Derivative Financial Instruments

12 Months Ended

Dec. 31, 2012

Derivative Financial Instruments

NOTE P--DERIVATIVE FINANCIAL INSTRUMENTS

United uses derivative instruments to help aid against adverse prices or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives may consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. United also executes derivative instruments with its commercial banking customers to facilitate its risk management strategies.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. As of December 31, 2012, United has only fair value hedges. United’s cash flow hedge matured in December of 2010.

For the years ended December 31, 2012 and 2011, the derivative portfolio also included derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. Gains and losses on other derivative financial instruments are included in noninterest income and noninterest expense, respectively.

The following table sets forth certain information regarding interest rate derivatives portfolio used for interest-rate risk management purposes and designated as accounting hedges at December 31, 2012 and 2011.

	Derivative Hedging Instruments
	December 31, 2012				December 31, 2011
(Dollars in thousands)	Notional Amount		Average Pay Rate		Notional Amount		Average Pay Rate
Fair Value Hedges:
Pay Fixed Swap (Hedging Commercial Loans)	$	52,558		5.14%	$	13,045		6.27%
Total Derivatives Used in Fair Value Hedges	$	52,558			$	13,045
Total Derivatives Used for Interest Rate Risk Management and Designated as Hedges	$	52,558			$	13,045

The following tables summarize the fair value of United’s derivative financial instruments:

	Asset Derivatives
	December 31, 2012			December 31, 2011
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments
Interest rate contracts	Other assets	$	2,367	Other assets	$	3,817
Total derivatives not designated as hedging instruments		$	2,367		$	3,817
Total asset derivatives		$	2,367		$	3,817

	Liability Derivatives
	December 31, 2012				December 31, 2011
(In thousands)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Interest rate contracts		Other liabilities	$	1,914		Other liabilities	$	1,233
Total derivatives designated as hedging instruments			$	1,914			$	1,233
Derivatives not designated as hedging instruments
Interest rate contracts		Other liabilities	$	2,367		Other liabilities	$	3,817
Total derivatives not designated as hedging instruments			$	2,367			$	3,817
Total liability derivatives			$	4,281			$	5,050

Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. United’s exposure is limited to the replacement value of the contracts rather than the notional amount of the contract. The Company’s agreements generally contain provisions that limit the unsecured exposure up to an agreed upon threshold. Additionally, the Company attempts to minimize credit risk through certain approval processes established by management.

The effect of United’s derivative financial instruments on its Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010 is presented as follows:

		Year Ended
(In thousands)	Income Statement Location	December 31, 2012		December 31, 2011		December 31, 2010
Derivatives in fair value hedging relationships
Interest rate contracts	Interest income/(expense)	$	(298)	$	81	$	86
Total derivatives in fair value hedging relationships		$	(298)	$	81	$	86
Derivatives not designated as hedging instruments
Interest rate contracts (1)	Other income	$	1,450	$	1,782	$	3,654
Interest rate contracts (2)	Other expense	$	(1,450)	$	(1,782)	$	(3,654)
Total derivatives not designated as hedging instruments		$	0	$	0	$	0
Total derivatives		$	(298)	$	81	$	86

(1) Represents net gains from derivative assets not designated as hedging instruments.

(2) Represents net losses from derivative liabilities not designated as hedging instruments.

For the years ended December 31, 2012 and 2011, changes in the fair value of any interest rate swaps attributed to hedge ineffectiveness were not significant to United’s Consolidated Statements of Income. For the year ended December 31, 2010, $4,999,000 in net deferred gains, net of tax, related to the matured cash flow hedge were recorded in accumulated other comprehensive income. Because the cash flow hedge matured, there were no net deferred gains or losses remaining in accumulated other comprehensive income at December 31, 2012 and 2011.