The Corporation, through its mortgage banking and risk management operations, is party to various derivative instruments that are used for asset and liability management and customers' financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract.

The predominant derivative and hedging activities include interest rate swaps and certain mortgage banking activities. Generally, these instruments help the Corporation manage exposure to market risk, and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors, such as interest rates, market-driven rates and prices or other economic factors. Foreign exchange contracts are entered into to accommodate the needs of customers.

Derivatives Designated in Hedge Relationships

The Corporation's fixed rate loans result in exposure to losses in value as interest rates change. The risk management objective for hedging fixed rate loans is to convert the fixed rate received to a floating rate. The Corporation hedges exposure to changes in the fair value of fixed rate loans through the use of swaps. For a qualifying fair value hedge, changes in the value of the derivatives that have been highly effective as hedges are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged.

Through the Corporation's Fixed Rate Advantage Program ("FRAP Program"), a customer received a fixed interest rate commercial loan and the Corporation subsequently converted that fixed rate loan to a variable rate instrument over the term of the loan by entering into an interest rate swap with a dealer counterparty. The Corporation receives a fixed rate payment from the customer on the loan and pays the equivalent amount to the dealer counterparty on the swap in exchange for a variable rate payment based on the one month London Inter-Bank Offered Rate index. These interest rate swaps are designated as fair value hedges. Through application of the "short cut method of accounting", there is an assumption that the hedges are effective. The Corporation discontinued originating interest rate swaps under the FRAP program in February 2008 and subsequently began a new interest rate swap program for commercial loan customers, termed the Back-to-Back Program. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a stand-alone derivative.

At March 31, 2013, December 31, 2012 and March 31, 2012, the notional values or contractual amounts and fair value of the Corporation's derivatives designated in hedge relationships were as follows:



	Asset Derivatives												Liability Derivatives
	March 31, 2013				December 31, 2012				March 31, 2012				March 31, 2013				December 31, 2012				March 31, 2012
	Notional/ Contract Amount		Fair Value (a)		Notional/ Contract Amount		Fair Value (a)		Notional/ Contract Amount		Fair Value (a)		Notional/ Contract Amount		Fair Value (b)		Notional/ Contract Amount		Fair Value (b)		Notional/ Contract Amount		Fair Value (b)
Interest rate swaps:
Fair value hedges	$	—	$	—	$	—	$	—	$	—	$	—	$	145,382	$	17,247	$	161,133	$	19,080	$	220,630	$	23,786

(a) Included in Other Assets on the Consolidated Balance Sheet

(b) Included in Other Liabilities on the Consolidated Balance Sheet

Derivatives Not Designated in Hedge Relationships

As of March 31, 2013, December 31, 2012 and March 31, 2012, the notional values or contractual amounts and fair value of the Corporation's derivatives not designated in hedge relationships were as follows:



	Asset Derivatives														Liability Derivatives
	March 31, 2013					December 31, 2012					March 31, 2012				March 31, 2013				December 31, 2012				March 31, 2012
	Notional/ Contract Amount		Fair Value(a)			Notional/ Contract Amount		Fair Value(a)			Notional/ Contract Amount		Fair Value(a)		Notional/ Contract Amount		Fair Value(b)		Notional/ Contract Amount		Fair Value(b)		Notional/ Contract Amount		Fair Value(b)
Interest rate swaps	$	1,266,831	$	54,590		$	1,204,835	$	58,769		$	1,016,626	$	56,298	$	1,266,831	$	54,590	$	1,204,835	$	58,769	$	1,016,626	$	56,298
Mortgage loan commitments	214,573		4,152			168,271		4,400			247,453		3,268		—		—		—		—		—		—
Forward sales contracts	122,795		(284		)	124,017		(62		)	201,637		446		—		—		—		—		—		—
Credit contracts	—		—			—		—			—		—		40,541		—		25,225		—		17,805		—
Foreign exchange	8,063		105			6,662		62			7,969		103		8,080		96		6,026		57		8,043		90
Other	—		—			—		—			—		—		35,286		—		31,492		—		24,516		—
Total	$	1,612,262	$	58,563		$	1,503,785	$	63,169		$	1,473,685	$	60,115	$	1,350,738	$	54,686	$	1,267,578	$	58,826	$	1,066,990	$	56,388

(a) Included in Other Assets on the Consolidated Balance Sheet

(b) Included in Other Liabilities on the Consolidated Balance Sheet

Interest Rate Swaps. In 2008, the Corporation implemented the Back-to-Back Program, which is an interest rate swap program for commercial loan customers. The Back-to-Back Program provides the customer with a fixed rate loan while creating a variable rate asset for the Corporation through the customer entering into an interest rate swap with the Corporation on terms that match the loan. The Corporation offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a standalone derivative.

