Derivative Instruments

3 Months Ended

Mar. 31, 2013

Derivative Instruments

Derivative Instruments

Note 12. Derivative Instruments

The following table summarizes the fair value and balance sheet classification of derivative instruments as of March 31, 2013 and December 31, 2012. The notional amount of the contract is not recorded on the consolidated balance sheets, but is used as the basis for determining the amount of interest payments to be exchanged between the counterparties. If a counterparty fails to perform, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset.

Notional Amounts and Fair Values of Derivative Instruments

	March 31, 2013						December 31, 2012
(in millions) (1)	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments
Interest-rate swaps - fair value:
Long-term and subordinated debt	$	—	$	—	$	—	$	205.5	$	2.3	$	0.1
Total derivatives designated as hedging instruments	$	—	$	—	$	—	$	205.5	$	2.3	$	0.1
Derivatives not designated as hedging instruments
Interest-rate contracts:
Swaps	$	2,315.0	$	57.3	$	57.6	$	2,243.6	$	64.2	$	64.2
Interest-rate caps, floors and collars	235.4		0.2		0.2		240.1		0.2		0.2
Options purchased	2.0		0.3		0.3		2.0		0.2		0.2
Options written	2.0		—		—		2.0		—		—
Total interest-rate contracts	$	2,554.4	$	57.8	$	58.1	$	2,487.7	$	64.6	$	64.6
Option contracts	$	—	$	1.1	$	—	$	—	$	0.7	$	—
Foreign exchange contracts:
Spot and forward contracts	$	350.4	$	2.3	$	1.9	$	231.4	$	1.5	$	1.3
Total derivatives not designated as hedging instruments	$	2,904.8	$	61.2	$	60.0	$	2,719.1	$	66.8	$	65.9

(1)  The Company offsets interest receivable, interest payable and cash collateral received on interest-rate swaps that are executed with the same counterparty under a master netting agreement, and reports the net balance in the other assets section of the consolidated balance sheets. For purposes of this disclosure, interest receivable and payable are presented on a gross basis and cash collateral is excluded from fair value amounts.

Derivatives Designated as Hedging Instruments

As of March 31, 2013, the Company had no hedging instruments. As of December 31, 2012, the Company had $205.5 million notional amount of interest-rate swap contracts, all of which were designated as fair value hedges. There were no cash flow hedges at December 31, 2012. The net positive fair value of the fair value hedges of $2.2 million is recorded in other assets. It includes a mark-to-market asset of $1.1 million and net interest receivable of $1.1 million. The balance of borrowings reported in the consolidated balance sheet includes a $1.1 million mark-to-market adjustment associated with interest-rate hedge transactions.

The periodic net settlement of interest-rate swaps is recorded as an adjustment to interest income or interest expense. The impact of interest-rate swaps on interest income and interest expense for the three months ended March 31, 2013 and 2012 is provided below:

(in millions) Derivative Instruments Designated as	Location in Consolidated	For the three months ended March 31,
Hedging Instruments	Statements of Income	2013			2012
Interest-rate swaps-fair value	Interest expense	$	(1.0	)	$	(2.0	)
Interest-rate swaps-cash flow	Interest income	0.1			0.1
Total income		$	1.1		$	2.1

Interest-rate swaps increased net interest income by $1.1 million and $2.1 million for the three months ended March 31, 2013 and 2012, respectively.

Changes in fair value of the effective portion of cash flow hedges are reported in AOCI. When the cash flows associated with the hedged item are realized, the gain or loss included in AOCI is recognized in Interest income on loans and leases, the same location in the consolidated statements of income as the income on the hedged item. There were no cash flow hedges outstanding during the three-month periods ended March 31, 2013 and March 31, 2012. The $0.1 million of gains on cash flow hedges reclassified from AOCI to interest income for the three months ended March 31, 2013 and 2012 represents the amortization of deferred gains on cash flow hedges that were terminated in 2010 prior to their respective maturity dates for which the hedge transactions had yet to occur. At March 31, 2013, the balance of deferred gain on terminated swaps reported in AOCI was a nominal amount and will be amortized into interest income within the next 3 months.

Derivatives Not Designated as Hedging Instruments

Derivative contracts not designated as hedges are composed primarily of interest rate contracts with clients that are offset by paired trades with unrelated bank counterparties and foreign exchange contracts. Derivative contracts not designated as hedges are carried at fair value each reporting period with changes in fair value recorded as a part of Noninterest income in the consolidated statements of income. The table below provides the amount of gains and losses on these derivative contracts for the three months ended March 31, 2013 and 2012:

(in millions) Derivatives Not Designated	Location in Consolidated	For the three months ended March 31,
as Hedging Instruments	Statements of Income	2013			2012
Interest-rate contracts	Other noninterest income	$	(0.3	)	$	0.7
Option contracts	Other noninterest income	0.3			(0.6		)
Foreign exchange contracts	International services income	5.9			5.8
Total income		$	5.9		$	5.9

Credit Risk Exposure and Collateral

The Company’s swap agreements require the deposit of cash or marketable debt securities as collateral based on certain risk thresholds. These requirements apply individually to the Corporation and to the Bank. Additionally, certain of the Company’s swap contracts contain security agreements that include credit-risk-related contingent features. Under these agreements, the collateral requirements are based on the Company’s credit rating from the major credit rating agencies. The amount of collateral required may vary by counterparty based on a range of credit ratings that correspond with exposure thresholds established in the derivative agreements. If the credit ratings on the Company’s debt were to fall below the level associated with a particular exposure threshold and the derivatives with a counterparty are in a net liability position that exceeds that threshold, the counterparty could request immediate payment or delivery of collateral for the difference between the net liability amount and the exposure threshold. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on March 31, 2013 was $38.3 million. The Company delivered collateral valued at $23.3 million on swap agreements that had credit-risk contingent features and were in a net liability position at March 31, 2013.

The Company’s interest-rate swaps had $0.2 million and $1.6 million of credit risk exposure at March 31, 2013 and December 31, 2012, respectively. The credit exposure represents the cost to replace, on a present value basis and at current market rates, all contracts by trading counterparty having an aggregate positive market value, net of margin collateral received. The Company enters into master netting agreements with swap counterparties to mitigate credit risk. Under these agreements, the net amount due from or payable to each counterparty is settled on the contract payment date. No collateral had been received from swap counterparties at March 31, 2013. At December 31, 2012, the Company had received $1.0 million of collateral in the form of securities. The Company delivered collateral valued at $16.8 million on swap agreements that did not have credit-risk contingent features at March 31, 2013.