Derivative and Hedging Activities

9 Months Ended

Sep. 30, 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 $72 million of investment securities as collateral at September 30, 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)
December 31, 2011
Interest rate swap – Federal funds purchased and securities sold under agreements to repurchase	$	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		Amount of	Gain / (Loss)		Gain / (Loss)
	Recognized in		(Gain) / 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)
Nine Months Ended September 30, 2012			Interest Expense			Interest Expense
Interest rate swap - Federal funds purchased and securities sold under agreements to repurchase	$	6	Federal funds purchased and securities sold under agreements to repurchase	$	1,954	Federal funds purchased and securities sold under agreements to repurchase	$	33
Nine Months Ended September 30, 2011			Interest Expense			Interest Expense
Interest rate swap - Federal funds purchased and securities sold under agreements to repurchase	$	(528)	Federal funds purchased and securities sold under agreements to repurchase	$	3,969	Federal funds purchased and securities sold under agreements to repurchase	$	18

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. In the third quarter of 2012, the remaining 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 Federal funds purchased and securities sold under agreements to repurchase (i.e., the line item in which the hedged cash flows are recorded). At December 31, 2011, accumulated other comprehensive income included a deferred after-tax net loss of $1 million related to these derivatives.

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
September 30, 2012
Interest rate-related instruments — customer and mirror		$	1,700,367	$	75,065	Other assets	1.34	%	1.34	%	45	months
Interest rate-related instruments — customer and mirror			1,700,367		(81,884)	Other liabilities	1.34		1.34		45	months
Interest rate lock commitments (mortgage)			425,557		17,566	Other assets	-		-			-
Forward commitments (mortgage)			463,500		(8,167)	Other liabilities	-		-			-
Foreign currency exchange forwards			47,445		1,094	Other assets	-		-			-
Foreign currency exchange forwards			45,130		(977)	Other liabilities	-		-			-
Purchased options (time deposit)			106,921		5,032	Other assets	-		-			-
Written options (time deposit)			106,921		(5,032)	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-related 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)
Nine Months Ended September 30, 2012
Interest rate-related instruments — customer and mirror, net	Capital market fees, net	$	102
Interest rate lock commitments (mortgage)	Mortgage banking, net		12,995
Forward commitments (mortgage)	Mortgage banking, net		(3,396)
Foreign currency exchange forwards	Capital market fees, net		(71)
Covered call options	Interest on investment securities		469
Nine Months Ended September 30, 2011
Interest rate-related instruments — customer and mirror, net	Capital market fees, net	$	(3,379)
Interest rate lock commitments (mortgage)	Mortgage banking, net		10,935
Forward commitments (mortgage)	Mortgage banking, net		(11,386)
Foreign currency exchange forwards	Capital market fees, net		345

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).

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.

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.

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”). 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 sheets.

Other derivatives

During the second quarter of 2012, the Corporation began entering into covered call options. Under covered call options, the Corporation will sell options to a bank or dealer for the right to purchase certain securities held within the Corporation's investment securities portfolio. These option transactions are designed primarily to increase the total return associated with the investment securities portfolio. These options do not qualify as hedges, and, accordingly, the changes in fair value of these contracts are recognized in interest income. There were no covered call options outstanding as of September 30, 2012.