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Derivative financial instruments
12 Months Ended
Dec. 31, 2012
Derivative financial instruments

18.    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 December 31, 2012.

The net effect of interest rate swap agreements was to increase net interest income by $36 million in 2012, $38 million in 2011 and $42 million in 2010. The average notional amounts of interest rate swap agreements impacting net interest income that were entered into for interest rate risk management purposes were $900 million in each of 2012 and 2011 and $1.01 billion in 2010.

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
    Estimated Fair
Value Gain
 
           Fixed     Variable    
     (In thousands)      (In years)                  (In thousands)  

December 31, 2012

            

Fair value hedges:

            

Fixed rate long-term borrowings(a)

   $ 900,000         4.4         6.07     1.85   $ 143,179   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

December 31, 2011

            

Fair value hedges:

            

Fixed rate long-term borrowings(a)

   $ 900,000         5.4         6.07     2.07   $ 147,302   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

 

 

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

The notional amount of interest rate swap agreements entered into for risk management purposes that were outstanding at December 31, 2012 mature in 2016 and 2017.

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 $15.5 billion and $13.9 billion at December 31, 2012 and 2011, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes aggregated $869 million and $1.4 billion at December 31, 2012 and 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
Fair Value
December 31
     Liability Derivatives
Fair Value
December 31
 
     2012      2011      2012      2011  
     (In thousands)  

Derivatives designated and qualifying as hedging instruments

           

Fair value hedges:

           

Interest rate swap agreements(a)

   $ 143,179       $ 147,302       $       $   

Commitments to sell real estate loans(a)

     1,114         232         3,825         2,287   
  

 

 

    

 

 

    

 

 

    

 

 

 
     144,293         147,534         3,825         2,287   

Derivatives not designated and qualifying as hedging instruments

           

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

     48,056         7,991         197         1,068   

Commitments to sell real estate loans(a)

     1,982         1,328         6,570         2,771   

Trading:

           

Interest rate contracts(b)

     399,963         443,033         365,616         415,836   

Foreign exchange and other option and futures contracts(b)

     8,725         19,115         8,658         18,723   
  

 

 

    

 

 

    

 

 

    

 

 

 
     458,726         471,467         381,041         438,398   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 603,019       $ 619,001       $ 384,866       $ 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  
     Year Ended
December 31, 2012
     Year Ended
December 31, 2011
    Year Ended
December 31, 2010
 
     Derivative     Hedged Item      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)

     (4,123     3,724         50,665        (47,916     41,628        (39,802
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (4,123   $ 3,724       $ 50,665      $ (47,916   $ 41,125      $ (39,299
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as hedging instruments

             

Trading:

             

Interest rate contracts(b)

   $ 8,004         $ 6,130        $ 3,760     

Foreign exchange and other option and futures contracts(b)

     (3,970        (2,649       (307  
  

 

 

      

 

 

     

 

 

   

Total

   $ 4,034         $ 3,481        $ 3,453     
  

 

 

      

 

 

     

 

 

   

 

 

 

(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 $89 million and $12 million at December 31, 2012 and 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 December 31, 2012 for which the Company was required to post collateral was $281 million. The fair value of collateral posted for such instruments was $266 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 December 31, 2012 was $84 million, for which the Company had posted collateral of $65 million in the normal course of business. If the credit-risk-related contingent features had been triggered on December 31, 2012, the maximum amount of additional collateral the Company would have been required to post with counterparties was $19 million.

The Company’s credit exposure with respect to the estimated fair value as of December 31, 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 $69 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.