Derivative financial instruments

9 Months Ended

Sep. 30, 2012

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, 2012.

The net effect of interest rate swap agreements was to increase net interest income by $9 million for each of the three-month periods ended September 30, 2012 and 2011, and $27 million and $28 million for the nine months ended September 30, 2012 and 2011, 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:

					Weighted-
	Notional		Average		average rate .
	amount		maturity		Fixed			Variable
	(in thousands)		(in years)
September 30, 2012
Fair value hedges:
Fixed rate long-term borrowings (a)	$	900,000		4.6		6.07	%		1.96	%
December 31, 2011
Fair value hedges:
Fixed rate long-term borrowings (a)	$	900,000		5.4		6.07	%		2.07	%

(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 $15.1 billion and $13.9 billion at September 30, 2012 and December 31, 2011, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes aggregated $1.2 billion and $1.4 billion at September 30, 2012 and December 31, 2011, 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, 2012		December 31, 2011		September 30, 2012		December 31, 2011
	(in thousands)
Derivatives designated and qualifying as hedging instruments
Fair value hedges:
Interest rate swap agreements (a)	$	153,220		147,302	$	—		—
Commitments to sell real estate loans (a)		127		232		16,804		2,287
		153,347		147,534		16,804		2,287
Derivatives not designated and qualifying as hedging instruments
Mortgage-related commitments to originate real estate loans for sale (a)		70,430		7,991		85		1,068
Commitments to sell real estate loans (a)		2,777		1,328		22,909		2,771
Trading:
Interest rate contracts (b)		441,467		443,033		410,929		415,836
Foreign exchange and other option and futures contracts (b)		13,462		19,115		13,383		18,723
		528,136		471,467		447,306		438,398
Total derivatives	$	681,483		619,001	$	464,110		440,685

(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.

	Amount of unrealized gain (loss) recognized
	Three months ended September 30, 2012					Three months ended September 30, 2011
	Derivative		Hedged item			Derivative		Hedged item
	(in thousands)
Derivatives in fair value hedging relationships
Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	3,273		(3,252	)	$	42,587		(40,355	)
Derivatives not designated as hedging instruments
Trading:
Interest rate contracts (b)	$	777				$	2,425
Foreign exchange and other option and futures contracts (b)		74					1,764
Total	$	851				$	4,189

	Amount of unrealized gain (loss) recognized
	Nine months ended September 30, 2012						Nine months ended September 30, 2011
	Derivative			Hedged item			Derivative		Hedged item
	(in thousands)
Derivatives in fair value hedging relationships
Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	5,918			(5,876	)	$	52,127		(49,452	)
Derivatives not designated as hedging instruments
Trading:
Interest rate contracts (b)	$	3,996					$	3,901
Foreign exchange and other option and futures contracts (b)		(3,071	)					473
Total	$	925					$	4,374

(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 $81 million and $12 million at September 30, 2012 and December 31, 2011, 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, 2012 for which the Company was required to post collateral was $330 million. The fair value of collateral posted for such instruments was $306 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, 2012 was $95 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, 2012, the maximum amount of additional collateral the Company would have been required to post to counterparties was $24 million.

The Company’s credit exposure with respect to the estimated fair value as of September 30, 2012 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 $77 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.