Derivative Instruments

9 Months Ended

Sep. 30, 2011

Derivative Instruments

Derivative Instruments

Note 12. Derivative Instruments

The following table summarizes the notional amounts of derivative instruments as of September 30, 2011, December 31, 2010 and September 30, 2010.  The notional amount of the contract is not recorded on the consolidated balance sheets, but is used as the basis for determining the amount of interest payments to be exchanged between the counterparties.

Notional Amounts of Derivative Instruments

(in millions)	September 30, 2011		December 31, 2010		September 30, 2010
Derivatives designated as hedging instruments
Interest rate swaps - fair value:
Certificates of deposit	$	—	$	10.0	$	10.0
Long-term and subordinated debt	207.4		355.9		356.8
Total fair value contracts	$	207.4	$	365.9	$	366.8
Interest rate swaps - cash flow:
Prime based loans	$	—	$	—	$	50.0
Total derivatives designated as hedging instruments	$	207.4	$	365.9	$	416.8
Derivatives not designated as hedging instruments
Interest rate contracts:
Swaps	$	1,293.2	$	1,043.8	$	972.5
Interest-rate caps, floors and collars	245.4		84.5		87.4
Options purchased	2.0		2.0		2.0
Options written	2.0		2.0		2.0
Total interest-rate contracts	$	1,542.6	$	1,132.3	$	1,063.9
Foreign exchange contracts:
Spot and forward contracts	$	142.9	$	78.2	$	217.4
Options purchased	—		—		14.5
Options written	—		—		14.5
Total foreign exchange contracts	$	142.9	$	78.2	$	246.4
Total derivatives not designated as hedging instruments	$	1,685.5	$	1,210.5	$	1,310.3

The following table summarizes the fair value and balance sheet classification of derivative instruments as of September 30, 2011, December 31, 2010 and September 30, 2010. If a counterparty fails to perform, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset.

Fair Values of Derivative Instruments

	September 30, 2011				December 31, 2010				September 30, 2010
(in millions) (1)	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments
Interest rate swaps - fair value:
Certificates of deposit	$	—	$	—	$	0.3	$	—	$	0.5	$	—
Long-term and subordinated debt	10.5		—		19.8		—		27.4		—
Total fair value contracts	$	10.5	$	—	$	20.1	$	—	$	27.9	$	—
Interest rate swaps - cash flow:
Prime based loans	$	—	$	—	$	—	$	—	$	0.3	$	—
Total derivatives designated as hedging instruments	$	10.5	$	—	$	20.1	$	—	$	28.2	$	—
Derivatives not designated as hedging instruments
Interest rate contracts:
Swaps	$	49.3	$	50.6	$	25.7	$	25.7	$	36.8	$	37.8
Interest-rate caps, floors and collars	0.4		0.4		0.5		0.5		0.7		0.7
Options purchased	0.1		0.1		0.2		0.2		0.1		0.1
Total interest-rate contracts	$	49.8	$	51.1	$	26.4	$	26.4	$	37.6	$	38.6
Option contracts	$	1.1	$	—	$	—	$	—	$	—	$	—
Foreign exchange contracts:
Spot and forward contracts	$	2.3	$	2.4	$	1.3	$	1.0	$	4.9	$	4.7
Options written	—		—		—		—		0.3		0.3
Total foreign exchange contracts	$	2.3	$	2.4	$	1.3	$	1.0	$	5.2	$	5.0
Total derivatives not designated as hedging instruments	$	53.2	$	53.5	$	27.7	$	27.4	$	42.8	$	43.6

(1)Derivative assets include the estimated gain to settle a derivative contract net of cash collateral received from counterparties plus net interest receivable.  Derivative liabilities include the estimated loss to settle a derivative contract.

Derivatives Designated as Hedging Instruments

As of September 30, 2011, the Company had $207.4 million notional amount of interest-rate swap hedge transactions, all of which were designated as fair value hedges. There were no cash flow hedges at September 30, 2011. The positive fair value of the fair value hedges of $10.5 million is recorded in other assets.  It includes a mark-to-market asset of $11.2 million and net interest receivable of $1.1 million, less $1.8 million of cash collateral received from a counterparty. The balance of borrowings reported in the consolidated balance sheet includes an $11.2 million mark-to-market adjustment associated with interest-rate hedge transactions. AOCI includes a net deferred gain of $0.3 million related to cash flow hedges that were terminated in 2010 prior to their maturity dates for which the hedged transactions had yet to occur.

As of December 31, 2010, the Company had $365.9 million notional amount of interest-rate swap hedge transactions, all of which were designated as fair value hedges. There were no cash flow hedges outstanding at December 31, 2010. The positive fair value of the fair value hedges of $20.1 million is recorded in other assets. It includes a mark-to-market asset of $21.4 million and net interest receivable of $1.8 million, less $3.1 million of cash collateral received from a counterparty.  The balance of deposits and borrowings reported in the consolidated balance sheet include a $21.4 million mark-to-market adjustment associated with interest-rate hedge transactions. AOCI includes a net deferred gain of $1.2 million related to cash flow hedges that were terminated in 2010 prior to their maturity dates for which the hedged transactions had yet to occur.

