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Derivative financial instruments
9 Months Ended
Sep. 30, 2011
Derivative financial instruments [Abstract] 
Derivative financial instruments
10. Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts is not significant as of September 30, 2011.

The net effect of interest rate swap agreements was to increase net interest income by $9 million and $10 million for the three-month periods ended September 30, 2011 and 2010, respectively, and $28 million and $32 million for the nine months ended September 30, 2011 and 2010, respectively. Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:

 

                                 
    Notional
amount
    Average
maturity
    Weighted-
average rate
 
        Fixed     Variable  
    (in thousands)     (in years)              

September 30, 2011

                               

Fair value hedges:

                               

Fixed rate long-term borrowings (a)

  $ 900,000       5.6       6.07     1.87
   

 

 

   

 

 

   

 

 

   

 

 

 
         

December 31, 2010

                               

Fair value hedges:

                               

Fixed rate long-term borrowings (a)

  $ 900,000       6.4       6.07     1.84
   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Under the terms of these agreements, the Company receives settlement amounts at a fixed rate and pays at a variable rate.

 

The Company utilizes commitments to sell residential and commercial real estate loans to hedge the exposure to changes in the fair value of real estate loans held for sale. Such commitments have generally been designated as fair value hedges. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in fair value of certain commitments to originate real estate loans for sale.

Derivative financial instruments used for trading purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading purposes had notional values of $13.6 billion and $12.8 billion at September 30, 2011 and December 31, 2010, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes aggregated $1.3 billion and $769 million at September 30, 2011 and December 31, 2010, respectively.

Information about the fair values of derivative instruments in the Company’s consolidated balance sheet and consolidated statement of income follows:

 

                                 
    Asset derivatives     Liability derivatives  
    Fair value     Fair value  
    September 30,
2011
    December 31,
2010
    September 30,
2011
    December 31,
2010
 
    (in thousands)  

Derivatives designated and qualifying as hedging instruments

                               

Fair value hedges:

                               

Interest rate swap agreements (a)

  $ 148,764       96,637     $ —         —    

Commitments to sell real estate loans (a)

    104       4,880       1,703       1,062  
   

 

 

   

 

 

   

 

 

   

 

 

 
      148,868       101,517       1,703       1,062  
         

Derivatives not designated and qualifying as hedging instruments

                               

Mortgage-related commitments to originate real estate loans for sale (a)

    7,997       2,827       60       583  

Commitments to sell real estate loans (a)

    196       10,322       3,820       1,962  

Trading:

                               

Interest rate contracts (b)

    460,533       345,632       434,844       321,461  

Foreign exchange and other option and futures contracts (b)

    25,855       11,267       23,376       11,761  
   

 

 

   

 

 

   

 

 

   

 

 

 
      494,581       370,048       462,100       335,767  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Total derivatives

  $ 643,449       471,565     $ 463,803       336,829  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Asset derivatives are reported in other assets and liability derivatives are reported in other liabilities.
(b) Asset derivatives are reported in trading account assets and liability derivatives are reported in other liabilities.

 

      $42,587       $42,587       $42,587       $42,587  
    Amount of unrealized gain (loss) recognized  
    Three months ended
September  30, 2011
    Three months ended
September  30, 2010
 
  Derivative     Hedged item     Derivative     Hedged item  
    (in thousands)  

Derivatives in fair value hedging relationships

                               
         

Interest rate swap agreements:

                               

Fixed rate long-term borrowings (a)

  $ 42,587       (40,355   $ 28,281       (27,166
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Derivatives not designated as hedging instruments

                               
         

Trading:

                               

Interest rate contracts (b)

  $ 2,425             $ 813          

Foreign exchange and other option and futures contracts (b)

    1,764               (1,532        
   

 

 

           

 

 

         
         

Total

  $ 4,189             $ (719        
   

 

 

           

 

 

         
   
    Amount of unrealized gain (loss) recognized  
    Nine months ended
September  30, 2011
    Nine months ended
September  30, 2010
 
  Derivative     Hedged item     Derivative     Hedged item  
    (in thousands)  

Derivatives in fair value hedging relationships

                               
         

Interest rate swap agreements:

                               

Fixed rate time deposits (a)

  $ —         —       $ (503     503  

Fixed rate long-term borrowings (a)

    52,127       (49,452     84,708       (80,827
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Total

  $ 52,127       (49,452   $ 84,205       (80,324
   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as hedging instruments

                               
         

Trading:

                               

Interest rate contracts (b)

  $ 3,901             $ (305        

Foreign exchange and other option and futures contracts (b)

    473               (575        
   

 

 

           

 

 

         
         

Total

  $ 4,374             $ (880        
   

 

 

           

 

 

         

 

(a) Reported as other revenues from operations.
(b) Reported as trading account and foreign exchange gains.

 

In addition, the Company also has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately $10 million and $17 million at September 30, 2011 and December 31, 2010, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

The aggregate fair value of derivative financial instruments in a net liability position at September 30, 2011 for which the Company was required to post collateral was $321 million. The fair value of collateral posted for such instruments was $285 million. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt rating were to fall below specified ratings, the counterparties to the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit-risk-related contingent features in a net liability position on September 30, 2011 was $105 million, for which the Company had posted collateral of $71 million in the normal course of business. If the credit-risk-related contingent features had been triggered on September 30, 2011, the maximum amount of additional collateral the Company would have been required to post to counterparties was $34 million.

The Company’s credit exposure with respect to the estimated fair value as of September 30, 2011 of interest rate swap agreements used for managing interest rate risk has been substantially mitigated through master netting arrangements with trading account interest rate contracts with the same counterparties as well as counterparty postings of $78 million of collateral with the Company. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit standards and often contain collateral provisions.