Derivative and Hedging Activities

3 Months Ended

Mar. 31, 2012

Derivative and Hedging Activities [Abstract]

Derivative and Hedging Activities

NOTE 10: Derivative and Hedging Activities

The Corporation uses derivative instruments primarily to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded on its consolidated balance sheet from changes in interest rates. The predominant derivative and hedging activities include interest rate-related instruments (swaps, caps, collars, and corridors), foreign currency exchange forwards, 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-related instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined from the credit ratings of each counterparty. The Corporation was required to pledge $80 million of investment securities as collateral at March 31, 2012, and pledged $85 million of investment securities as collateral at December 31, 2011.

The Corporation's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 12, “Fair Value Measurements,” for additional fair value information and disclosures.

The table below identifies the balance sheet category and fair values of the Corporation's derivative instruments designated as cash flow hedges.

						Weighted Average
		Notional		Fair	Balance Sheet	Receive		Pay
		Amount		Value	Category	Rate		Rate		Maturity
	($ in Thousands)
March 31, 2012
Interest rate swap – short-term funding	$	100,000	$	(1,240)	Other liabilities	0.13	%	3.04	%	5	months
December 31, 2011
Interest rate swap – short-term funding	$	100,000	$	(2,011)	Other liabilities	0.07	%	3.04	%	8	months

The table below identifies the gains and losses recognized on the Corporation's derivative instruments designated as cash flow hedges.

									Gross
	Amount of Gain /						Category of		Amount of
	(Loss)		Category of Gain		Amount of		Gain / (Loss)		Gain / (Loss)
	Recognized in		/ (Loss)		Gain / (Loss)		Recognized in		Recognized in
	OCI on		Reclassified from		Reclassified from		Income on		Income on
	Derivatives		AOCI into		AOCI into		Derivatives		Derivatives
($ in Thousands)	(Effective		Income (Effective		Income (Effective		(Ineffective		(Ineffective
	Portion)		Portion)		Portion)		Portion)		Portion)
Three Months Ended March 31, 2012			Interest Expense				Interest Expense
			Short-term				Short-term
Interest rate swap - short-term funding	$	10	funding	$	731		funding	$	18
Three Months Ended March 31, 2011			Interest Expense				Interest Expense
			Short-term				Short-term
Interest rate swaps - short-term funding	$	450	funding	$	982	funding		$	(24)

Cash flow hedges

The Corporation has variable-rate short-term funding which exposes the Corporation to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of these interest payments, the Corporation has entered into various interest rate swap agreements.

During the third quarter of 2008, the Corporation entered into two interest rate swap agreements which hedge the interest rate risk in the cash flows of certain short-term, variable-rate funding.In the third quarter of 2011, one interest rate swap agreement for $100 million matured. Hedge effectiveness is determined using regression analysis.No components of the derivatives change in fair value were excluded from the assessment of hedge effectiveness. Derivative gains and losses reclassified from accumulated other comprehensive income to current period earnings are included in interest expense on short-term funding (i.e., the line item in which the hedged cash flows are recorded). At March 31, 2012, accumulated other comprehensive income included a deferred after-tax net loss of $0.5million related to these derivatives, compared to a deferred after-tax net loss of $1million at December 31, 2011. The net after-tax derivative loss included in accumulated other comprehensive income at March 31, 2012, is projected to be reclassified into net interest income in conjunction with the recognition of interest payments on the variable-rate, short-term funding through September 2012.

The table below identifies the balance sheet category and fair values of the Corporation's derivative instruments not designated as hedging instruments.

