Derivative Instruments And Hedging Activities

3 Months Ended

Mar. 31, 2015

Summary of Derivative Instruments [Abstract]

Derivative Instruments And Hedging Activities

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Objectives

Our objectives in using derivatives are to add stability to interest income or expense, to modify the duration of specific assets or liabilities as we consider advisable, to manage exposure to interest rate movements or other identified risks, and/or to directly offset derivatives sold to our customers. To accomplish these objectives, we use interest rate swaps as part of our cash flow hedging strategy. These derivatives are used to hedge the variable cash flows associated with designated commercial loans.

Interest rate swap agreements designated as cash flow hedges involve the receipt of fixed-rate amounts in exchange for variable rate payments over the life of the agreements without exchange of the underlying principal amount. Derivatives not designated as accounting hedges, including basis swap agreements, are not speculative and are used to economically manage our exposure to interest rate movements and other identified risks, but do not meet the strict hedge accounting requirements.

Accounting

We record all derivatives on the balance sheet at fair value. Note 10 discusses the process to estimate fair value for derivatives. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives used to manage the exposure to risk are considered credit derivatives. When put in place after purchase of the asset(s) to be protected, these derivatives generally may not be designated as accounting hedges.

For derivatives designated as fair value hedges, changes in the fair value of the derivative are recognized in earnings together with changes in the fair value of the related hedged item. The net amount, if any, representing hedge ineffectiveness, is reflected in earnings. In previous years, we used fair value hedges to manage interest rate exposure to certain long-term debt. These hedges have been terminated and their remaining balances are being amortized into earnings, as discussed subsequently.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative are recorded in OCI and recognized in earnings when the hedged transaction affects earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized directly in earnings.

No derivatives have been designated for hedges of investments in foreign operations.

We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows on the derivative hedging instrument with the changes in fair value or cash flows on the designated hedged item or transaction. For derivatives not designated as accounting hedges, changes in fair value are recognized in earnings.

The remaining balances of any derivative instruments terminated prior to maturity, including amounts in accumulated other comprehensive income (“AOCI”) for swap hedges, are accreted or amortized to interest income or expense over the period to their previously stated maturity dates.

Amounts in AOCI are reclassified to interest income as interest is earned on variable rate loans and as amounts for terminated hedges are accreted or amortized to earnings. For the 12 months following March 31, 2015, we estimate that an additional$3.4 millionwill be reclassified.

Collateral and Credit Risk

Exposure to credit risk arises from the possibility of nonperformance by counterparties. Financial institutions which are well capitalized and well established are the counterparties for those derivatives entered into for asset liability management and to offset derivatives sold to our customers. The Company reduces its counterparty exposure for derivative contracts by centrally clearing all eligible derivatives.

For those derivatives that are not centrally cleared, the counterparties are typically financial institutions or customers of the Company. For those that are financial institutions, we manage our credit exposure through the use of a Credit Support Annex (“CSA”) to International Swaps and Derivative Association (“ISDA”) master agreements. Eligible collateral types are documented by the CSA and are controlled under the Company’s general credit policies and are typically monitored on a daily basis. A valuation haircut policy reflects the fact that collateral may fall in value between the date the collateral is called and the date of liquidation or enforcement. In practice, all of the Company’s collateral held as credit risk mitigation under a CSA is cash.

We offer interest rate swaps to our customers to assist them in managing their exposure to changing interest rates. Upon issuance, all of these customer swaps are immediately “hedged” by offsetting derivative contracts, such that the Company minimizes its interest rate risk exposure resulting from such transactions. Most of these customers do not have the capability for centralized clearing. Therefore we manage the credit risk through loan underwriting which includes a credit risk exposure formula for the swap, the same collateral and guarantee protection applicable to the loan and credit approvals, limits, and monitoring procedures. Fee income from customer swaps is included in other service charges, commissions and fees. No significant losses on derivative instruments have occurred as a result of counterparty nonperformance. Nevertheless, the related credit risk is considered and measured when and where appropriate. See Note 6 for further discussion of our underwriting, collateral requirements, and other procedures used to address credit risk.

