10. 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. 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, mortgage loan commitments and forward sales contracts result from the Company's mortgage banking operation, in which fixed rate personal real estate loans are originated and sold to other institutions. The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. The Company's risks and responsibilities as guarantor are further discussed in Note 5 on Guarantees.


	June 30		December 31
(In thousands)	2011		2010

Interest rate swaps	$	531,487	$	498,071
Interest rate caps		30,736		31,736
Credit risk participation agreements		83,101		40,661
Foreign exchange contracts:
Forward contracts		64,581		25,867
Option contracts		3,100		—
Mortgage loan commitments		8,241		12,125
Mortgage loan forward sale contracts		13,349		24,112

Total notional amount	$	734,595	$	632,572

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 June 30, 2011, the Company had entered into three interest rate swaps with a notional amount of $15.1 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						For the Six Months
	Ended June 30						Ended June 30
(In thousands)	2011			2010			2011			2010

Gain (loss) on interest rate swaps	$	(117	)	$	(309	)	$	70		$	(390	)
Gain (loss) on loans		117			299			(64	)		372

Amount of hedge ineffectiveness	$	—		$	(10	)	$	6		$	(18	)

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 June 30, 2011 was $516.4 million. The Company is party to master netting arrangements; however, the Company does not offset assets and liabilities under these arrangements. Collateral, usually in the form of marketable securities, is posted by the counterparty with liability positions, in accordance with contract thresholds. At June 30, 2011, the Company had net liability positions with its financial institution counterparties totaling $16.9 million and had posted $16.9 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, communications, consumer products, and manufacturing. The manufacturing group is the largest, with a combined notional amount of 24.3% of the total customer swap portfolio. If this group of manufacturing counterparties failed to perform, and if the underlying collateral proved to be of no value, the Company would incur a loss of $2.8 million, based on amounts at June 30, 2011.

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 13 on Fair Value Measurements.


	Asset Derivatives					Liability Derivatives
	Balance	June 30		Dec. 31		Balance	June 30			Dec. 31
	Sheet	2011		2010		Sheet	2011			2010
(In thousands)	Location	Fair Value				Location	Fair Value

Derivatives designated as hedging instruments:
Interest rate swaps	Other assets	$	—	$	—	Other liabilities	$	(1,090	)	$	(1,159	)

Total derivatives designated as hedging instruments		$	—	$	—		$	(1,090	)	$	(1,159	)

Derivatives not designated as hedging instruments:
Interest rate swaps	Other assets	$	17,121	$	17,712	Other liabilities	$	(17,220	)	$	(17,799	)
Interest rate caps	Other assets		45		84	Other liabilities		(45	)		(84	)
Credit risk participation agreements	Other assets		6		—	Other liabilities		(373	)		(130	)
Foreign exchange contracts:
Forward contracts	Other assets		1,190		492	Other liabilities		(905	)		(359	)
Option contracts	Other assets		1		—	Other liabilities		(1	)		—
Mortgage loan commitments	Other assets		102		101	Other liabilities		(2	)		(30	)
Mortgage loan forward sale contracts	Other assets		30		434	Other liabilities		(51	)		(23	)

Total derivatives not designated as hedging instruments		$	18,495	$	18,823		$	(18,597	)	$	(18,425	)

Total derivatives		$	18,495	$	18,823		$	(19,687	)	$	(19,584	)

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 Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
		For the Three Months						For the Six Months
		Ended June 30						Ended June 30
(In thousands)		2011			2010			2011			2010

Derivatives in fair value hedging relationships:
Interest rate swaps	Interest and fees on loans	$	(117	)	$	(309	)	$	70		$	(390	)

Total		$	(117	)	$	(309	)	$	70		$	(390	)

Derivatives not designated as hedging instruments:
Interest rate swaps	Other non-interest income	$	167		$	269		$	556		$	459
Interest rate caps	Other non-interest income		—			32			—			32
Credit risk participation agreements	Other non-interest income		29			8			35			13
Foreign exchange contracts:
Forward contracts	Other non-interest income		(11	)		138			153			414
Option contracts	Other non-interest income		—			—			—			—
Mortgage loan commitments	Loan fees and sales		(15	)		156			29			240
Mortgage loan forward sale contracts	Loan fees and sales		(19	)		(259	)		(432	)		(361	)

Total		$	151		$	344		$	341		$	797