Derivatives

The Bank may use derivatives to hedge the risk of changes in the fair values of interest rate lock commitments, residential mortgage loans held for sale, and residential mortgage servicing rights. None of the Company's derivatives are designated as hedging instruments. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in income. The Company primarily utilizes forward interest rate contracts in its derivative risk management strategy.

The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments. Credit risk associated with forward contracts is limited to the replacement cost of those forward contracts in a gain position. There were no counterparty default losses on forward contracts in the three and six months ended June 30, 2014 and 2013. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Bank limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the Company completes the transaction by either paying or receiving a fee to or from the broker/dealer equal to the increase or decrease in the market value of the forward contract. At June 30, 2014, the Bank had commitments to originate mortgage loans held for sale totaling $323.0 million and forward sales commitments of $482.0 million.

The Bank's mortgage banking derivative instruments do not have specific credit risk-related contingent features. The forward sales commitments do have contingent features that may require transferring collateral to the broker/dealers upon their request. However, this amount would be limited to the net unsecured loss exposure at such point in time and would not materially affect the Company's liquidity or results of operations.

The Bank executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting the interest rate swaps that the Bank executes with a third party, such that the Bank minimizes its net risk exposure. As of June 30, 2014, the Bank had 296 interest rate swaps with an aggregate notional amount of $1.5 billion related to this program.

In connection with the interest rate swap program with commercial customers, the Bank has agreements with its derivative counterparties that contain a provision where if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations. The Bank also has agreements with its derivative counterparties that contain a provision where if the Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and the Bank would be required to settle its obligations under the agreements. Similarly, the Bank could be required to settle its obligations under certain of its agreements if specific regulatory events occur, such as if the Bank were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels. If the Bank had breached any of these provisions at June 30, 2014, it could have been required to settle its obligations under the agreements at the termination value.

As of June 30, 2014, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $21.6 million. The Bank has collateral posting requirements for initial or variation margins with its clearing members and clearing houses and has been required to post collateral against its obligations under these agreements of $33.2 million and $13.0 million as of June 30, 2014 and December 31, 2013, respectively.

The Bank incorporates credit valuation adjustments ("CVA") to appropriately reflect nonperformance risk in the fair value measurement of its derivatives. As of June 30, 2014, the net CVA decreased the settlement values of the Bank's net derivative assets by $1.5 million. During the three and six months ended June 30, 2014, the Bank recognized a loss of $1.8 million and $3.0 million, respectively, and during the three and six months ended June 30, 2013, the Bank recognized a gain of $1.8 million for both periods related to CVA on nonhedge derivative instruments, which is included in noninterest income. Various factors impact changes in the CVA over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.

The following tables summarize the types of derivatives, separately by assets and liabilities, and the fair values of such derivatives as of June 30, 2014 and December 31, 2013:



(in thousands)	Asset Derivatives				Liability Derivatives
Derivatives not designated	June 30,		December 31,		June 30,		December 31,
as hedging instrument	2014		2013		2014		2013
Interest rate lock commitments	$	4,580	$	706	$	175	$	—
Interest rate forward sales commitments	21		1,250		4,700		6
Interest rate swaps	19,609		15,965		21,029		14,556
Total	$	24,210	$	17,921	$	25,904	$	14,562

The fair values of the derivatives are recorded in other assets and other liabilities. The following table summarizes the types of derivatives and the gains (losses) recorded during the three and six months ended June 30, 2014 and 2013:



(in thousands)	Three months ended						Six Months Ended
Derivatives not designated	June 30,						June 30,
as hedging instrument	2014			2013			2014			2013
Interest rate lock commitments	$	6,099		$	(3,307	)	$	6,787		$	(840	)
Interest rate forward sales commitments	(13,368		)	12,116			(16,016		)	14,748
Interest rate swaps	(1,787		)	1,823			(3,001		)	1,839
Total	$	(9,056	)	$	10,632		$	(12,230	)	$	15,747

The gains and losses on the Company's mortgage banking derivatives are included in mortgage banking revenue. The gains and losses on the Company's interest rate swaps are included in other income.

The following table summarizes the offsetting derivatives assets that have a right of offset as of June 30, 2014 and December 31, 2013:



(in thousands)							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets/Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets/Liabilities presented in the Statement of Financial Position		Financial Instruments			Collateral Posted			Net Amount
June 30, 2014
Derivative Assets
Interest rate swaps	$	19,609	$	—	$	19,609	$	(1,689	)	$	(18,309	)	$	(389	)
Derivative Liabilities
Interest rate swaps	$	21,029	$	—	$	21,029	$	(1,689	)	$	(19,340	)	$	—

December 31, 2013
Derivative Assets
Interest rate swaps	$	15,965	$	—	$	15,965	$	(4,852	)	$	(2,207	)	$	8,906
Derivative Liabilities
Interest rate swaps	$	14,556	$	—	$	14,556	$	(4,852	)	$	(9,704	)	$	—