Mortgage banking. In the normal course of business, the Corporation sells originated mortgage loans into the secondary mortgage loan markets. During the period of loan origination and prior to the sale of the loans in the secondary market, the Corporation has exposure to movements in interest rates associated with mortgage loans that are in the "mortgage pipeline" and the "mortgage warehouse". A pipeline loan is one in which the Corporation has entered into a written mortgage loan commitment with a potential borrower that will be held for resale. Once a mortgage loan is closed and funded, it is included within the mortgage warehouse of loans awaiting sale and delivery into the secondary market.

Written loan commitments that relate to the origination of mortgage loans that will be held for resale are considered free-standing derivatives and do not qualify for hedge accounting. Written loan commitments generally have a term of up to 60 days before the closing of the loan. The loan commitment does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected "fallout" (loan commitments not expected to close), using models which consider cumulative historical fallout rates and other factors. In addition, expected net future cash flows related to loan servicing activities are included in the fair value measurement of a written loan commitment.

Written loan commitments in which the borrower has locked in an interest rate results in market risk to the Corporation to the extent market interest rates change from the rate quoted to the borrower. The Corporation economically hedges the risk of changing interest rates associated with its interest rate lock commitments by entering into forward sales contracts.

The Corporation's warehouse (mortgage loans held for sale) is subject to changes in fair value, due to fluctuations in interest rates from the loan's closing date through the date of sale of the loan into the secondary market. Typically, the fair value of the warehouse declines in value when interest rates increase and rises in value when interest rates decrease. To mitigate this risk, the Corporation enters into forward sales contracts on a significant portion of the warehouse to provide an economic hedge against those changes in fair value. Mortgage loans held for sale and the forward sales contracts were recorded at fair value with ineffective changes in value recorded in current earnings as Loan sales and servicing income.

Credit contracts. Prior to implementation of the Back-to-Back Program, certain of the Corporation's commercial loan customers entered into interest rate swaps with unaffiliated dealer counterparties. The Corporation entered into swap participations with these dealer counterparties whereby the Corporation guaranteed payment in the event that the counterparty experienced a loss on the interest rate swap due to a failure to pay by the Corporation's commercial loan customer. The Corporation simultaneously entered into reimbursement agreements with the commercial loan customers obligating the customers to reimburse the Corporation for any payments it makes under the swap participations. The Corporation monitors its payment risk on its swap participations by monitoring the creditworthiness of its commercial loan customers, which is based on the normal credit review process the Corporation would have performed had it entered into these derivative instruments directly with the commercial loan customers. At March 31, 2013, the remaining terms on these swap participation agreements generally ranged from less than one year to ten years. The Corporation's maximum estimated exposure to written swap participations, as measured by projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on the maximum values, was approximately $4.3 million as of March 31, 2013. The fair values of the written swap participations were not material at March 31, 2013, December 31, 2012 and March 31, 2012.

Gains and losses recognized in income on non-designated hedging instruments for the three months ended March 31, 2013 and 2012 are as follows:



Derivatives not designated as hedging instruments	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain / (Loss) Recognized in Income on Derivatives
		Three Months Ended
		March 31, 2013			March 31, 2012
Mortgage loan commitments	Other operating income	$	(248	)	$	(1,691	)
Forward sales contracts	Other operating income	(223		)	2,244
Foreign exchange contracts	Other operating income	(191		)	45
Other	Other operating expense	—			—
Total		$	(662	)	$	598

Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of "credit risk" or the possibility that the Corporation will incur a loss because a counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Corporation's Asset and Liability Committee, and only within the Corporation's Board of Directors Credit Committee approved credit exposure limits. Where contracts have been created for customers, the Corporation enters into derivatives with dealers to offset its risk exposure. To manage the credit exposure to exchanges and counterparties, the Corporation generally enters into bilateral collateral agreements using standard forms published by the International Swaps and Derivatives Association. These agreements are to include thresholds of credit exposure or the maximum amount of unsecured credit exposure that the Corporation is willing to assume. Beyond the threshold levels, collateral in the form of securities made available from the investment portfolio or other forms of collateral acceptable under the bilateral collateral agreements are provided. The threshold levels for each counterparty are established by the Corporation's Asset and Liability Committee. The Corporation generally posts collateral in the form of highly rated Government Agency issued bonds or MBSs. Collateral posted against derivative liabilities was $100.4 million, $96.5 million and $100.3 million as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Corporation to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. The following tables illustrate the potential effect of the Corporation's derivative master netting arrangements, by type of financial instrument, on the Corporation's statement of financial position as of March 31, 2013, December 31, 2012 and March 31, 2012.



As of March 31, 2013
	Gross amounts of recognized assets		Gross amounts offset in the statement of financial position		Net amounts of assets presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial collateral
Derivative Assets	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	$	—	$	—	$	—	$	—		$	—	$	—	$	—
Interest rate swaps - non-designated	54,590		—		54,590		—			54,590		54,590		—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	105		—		105		(21		)	126		105		—
Total	$	54,695	$	—	$	54,695	$	(21	)	$	54,716	$	54,695	$	—

	Gross amounts of recognized liabilities		Gross amounts offset in the statement of financial position		Net amounts of liabilities presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial collateral
Derivative Liabilities	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	$	17,247	$	—	$	17,247	$	—		$	17,247	$	17,247	$	—
Interest rate swaps - non-designated	54,590		—		54,590		(59		)	54,649		54,590		—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	96		—		96		—			96		96		—
Total	$	71,933	$	—	$	71,933	$	(59	)	$	71,992	$	71,933	$	—



As of December 31, 2012
	Gross amounts of recognized assets		Gross amounts offset in the statement of financial position		Net amounts of assets presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial instrument collateral
Derivative assets	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	—		—		—		—			—		—		—
Interest rate swaps - non-designated	$	58,769	$	—	$	58,769	$	—		$	58,769	$	58,769	$	—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	62		—		62		—			62		62		—
Total	$	58,831	$	—	$	58,831	$	—		$	58,831	$	58,831	$	—

	Gross amounts of recognized liabilities		Gross amounts offset in the statement of financial position		Net amounts of liabilities presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial instrument collateral
Derivative Liabilities	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	$	19,080	$	—	$	19,080	$	—		$	19,080	$	19,080	$	—
Interest rate swaps - non-designated	58,769		—		58,769		(55		)	58,824		58,769		—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	57		—		57		(14		)	71		57		—
Total	$	77,906	$	—	$	77,906	$	(69	)	$	77,975	$	77,906	$	—



As of March 31, 2012
	Gross amounts of recognized assets		Gross amounts offset in the statement of financial position		Net amounts of assets presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial instrument collateral
Derivative assets	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	—		—		—		—			—		—		—
Interest rate swaps - non-designated	$	56,298	$	—	$	56,298	$	—		$	56,298	$	56,298	$	—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	103		—		103		—			103		103		—
Total	$	56,401	$	—	$	56,401	$	—		$	56,401	$	56,401	$	—

	Gross amounts of recognized liabilities		Gross amounts offset in the statement of financial position		Net amounts of liabilities presented in the statement of financial position		Gross amounts of financial instruments not offset in the statement of financial position					Total of gross amounts of financial instruments not offset in the statement of financial position including applicable netting agreement and fair value of collateral		Net amount

							Netting adjustment per applicable master netting agreements			Fair value of financial instrument collateral
Derivative Liabilities	(i)		(ii)		(iii) = (i) - (ii)							(iv)		(v) = (iii) - (iv)
Interest rate swaps - designated	$	23,786	$	—	$	23,786	$	—		$	23,786	$	23,786	$	—
Interest rate swaps - non-designated	56,298		—		56,298		(204		)	56,502		56,298		—
Credit contracts	—		—		—		—			—		—		—
Foreign exchange	90		—		90		(24		)	114		90		—
Total	$	80,174	$	—	$	80,174	$	(228	)	$	80,402	$	80,174	$	—