	783	$	10,740	$	—	$	—	$	10,740
December 31, 2012
Interest Rate Swaps	$	17,422	$	1,296	$	16,126	$	—	$	—	$	16,126

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

	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Liabilities Presented in		Gross Amounts Not Offset in the Statement of Financial Position
(Dollars in thousands)	Recognized Liabilities		Statement of Financial Position		the Statement of Financial Position		Financial Instruments		Cash Collateral Pledged		Net Amount
June 30, 2013
Interest Rate Swaps	$	11,728	$	783	$	10,945	$	—	$	9,984	$	961
December 31, 2012
Interest Rate Swaps	$	17,740	$	1,296	$	16,444	$	—	$	15,811	$	633