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Derivative and Hedging Activities
 9 Months Ended
Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative and Hedging Activities Derivative and Hedging Activities
The Corporation facilitates customer borrowing activity by providing various interest rate risk management, commodity hedging, and foreign currency exchange solutions through its capital markets area. To date, all of the notional amounts of customer transactions have been matched with a mirror hedge with another counterparty. The Corporation has used, and may use again in the future, derivative instruments to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded on its consolidated balance sheets from changes in interest rates. The predominant derivative and hedging activities include interest rate-related instruments (swaps and caps), foreign currency exchange forwards, commodity contracts, written options, purchased options, and certain mortgage banking activities.
The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. The Corporation is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. To mitigate the counterparty risk, interest rate and commodity-related instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain mutually agreed upon threshold limits. The Corporation pledged $26 million of investment securities as collateral at September 30, 2017, and pledged $40 million of investment securities as collateral at December 31, 2016. Federal regulations require the Corporation to clear all LIBOR interest rate swaps through a clearing house if it can be cleared. As such, the Corporation is required to pledge cash collateral for the margin. At September 30, 2017 the Corporation posted $3 million of cash collateral for the margin compared to none at December 31, 2016.
Derivatives to Accommodate Customer Needs
The Corporation enters into various derivative contracts which are designated as free standing derivative contracts. Free standing derivative products are entered into primarily for the benefit of commercial customers seeking to manage their exposures to interest rate risk, foreign currency, and commodity prices. These derivative contracts are not designated against specific assets and liabilities on the balance sheet or forecasted transactions and, therefore, do not qualify for hedge accounting treatment. Such derivative contracts are carried at fair value on the consolidated balance sheets with changes in the fair value recorded as a component of Capital market fees, net, and typically include interest rate-related instruments (swaps and caps), foreign currency exchange forwards, and commodity contracts. See Note 11 for additional information and disclosures on balance sheet offsetting.
Interest rate-related instruments: The Corporation provides interest rate risk management services to commercial customers, primarily forward interest rate swaps and caps. The Corporation’s market risk from unfavorable movements in interest rates related to these derivative contracts is generally economically hedged by concurrently entering into offsetting derivative contracts. The offsetting derivative contracts have identical notional values, terms and indices.
Foreign currency exchange forwards: The Corporation provides foreign currency exchange services to customers, primarily forward contracts. Our customers enter into a foreign currency exchange forward with the Corporation as a means for them to mitigate exchange rate risk. The Corporation mitigates its risk by then entering into an offsetting foreign currency exchange derivative contract.
Commodity contracts: Commodity contracts are entered into primarily for the benefit of commercial customers seeking to manage their exposure to fluctuating commodity prices. The Corporation mitigates its risk by then entering into an offsetting commodity derivative contract.
The table below identifies the balance sheet category and fair values of the Corporation’s free standing derivative instruments, which are not designated as hedging instruments.
 
September 30, 2017
 
December 31, 2016
($ in Thousands)
Notional Amount
 
Fair
Value
 
Balance Sheet
Category
 
Notional Amount
 
Fair
Value
 
Balance Sheet
Category
Interest rate-related instruments — customer and mirror
$
2,198,794

 
$
26,837

 
Trading assets
 
$
2,039,323

 
$
33,671

 
Trading assets
Interest rate-related instruments — customer and mirror
2,198,794

 
(26,469
)
 
Trading liabilities
 
2,039,323

 
(33,188
)
 
Trading liabilities
Foreign currency exchange forwards
130,191

 
3,053

 
Trading assets
 
109,675

 
2,002

 
Trading assets
Foreign currency exchange forwards
122,307

 
(3,033
)
 
Trading liabilities
 
106,251

 
(1,943
)
 
Trading liabilities
Commodity contracts
424,996

 
18,539

 
Trading assets
 
127,582

 
16,725

 
Trading assets
Commodity contracts
396,754

 
(17,310
)
 
Trading liabilities
 
128,368

 
(15,972
)
 
Trading liabilities


Mortgage Derivatives
Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets with the changes in fair value recorded as a component of mortgage banking, net.
Written and Purchased Options (Time Deposit)
Historically, the Corporation had entered into written and purchased option derivative instruments to facilitate an equity linked time deposit product (the “Power CD”), which the Corporation ceased offering in September 2013. The Power CD was a time deposit that provided the purchaser a guaranteed return of principal at maturity plus a potential equity return (a written option), while the Corporation received a known stream of funds based on the equity return (a purchased option). The written and purchased options are mirror derivative instruments, which are carried at fair value on the consolidated balance sheets.
The table below identifies the balance sheet category and fair values of the Corporation’s derivative instruments, which are not designated as hedging instruments.
 
September 30, 2017
 
December 31, 2016
($ in Thousands)
Notional Amount
 
Fair
Value
 
Balance Sheet
Category
 
Notional Amount
 
Fair
Value
 
Balance Sheet
Category
Interest rate lock commitments (mortgage)
$
354,075

 
$
2,729

 
Other assets
 
$
285,345

 
$
206

 
Other assets
Forward commitments (mortgage)
243,500

 
234

 
Other assets
 
179,600

 
2,908

 
Other assets
Purchased options (time deposit)
53,074

 
1,434

 
Other assets
 
80,554

 
2,576

 
Other assets
Written options (time deposit)
53,074

 
(1,434
)
 
Other liabilities
 
80,554

 
(2,576
)
 
Other liabilities


The table below identifies the income statement category of the gains and losses recognized in income on the Corporation’s derivative instruments not designated as hedging instruments.
 
Income Statement Category of
Gain / (Loss) Recognized in Income
Nine Months Ended September 30,
($ in Thousands)
 
2017
 
2016
Derivative Instruments
 
 
 
 
Interest rate-related instruments — customer and mirror, net
Capital market fees, net
$
(115
)
 
$
(888
)
Interest rate lock commitments (mortgage)
Mortgage banking, net
2,523

 
2,768

Forward commitments (mortgage)
Mortgage banking, net
(2,674
)
 
(2,271
)
Foreign currency exchange forwards
Capital market fees, net
(39
)
 
(85
)
Commodity contracts
Capital market fees, net
476

 
690