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Derivative Instruments
 9 Months Ended
Sep. 30, 2012
Derivative Instrument Detail [Abstract]  
Derivative Instruments
Derivative Instruments

The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. The largest group of notional amounts relate to interest rate swaps, which are discussed in more detail below. The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 5 on Guarantees.

Through its International Department, the Company enters into foreign exchange contracts consisting mainly of contracts to purchase or deliver foreign currencies for customers at specific future dates. Also, the Company's past practice of originating and selling fixed rate personal real estate loans to other institutions resulted in mortgage loan commitments and forward sales contracts. In mid 2011, the Company curtailed the sales of these types of loans and, at September 30, 2012, did not hold such loans for sale.

(In thousands)
September 30, 2012
December 31, 2011
Interest rate swaps
$
450,188

$
486,207

Interest rate caps
28,236

29,736

Credit risk participation agreements
40,160

41,414

Foreign exchange contracts
48,198

80,535

 Mortgage loan commitments
—

1,280

Mortgage loan forward sale contracts
—

3,650

Total notional amount
$
566,782

$
642,822



The Company’s interest rate risk management strategy includes the ability to modify the repricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Interest rate swaps are used on a limited basis as part of this strategy. At September 30, 2012, the Company had entered into three interest rate swaps with a notional amount of $13.5 million, included in the table above, which are designated as fair value hedges of certain fixed rate loans. Gains and losses on these derivative instruments, as well as the offsetting loss or gain on the hedged loans attributable to the hedged risk, are recognized in current earnings. These gains and losses are reported in interest and fees on loans in the accompanying statements of income. The table below shows gains and losses related to fair value hedges.


For the Three Months Ended September 30
 
For the Nine Months Ended September 30
(In thousands)
2012
2011
 
2012
2011
Gain (loss) on interest rate swaps
$
76

$
(101
)
 
$
221

$
(31
)
Gain (loss) on loans
(83
)
101

 
(218
)
37

Amount of hedge ineffectiveness
$
(7
)
$
—

 
$
3

$
6



The Company’s other derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings. These instruments include interest rate swap contracts sold to customers who wish to modify their interest rate sensitivity. These swaps are offset by matching contracts purchased by the Company from other financial institutions. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings. The notional amount of these types of swaps at September 30, 2012 was $436.7 million. The Company is party to master netting arrangements with several other financial institutions; however, the Company does not offset assets and liabilities under these arrangements for balance sheet presentation, as the effect of offsetting is not significant. Collateral, usually in the form of marketable securities, is posted by the counterparty with liability positions, in accordance with contract thresholds. At September 30, 2012, the Company had only net liability positions with its financial institution counterparties totaling $18.2 million and had posted $18.0 million in collateral.
Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions, or can require instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.

The banking customer counterparties are engaged in a variety of businesses, including real estate, building materials, education, communications, consumer products, and manufacturing. At September 30, 2012, the largest loss exposures were in the groups related to real estate, education and manufacturing. If the counterparties in these groups failed to perform, and if the underlying collateral proved to be of no value, the Company estimates that it would incur losses of $3.9 million (education), $3.7 million (real estate and building materials) and $2.7 million (manufacturing) at September 30, 2012.

The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 12 on Fair Value Measurements.
 
Asset Derivatives    
 
Liability Derivatives    
 
Balance Sheet
Sept. 30, 2012
Dec 31, 2011
 
Balance Sheet
Sept. 30, 2012
Dec 31, 2011
(In thousands)    
Location
  Fair Value
 
Location
  Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 Interest rate swaps
Other assets
$
—

$
—

 
Other liabilities
$
(833
)
$
(1,053
)
Total derivatives designated as hedging instruments
 
$
—

$
—

 
 
$
(833
)
$
(1,053
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 Interest rate swaps
Other assets
$
17,892

$
19,051

 
Other liabilities
$
(18,040
)
$
(19,157
)
 Interest rate caps
Other assets
2

11

 
Other liabilities
(2
)
(11
)
 Credit risk participation agreements
Other assets
10

9

 
Other liabilities
(176
)
(141
)
 Foreign exchange contracts
Other assets
959

2,440

 
Other liabilities
(816
)
(2,343
)
 Mortgage loan commitments
Other assets
—

20

 
Other liabilities
—

—

 Mortgage loan forward sale contracts
Other assets
—

6

 
Other liabilities
—

(17
)
Total derivatives not designated as hedging instruments
 
$
18,863

$
21,537

 
 
$
(19,034
)
$
(21,669
)
 Total derivatives
 
$
18,863

$
21,537

 
 
$
(19,867
)
$
(22,722
)


The effects of derivative instruments on the consolidated statements of income are shown in the table below.



Location of Gain or (Loss) Recognized in Income on Derivatives
Amount of Gain or (Loss) Recognized in Income on Derivatives


 
For the Three Months Ended September 30
 
For the Nine Months Ended September 30
(In thousands)
 
2012
2011
 
2012
2011
Derivatives in fair value hedging relationships:
 
 
 
 
 
 
Interest rate swaps
Interest and fees on loans
$
76

$
(101
)
 
$
221

$
(31
)
Total
 
$
76

$
(101
)
 
$
221

$
(31
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps
Other non-interest income
$
52

$
(27
)
 
$
250

$
529

Credit risk participation agreements
Other non-interest income
1

224

 
6

259

Foreign exchange contracts
Other non-interest income
40

(177
)
 
47

(24
)
Mortgage loan commitments
Loan fees and sales
—

185

 
(20
)
214

Mortgage loan forward sale contracts
Loan fees and sales
—

(25
)
 
11

(457
)
Total
 
$
93

$
180

 
$
294

$
521