Our derivative contracts require us to pledge collateral for derivatives that are in a net liability position at a given balance sheet date. Certain of these derivative contracts contain credit-risk-related contingent features that include the requirement to maintain a minimum debt credit rating. We may be required to pledge additional collateral if a credit-risk-related feature were triggered, such as a downgrade of our credit rating. However, in past situations, not all counterparties have demanded that additional collateral be pledged when provided for under their contracts. At March 31, 2015, the fair value of our derivative liabilities was $81.1 million, for which we were required to pledge cash collateral of approximately $65.8 million in the normal course of business. If our credit rating were downgraded one notch by either Standard & Poor’s or Moody’s at March 31, 2015, the additional amount of collateral we could be required to pledge is approximately $1.8 million. As a result of the Dodd-Frank Act, all newly eligible derivatives entered into are cleared through a central clearinghouse. Derivatives that are centrally cleared do not have credit-risk-related features that require additional collateral if our credit rating were downgraded.

Derivative Amounts

Selected information with respect to notional amounts and recorded gross fair values at March 31, 2015 and December 31, 2014, and the related gain (loss) of derivative instruments for the three months endedMarch 31, 2015 and 2014 is summarized as follows:

	March 31, 2015						December 31, 2014
	Notional amount		Fair value				Notional amount		Fair value
(In thousands)			Other assets		Other liabilities				Other assets		Other liabilities
Derivatives designated as hedging instruments
Cash flow hedges:
Interest rate swaps	$	300,000	$	4,623	$	—	$	275,000	$	1,508	$	123
Total derivatives designated as hedging instruments	300,000		4,623		—		275,000		1,508		123
Derivatives not designated as hedging instruments
Interest rate swaps for customers 2	3,048,760		58,982		62,452		2,770,052		48,287		50,669
Foreign exchange	355,708		20,373		18,671		443,721		16,625		15,272
Total derivatives not designated as hedging instruments	3,404,468		79,355		81,123		3,213,773		64,912		65,941
Total derivatives	$	3,704,468	$	83,978	$	81,123	$	3,488,773	$	66,420	$	66,064

	Three Months Ended March 31, 2015								Three Months Ended March 31, 2014
	Amount of derivative gain (loss) recognized/reclassified
(In thousands)	OCI		Reclassified from AOCI to interest income 3		Noninterest income (expense)		Offset to interest expense		OCI		Reclassified from AOCI to interest income 3		Noninterest income (expense)			Offset to interest expense
Derivatives designated as hedging instruments
Asset derivatives
Cash flow hedges 1:
Interest rate swaps	$	4,253	$	1,016	$	—			$	538	$	351	$	—
	4,253		1,016		—				538		351		—
Liability derivatives
Fair value hedges:
Terminated swaps on long-term debt							$	468								$	718
Total derivatives designated as hedging instruments	4,253		1,016		—		468		538		351		—			718
Derivatives not designated as hedging instruments
Interest rate swaps					—								6
Interest rate swaps for customers 2					517								(549		)
Futures contracts					1								—
Foreign exchange					2,735								1,711
Total return swap					—								(7,427		)
Total derivatives not designated as hedging instruments					3,253								(6,259		)
Total derivatives	$	4,253	$	1,016	$	3,253	$	468	$	538	$	351	$	(6,259	)	$	718

Note: These schedules are not intended to present at any given time the Company’s long/short position with respect to its derivative contracts.

¹  Amounts recognized in OCI and reclassified from AOCI represent the effective portion of the derivative gain.

²  Amounts include both the customer swaps and the offsetting derivative contracts.

³  Amounts for the three months endedMarch 31, 2015 and 2014 of $1.0 million and $0.4 million, respectively, are the amounts of reclassification to earnings from AOCI presented in Note 8.

At March 31, the fair values of derivative assets and liabilities were reduced by net credit valuation adjustments of $3.3 million and $0.1 million in 2015, and $1.6 million and $1.2 million in 2014, respectively. These adjustments are required to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk.