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Derivative Instruments and Hedging Activities
 6 Months Ended
Jun. 30, 2013
Derivative Instruments and Hedging Activities
Note 9. Derivative Instruments and Hedging Activities

The Company uses derivative instruments primarily to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. These derivatives may consist of interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another asset to the other party based on a notional amount and an underlying asset as specified in the contract. Derivative assets and liabilities are recorded at fair value on the balance sheet.

Like other financial instruments, derivatives contain an element of credit risk due to the possibility the Company may incur a loss if a counterparty fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Company’s Asset/Liability Management Committee.

The primary derivative instrument the Company uses is interest rate lock commitments (“IRLCs”). Generally, this instrument helps the Company meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors.

In the normal course of business, the Company sells originated mortgage loans into the secondary mortgage loan market. The Company enters into IRLCs to provide potential borrowers an interest rate guarantee. Once a mortgage loan is closed and funded, it is included within loans held for sale and awaits sale and delivery into the secondary market. From the loan closing date through the date of sale into the secondary market, the Company has exposure to interest rate movement resulting from the risk that interest rates will change from the rate quoted to the borrower. Due to these interest rate fluctuations, the Company’s balance of mortgage loans held for sale is subject to changes in fair value. Typically, the fair value of these loans decline when interest rates increase and rise when interest rates decrease.

 

The following table presents the aggregate contractual or notional amounts of derivative financial instruments as of the dates indicated:

 

     June 30, 2013      December 31, 2012      June 30, 2012  
(Amounts in thousands)                     

Derivatives not designated as hedges

         

IRLCs

    $ 9,072       $ 14,841       $ 16,604   

The following table presents the fair value of derivative financial instruments as of the dates indicated:

 

    

June 30, 2013

     

December 31, 2012

     

June 30, 2012

  
     Balance Sheet    Fair      Balance Sheet    Fair      Balance Sheet    Fair  
    

Location

    Value     

Location

    Value     

Location

    Value  
(Amounts in thousands)                                    

Asset derivatives

                  

Derivatives not designated as hedges

                  

IRLCs

    Other assets    $ 17       Other assets    $ 144       Other assets    $ 206   
     

 

 

        

 

 

        

 

 

  

Total

       $ 17          $ 144          $ 206   
     

 

 

        

 

 

        

 

 

  

Liability derivatives

                  

Derivatives not designated as hedges

                  

IRLCs

    Other liabilities    $ 163       Other liabilities    $ 16       Other liabilities    $ 2   
     

 

 

        

 

 

        

 

 

  

Total

       $ 163          $ 16          $ 2   
     

 

 

        

 

 

        

 

 

  

Effect of Derivatives and Hedging Activities on the Income Statement. For the three and six months ended June 30, 2013 and 2012, the Company determined there was no amount of ineffectiveness on cash flow hedges. The following table details gains and losses recognized in income on derivatives for the dates indicated:

 

          Three Months Ended      Six Months Ended  
     Income Statement    June 30,      June 30,  
(Amounts in thousands)    Location    2013     2012      2013     2012  

Derivatives not designated as hedges

             

IRLCs

    Other income    $ (439 )    $ 161       $ (435 )    $ 76   
     

 

 

    

 

 

     

 

 

    

 

 

  

Total

       $ (439 )    $ 161       $ (435 )    $ 76