							Weighted Average
($ in Thousands)			Notional		Fair	Balance Sheet	Receive		Pay
			Amount		Value	Category	Rate(1)		Rate(1)		Maturity
March 31, 2012
Interest rate-related instruments — customer and mirror		$	1,655,325	$	67,891	Other assets	1.54	%	1.54	%	43	months
Interest rate-related instruments — customer and mirror			1,655,325		(74,057)	Other liabilities	1.54		1.54		43	months
Interest rate lock commitments (mortgage)			366,507		6,755	Other assets	-		-			-
Forward commitments (mortgage)			461,250		(887)	Other liabilities	-		-			-
Foreign currency exchange forwards			44,363		1,133	Other assets	-		-			-
Foreign currency exchange forwards			44,722		(1,066)	Other liabilities	-		-			-
Purchased options (time deposit)			82,116		4,078	Other assets	-		-			-
Written options (time deposit)			82,116		(4,078)	Other liabilities	-		-			-
December 31, 2011
Interest rate-related instruments — customer and mirror		$	1,563,831	$	71,143	Other assets	1.66	%	1.66	%	45	months
Interest rate-related instruments — customer and mirror			1,563,831		(78,064)	Other liabilities	1.66		1.66		45	months
Interest rate lock commitments (mortgage)			235,375		4,571	Other assets	-		-			-
Forward commitments (mortgage)			437,500		(4,771)	Other liabilities	-		-			-
Foreign currency exchange forwards			52,973		2,079	Other assets	-		-			-
Foreign currency exchange forwards			44,107		(1,891)	Other liabilities	-		-			-
Purchased options (time deposit)			54,780		2,854	Other assets	-		-			-
Written options (time deposit)			54,780		(2,854)	Other liabilities	-		-			-
(1)	Reflects the weighted average receive rate and pay rate for the interest rate swap derivative financial instruments only.

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)
	Gain / (Loss) Recognized in Income	Recognized in Income
		($ in Thousands)
Three Months Ended March 31, 2012
Interest rate-related instruments — customer and mirror, net	Capital market fees, net	$	755
Interest rate lock commitments (mortgage)	Mortgage banking, net		2,184
Forward commitments (mortgage)	Mortgage banking, net		3,884
Foreign currency exchange forwards	Capital market fees, net		(121)
Three Months Ended March 31, 2011
Interest rate-related instruments — customer and mirror, net	Capital market fees, net	$	(63)
Interest rate lock commitments (mortgage)	Mortgage banking, net		1,272
Forward commitments (mortgage)	Mortgage banking, net		(6,162)
Foreign currency exchange forwards	Capital market fees, net		(90)

Free Standing Derivatives

The Corporation enters into various derivative contracts which are designated as free standing derivative contracts. 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 sheet with changes in the fair value recorded as a component of Capital market fees, net, and typically include interest rate-related instruments (swaps, caps, collars, and corridors). The net impact for the first quarter of 2012 was a $1 million gain, while the net impact for the full year 2011 was a $2million net loss and the net impact for the first quarter of 2011 was less than a $0.1 million loss.

Free standing derivatives are entered into primarily for the benefit of commercial customers through providing derivative products which enable the customer to manage their exposures to interest rate risk. 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.

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. The fair value of the mortgage derivatives at March 31, 2012, was a net asset of $6million compared to a net liability of $0.2million at December 31, 2011.

Foreign currency derivatives

The Corporation provides foreign exchange services to customers. The Corporation may enter into a foreign currency forward to mitigate the exchange rate risk attached to the cash flows of a loan or as an offsetting contract to a forward entered into as a service to our customer. At March 31, 2012, the Corporation had $89 million in notional balances of foreign currency forwards related to loans and foreign currency forwards related to customer transactions (including mirror foreign currency forwards on the customer transactions). At December 31, 2011, the Corporation had $97 million in notional balances of foreign currency forwards related to loansand foreign currency forwards related to customer transactions (including mirror foreign currency forwards on the customer transactions).

Written and purchased option derivatives (time deposit)

The Corporation periodically enters into written and purchased option derivative instruments to facilitate anequity linked time deposit product (the “Power CD”) initiated during the third quarter of 2011. The Power CD is a time deposit that provides the purchaser a guaranteed return of principal at maturity plus a potential equity return (a written option), while the Corporation receives 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 sheet. At March 31, 2012, the Corporation had $82 million in notional balances of written and purchased options, compared with $55 million in notional balances at December 31, 2011.