Derivative and Hedging Activities

6 Months Ended

Jun. 30, 2013

Derivative and Hedging Activities [Abstract]

Derivative and Hedging Activities

NOTE 10: Derivative and Hedging Activities

The Corporation facilitates customer borrowing activity by providing various interest rate risk management solutions through its capital markets area. To date, all of the notional amounts of customer transactions have been matched with a mirror swap with another counterparty. The Corporationmay also use derivative instruments 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, 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-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 $54 million of investment securities as collateral at June 30, 2013, and pledged $70 million of investment securities as collateral at December 31, 2012.

The Corporation's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. The fair value of the Corporation's interest rate-related instruments is determined using discounted cash flow analysis on the expected cash flows of each derivative and also includes a nonperformance / credit risk component (credit valuation adjustment). See Note 13, “Fair Value Measurements,” for additional fair value information and disclosures.

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

							Weighted Average
($ in Thousands)			Notional		Fair	Balance Sheet	Receive		Pay
			Amount		Value	Category	Rate(1)		Rate(1)		Maturity
June 30, 2013
Interest rate-related instruments — customer and mirror		$	1,808,002	$	48,337	Trading assets	1.57	%	1.57	%	45	months
Interest rate-related instruments — customer and mirror			1,808,002		(51,299)	Trading liabilities	1.57		1.57		45	months
Interest rate lock commitments (mortgage)			333,668		(5,151)	Other liabilities	-		-			-
Forward commitments (mortgage)			507,000		20,313	Other assets	-		-			-
Foreign currency exchange forwards			46,853		1,395	Trading assets	-		-			-
Foreign currency exchange forwards			43,748		(1,299)	Trading liabilities	-		-			-
Purchased options (time deposit)			114,567		5,108	Other assets	-		-			-
Written options (time deposit)			114,567		(5,108)	Other liabilities	-		-			-
December 31, 2012
Interest rate-related instruments — customer and mirror		$	1,728,545	$	69,370	Trading assets	1.30	%	1.30	%	47	months
Interest rate-related instruments — customer and mirror			1,728,545		(75,131)	Trading liabilities	1.30		1.30		47	months
Interest rate lock commitments (mortgage)			351,786		7,794	Other assets	-		-			-
Forward commitments (mortgage)			520,000		(147)	Other liabilities	-		-			-
Foreign currency exchange forwards			39,763		1,341	Trading assets	-		-			-
Foreign currency exchange forwards			35,745		(1,212)	Trading liabilities	-		-			-
Purchased options (time deposit)			111,262		3,620	Other assets	-		-			-
Written options (time deposit)			111,262		(3,620)	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)
Six Months Ended June 30, 2013
Interest rate-related instruments — customer and mirror, net	Capital market fees, net	$	2,799
Interest rate lock commitments (mortgage)	Mortgage banking, net		(12,945)
Forward commitments (mortgage)	Mortgage banking, net		20,460
Foreign currency exchange forwards	Capital market fees, net		(33)
Six Months Ended June 30, 2012
Interest rate-related instruments — customer and mirror, net	Capital market fees, net	$	174
Interest rate lock commitments (mortgage)	Mortgage banking, net		6,621
Forward commitments (mortgage)	Mortgage banking, net		1,850
Foreign currency exchange forwards	Capital market fees, net		(64)
Covered call options	Interest on investment securities		469

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 enables 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 June 30, 2013 or December 31, 2012.