As of September 30, 2010, the Company had $416.8 million notional amount of interest-rate swap hedge transactions, of which $366.8 million were designated as fair value hedges and $50.0 million were designated as cash flow hedges. The positive fair value of the fair value hedges of $27.9 million is recorded in other assets. It includes a mark-to-market asset of $26.0 million and net interest receivable of $1.9 million. The balance of deposits and borrowings reported in the consolidated balance sheet include a $26.0 million mark-to-market adjustment associated with interest-rate hedge transactions. The net positive fair value of cash flow hedges of variable-rate loans of $0.3 million includes a mark-to-market asset of $0.2 million and interest receivable of $0.1 million. AOCI includes $0.1 million, after tax, related to the net positive fair value of cash flow hedges at September 30, 2010. AOCI also includes a net deferred gain of $2.1 million related to cash flow hedges that were terminated in 2010 prior to their maturity dates for which the hedged transactions had yet to occur.

The periodic net settlement of interest-rate swaps is recorded as an adjustment to interest income or interest expense.  The impact of interest-rate swaps on interest income and interest expense for the three and nine months ended September 30, 2011 and 2010 is provided below:

(in millions) Derivative Instruments Designated as	Location in Consolidated	For the three months ended September 30,						For the nine months ended September 30,
Hedging Instruments	Statements of Income	2011			2010			2011			2010
Interest-rate swaps-fair value	Interest expense	$	(3.5	)	$	(4.2	)	$	(12.0	)	$	(13.0	)
Interest-rate swaps-cash flow	Interest income	0.1			1.9			0.9			7.4
Total income		$	3.6		$	6.1		$	12.9		$	20.4

Fair value and cash flow interest-rate swaps increased net interest income by $3.6 million and $12.9 million for the three and nine months ended September 30, 2011, respectively, and increased net interest income by $6.1 million and $20.4 million for the same periods in 2010.

Changes in fair value of the effective portion of cash flow hedges are reported in AOCI. When the cash flows associated with the hedged item are realized, the gain or loss included in AOCI is recognized in Interest income on loans and leases, the same location in the consolidated statements of income as the income on the hedged item. There were no cash flow hedges outstanding during the nine months ended September 30, 2011, accordingly, the gains on cash flow hedges reclassified from AOCI to interest income for the three and nine months ended September 30, 2011 of $0.1 million and $0.9 million, respectively, represent the amortization of deferred gains on terminated cash flow hedges. The amount of gains on cash flow hedges reclassified from AOCI to interest income for the three and nine months ended September 30, 2010 was $1.9 million and $7.4 million, respectively.  Within the next 12 months, $0.2 million of other comprehensive income, representing the amortization of deferred gains on terminated cash flow swaps, is expected to be reclassified into interest income. Any ineffective portion of the changes of fair value of cash flow hedges is recognized immediately in Other noninterest income in the consolidated statements of income.

The amount of after-tax loss on cash flow hedges recognized in AOCI was $2.2 million for the nine months ended September 30, 2010 and includes the loss on the change in fair value of cash flow hedges as well as deferred gains on the early termination of cash flow swaps.

Derivatives Not Designated as Hedging Instruments

Derivative contracts not designated as hedges are composed primarily of interest rate contracts with clients that are offset by paired trades with unrelated bank counterparties and foreign exchange contracts. Derivative contracts not designated as hedges are marked-to-market each reporting period with changes in fair value recorded as a part of Noninterest income in the consolidated statements of income.  The table below provides the amount of gains and losses on these derivative contracts for the three and nine months ended September 30, 2011 and 2010:

(in millions) Derivatives Not Designated	Location in Consolidated	For the three months ended September 30,						For the nine months ended September 30,
as Hedging Instruments	Statements of Income	2011			2010			2011			2010
Interest-rate contracts	Other noninterest income	$	(1.0	)	$	(0.4	)	$	(1.3	)	$	(1.3	)
Option contracts	Other noninterest income	0.6			—			0.5			(0.1		)
Foreign exchange contracts	International services income	7.1			5.2			18.4			15.7
Total income		$	6.7		$	4.8		$	17.6		$	14.3

Credit Risk Exposure and Collateral

The Company’s swap agreements require the deposit of cash or marketable debt securities as collateral based on certain risk thresholds. These requirements apply individually to the Corporation and to the Bank. Additionally, certain of the Company’s swap contracts contain security agreements that include credit-risk-related contingent features. Under these agreements, the collateral requirements are based on the Company’s credit rating from the major credit rating agencies. The amount of collateral required may vary by counterparty based on a range of credit ratings that correspond with exposure thresholds established in the derivative agreements. If the credit rating on the Company’s debt were to fall below the level associated with a particular exposure threshold and the derivatives with a counterparty are in a net liability position that exceeds that threshold, the counterparty could request immediate payment or delivery of collateral for the difference between the net liability amount and the exposure threshold. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on September 30, 2011 was $26.6 million. The Company delivered collateral valued at $18.5 million on swap agreements that had credit-risk contingent features and were in a net liability position at September 30, 2011.

The Company’s interest-rate swaps had $4.7 million, $5.3 million and $5.5 million of credit risk exposure at September 30, 2011, December 31, 2010 and September 30, 2010, respectively. The credit exposure represents the cost to replace, on a present value basis and at current market rates, all contracts by trading counterparty having an aggregate positive market value, net of margin collateral received. The Company enters into master netting agreements with swap counterparties to mitigate credit risk. Under these agreements, the net amount due from or payable to each counterparty is settled on the contract payment date.  Collateral in the form of securities valued at $6.5 million, $9.7 million and $14.5 million had been received from swap counterparties at September 30, 2011, December 31, 2010 and September 30, 2010, respectively.  The Company delivered collateral valued at $22.7 million on swap agreements that did not have credit-risk contingent features at September 30, 2011.