Derivative and Hedging Activities

6 Months Ended

Jun. 30, 2011

Derivative and Hedging Activities [Abstract]

Derivative and Hedging Activities

NOTE 11: Derivative and Hedging Activities

The Corporation uses derivative instruments primarily 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, 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 $81 million of investment securities as collateral at June 30, 2011, and pledged $94 million of investment securities as collateral at December 31, 2010.

The Corporation’s derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 13, “Fair Value Measurements,” for additional fair value information and disclosures.

The table below identifies the balance sheet category and fair values of the Corporation’s derivative instruments designated as cash flow hedges.

								Weighted Average
	Notional						Balance Sheet
	Amount		Fair Value			Category		Receive Rate			Pay Rate			Maturity
	($ in Thousands)
June 30, 2011
Interest rate swaps — short-term funding	$	200,000	$	(3,634	)	Other liabilities			0.09	%		3.15	%	8 months
December 31, 2010
Interest rate swaps — short-term funding	$	200,000	$	(6,295	)	Other liabilities			0.19	%		3.15	%	14 months

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

								Amount of Gain /
								(Loss) Recognized
								in Income on
							Category of Gain /	Derivatives
	Amount of Gain			Category of (Gain)	Amount of (Gain) /		(Loss) Recognized	(Ineffective
	/ (Loss) Recognized			/ Loss Reclassified	Loss Reclassified		in Income on	Portion and Amount
	in OCI on			from AOCI into	from AOCI into		Derivatives	Excluded from
	Derivatives			Income (Effective	Income (Effective		(Ineffective	Effectiveness
($ in Thousands)	(Effective Portion)			Portion)	Portion)		Portion)	Testing)
Six Months Ended June 30, 2011				Interest Expense			Interest Expense
Interest rate swaps — short-term funding	$	(374	)	Short-term funding	$	2,962	Short-term funding	$	(6	)
Six Months Ended June 30, 2010				Interest Expense			Interest Expense
Interest rate swaps — short-term funding	$	(3,952	)	Short-term funding	$	3,000	Short-term funding	$	(3	)

Cash flow hedges

The Corporation has variable-rate, short-term funding which expose the Corporation to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of these interest payments, the Corporation has entered into various interest rate swap agreements.

During the third quarter of 2008, the Corporation entered into two interest rate swap agreements which hedge the interest rate risk in the cash flows of certain short-term, variable-rate funding. Hedge effectiveness is determined using regression analysis. The Corporation recognized ineffectiveness of less than $0.1 million for the first half of 2011 (which increased interest expense), compared to ineffectiveness of less than $0.1 million for the first half of 2010 (which increased interest expense) and $0.2 million for full year 2010 (which increased interest expense) relating to these cash flow hedge relationships. No components of the derivatives change in fair value were excluded from the assessment of hedge effectiveness. Derivative gains and losses reclassified from accumulated other comprehensive income to current period earnings are included in interest expense on short-term funding (i.e., the line item in which the hedged cash flows are recorded). At June 30, 2011, accumulated other comprehensive income included a deferred after-tax net loss of $1.9 million related to these derivatives, compared to a deferred after-tax net loss of $3.5 million at December 31, 2010. The net after-tax derivative loss included in accumulated other comprehensive income at June 30, 2011, is projected to be reclassified into net interest income in conjunction with the recognition of interest payments on the variable-rate, short-term funding through September 2012.

The table below identifies the balance sheet category and fair values of the Corporation’s derivative instruments not designated as hedging instruments.

							Weighted Average
	Notional					Balance Sheet	Receive			Pay
	Amount		Fair Value			Category	Rate(1)			Rate(1)			Maturity
	($ in Thousands)
June 30, 2011
Interest rate-related instruments — customer and mirror	$	1,372,965		54,789		Other assets		1.68	%		1.68	%	43 months
Interest rate-related instruments — customer and mirror		1,372,965		(62,935	)	Other liabilities		1.68	%		1.68	%	43 months
Interest rate lock commitments (mortgage)		151,497		1,308		Other assets		—			—			—
Forward commitments (mortgage)		203,089		(166	)	Other liabilities		—			—			—
Foreign currency exchange forwards		44,100		2,100		Other assets		—			—			—
Foreign currency exchange forwards		35,161		(1,871	)	Other liabilities		—			—			—
December 31, 2010
Interest rate-related instruments — customer and mirror	$	1,268,502		54,154		Other assets		1.78	%		1.78	%	41 months
Interest rate—related instruments — customer and mirror		1,268,502		(58,632	)	Other liabilities		1.78	%		1.78	%	41 months
Interest rate lock commitments (mortgage)		129,377		(78	)	Other liabilities		—			—			—
Forward commitments (mortgage)		281,000		5,617		Other assets		—			—			—
Foreign currency exchange forwards		56,584		1,530		Other assets		—			—			—
Foreign currency exchange forwards		48,652		(1,289	)	Other liabilities		—			—			—

(1) Reflects the weighted average receive rate and pay rate for the interest rate swap derivative financial 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, 2011
Interest rate-related instruments — customer and mirror, net	Capital market fees, net	$	(3,668	)
Interest rate lock commitments (mortgage)	Mortgage banking, net		1,386
Forward commitments (mortgage)	Mortgage banking, net		(5,783	)
Foreign exchange forwards, net	Capital market fees, net		(12	)
Six Months Ended June 30, 2010
Interest rate-related instruments — customer and mirror, net	Capital market fees, net	$	(2,572	)
Interest rate lock commitments (mortgage)	Mortgage banking, net		7,373
Forward commitments (mortgage)	Mortgage banking, net		(11,120	)
Foreign exchange forwards, net	Capital market fees, net		(76	)

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). The net impact for the first half of 2011 was a $3.7 million loss, while the net impact for the full year 2010 was a $1.9 million net loss and the net impact for the first half of 2010 was a $2.6 million net loss.

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. The fair value of the mortgage derivatives at June 30, 2011, was a net gain of $1.1 million, comprised of the net gain of $1.3 million on interest rate lock commitments to originate residential mortgage loans held for sale to individual borrowers of approximately $151 million and the net loss of $0.2 million on forward commitments to sell residential mortgage loans to various investors of approximately $203 million. The fair value of the mortgage derivatives at December 31, 2010, was a net gain of $5.5 million, comprised of the net loss of $0.1 million on interest rate lock commitments to originate residential mortgage loans held for sale to individual borrowers of approximately $129 million and the net gain of $5.6 million on forward commitments to sell residential mortgage loans to various investors of approximately $281 million. The fair value of the mortgage derivatives at June 30, 2010, was a net loss of $0.6 million, comprised of the net gain of $6.0 million on interest rate lock commitments to originate residential mortgage loans held for sale to individual borrowers of approximately $265 million and the net loss of $6.6 million on forward commitments to sell residential mortgage loans to various investors of approximately $437 million.

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. At June 30, 2011, the Corporation had $14 million in notional balances of foreign currency forwards related to loans, and $33 million in notional balances of foreign currency forwards related to customer transactions (with mirror foreign currency forwards of $33 million), which on a combined basis had a fair value of $0.2 million net gain. At December 31, 2010, the Corporation had $5 million in notional balances of foreign currency forwards related to loans, and $50 million in notional balances of foreign currency forwards related to customer transactions (with mirror foreign currency forwards of $50 million), which on a combined basis had a fair value of $0.3 million net gain. At June 30, 2010, the Corporation had $4 million in notional balances of foreign currency forwards related to loans, and $23 million in notional balances of foreign currency forwards related to customer transactions (with mirror foreign currency forwards of $23 million), which on a combined basis had a fair value of $0.2 million net gain.