Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

Derivatives and Hedging Activities

The Company uses interest rate swaps to manage interest rate risk related to variable rate FHLB advances and certificates of deposit with maturities of one year, which expose the Company to variability in cash flows due to changes in interest rates. The Company enters into LIBOR-based interest rate swaps that are designated as cash flow hedges with the objective of limiting the variability of interest payment cash flows resulting from changes in the benchmark interest rate LIBOR. The effective portion of changes in the fair value of interest rate swaps designated as cash flow hedging instruments is reported in accumulated other comprehensive income (“AOCI”) and subsequently reclassified into interest expense in the same period in which the related interest on the floating-rate debt obligations affects earnings.

The Company also enters into interest rate derivative contracts with certain of its commercial borrowers to enable those borrowers to manage their exposure to interest rate fluctuations. To mitigate interest rate risk associated with these derivative contracts, the Company enters into offsetting derivative contract positions with primary dealers. These interest rate derivative contracts are not designated as hedging instruments; therefore, changes in the fair value of these derivatives are recognized immediately in earnings. The impact on earnings related to changes in fair value of these derivatives for the nine months ended September 30, 2015 and 2014 was not material.

The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. The Company manages dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of International Swaps and Derivatives Association ("ISDA") master agreements and counterparty limits. The agreements contain bilateral collateral arrangements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company manages the risk of default by its borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

The following tables set forth certain information concerning the Company’s interest rate contract derivative financial instruments and related hedged items at the dates indicated (dollars in thousands):

	September 30, 2015
		Weighted Average Pay Rate	Weighted Average Receive Rate	Weighted Average Remaining Life in Years
					Notional Amount		Balance Sheet Location	Fair Value
	Hedged Item							Asset		Liability
Derivatives designated as cash flow hedges:
Pay-fixed interest rate swaps	Variability of interest cash flows on certificates of deposit	3.11%	12-Month Libor	0.1	$	225,000	Other liabilities	$	—	$	(5,752	)
Pay-fixed interest rate swaps	Variability of interest cash flows on variable rate borrowings	1.62%	3-Month Libor	2.6	1,705,000		Other liabilities	—		(24,791		)
Pay-fixed forward-starting interest rate swaps	Variability of interest cash flows on variable rate borrowings	3.43%	3-Month Libor	11.7	300,000		Other liabilities	—		(28,999		)
Derivatives not designated as hedges:
Pay-fixed interest rate swaps		4.33%	Indexed to 1-month Libor	6.8	569,239		Other liabilities	—		(37,694		)
Pay-variable interest rate swaps		Indexed to 1-month Libor	4.33%	6.8	569,239		Other assets	37,694		—
Interest rate caps purchased, indexed to 1-month Libor			2.92%	2.2	105,000		Other assets	104		—
Interest rate caps sold, indexed to 1-month Libor		2.92%		2.2	105,000		Other liabilities	—		(104		)
					$	3,578,478		$	37,798	$	(97,340	)

	December 31, 2014
		Weighted Average Pay Rate	Weighted Average Receive Rate	Weighted Average Remaining Life in Years
					Notional Amount		Balance Sheet Location	Fair Value
	Hedged Item							Asset		Liability
Derivatives designated as cash flow hedges:
Pay-fixed interest rate swaps	Variability of interest cash flows on certificates of deposit	3.11%	12-Month Libor	0.8	$	225,000	Other liabilities	$	—	$	(5,741	)
Pay-fixed interest rate swaps	Variability of interest cash flows on variable rate borrowings	1.61%	3-Month Libor	2.8	1,505,000		Other assets / Other liabilities	4,083		(19,639		)
Pay-fixed forward-starting interest rate swaps	Variability of interest cash flows on variable rate borrowings	3.43%	3-Month Libor	12.5	300,000		Other liabilities	—		(18,115		)
Derivatives not designated as hedges:
Pay-fixed interest rate swaps and caps		4.34%	Indexed to 1-month Libor	6.3	537,368		Other assets / Other liabilities	60		(25,622		)
Pay-variable interest rate swaps and caps		Indexed to 1-month Libor	4.34%	6.3	537,368		Other assets / Other liabilities	25,622		(60		)
					$	3,104,736		$	29,765	$	(69,177	)

The following table provides information about gains and losses related to interest rate contract derivative instruments designated as cash flow hedges for the periods indicated (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Amount of loss reclassified from AOCI into interest expense during the period (effective portion)	$	(6,978	)	$	(6,729	)	$	(20,052	)	$	(19,936	)
Amount of gain (loss) recognized in income during the period (ineffective portion)	$	—		$	—		$	—		$	—

During the nine months ended September 30, 2015 and 2014, no derivative positions designated as cash flow hedges were discontinued and none of the gains and losses reported in AOCI were reclassified into earnings as a result of the discontinuance of cash flow hedges or because of the early extinguishment of debt. As of September 30, 2015, the amount expected to be reclassified from AOCI into income during the next twelve months was $18.4 million. 

Some of the Company’s ISDA master agreements with financial institution counterparties contain provisions that permit either counterparty to terminate the agreements and require settlement in the event that regulatory capital ratios fall below certain designated thresholds, upon the initiation of other defined regulatory actions or upon suspension or withdrawal of the Bank’s credit rating. The Company does not offset assets and liabilities under these agreements for financial reporting purposes. Currently, there are no circumstances that would trigger these provisions of the agreements. Information on interest rate swaps subject to master netting agreements is as follows at the dates indicated (in thousands):

	September 30, 2015
				Gross Amounts Offset in Balance Sheet		Net Amounts Presented in Balance Sheet			Gross Amounts Not Offset in Balance Sheet
	Gross Amounts Recognized								Derivative Instruments			Collateral Pledged		Net Amount
Derivative assets	$	104		$	—	$	104		$	(104	)	$	—	$	—
Derivative liabilities	(97,236		)	—		(97,236		)	104			97,121		(11		)
	$	(97,132	)	$	—	$	(97,132	)	$	—		$	97,121	$	(11	)

	December 31, 2014
				Gross Amounts Offset in Balance Sheet		Net Amounts Presented in Balance Sheet			Gross Amounts Not Offset in Balance Sheet
	Gross Amounts Recognized								Derivative Instruments			Collateral Pledged		Net Amount
Derivative assets	$	4,143		$	—	$	4,143		$	(4,143	)	$	—	$	—
Derivative liabilities	(69,117		)	—		(69,117		)	4,143			64,974		—
	$	(64,974	)	$	—	$	(64,974	)	$	—		$	64,974	$	—

The difference between the amounts reported for interest rate swaps subject to master netting agreements and the total fair value of interest rate contract derivative financial instruments reported in the consolidated balance sheets is related to interest rate contracts entered into with borrowers not subject to master netting agreements.

At September 30, 2015, the Company has pledged investment securities available for sale with a carrying amount of $67 million and cash on deposit of $52 million as collateral for interest rate swaps in a liability position. No financial collateral was pledged by counterparties to the Company for interest rate swaps in an asset position.  The amount of collateral required to be posted by the Company varies based on the settlement value of outstanding swaps and in some cases may include initial margin requirements. 

The Company enters into commitments to fund residential mortgage loans with the intention that these loans will subsequently be sold into the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate within a specified period of time, generally 30 to 75 days. These commitments are considered derivative instruments. The notional amount of outstanding mortgage loan commitment derivatives was $3 million at September 30, 2015 and December 31, 2014. Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the commitments might decline from inception of the commitment to funding of the loan. To protect against the price risk inherent in derivative loan commitments, the Company utilizes “best efforts” forward loan sale commitments. Under a “best efforts” contract, the Company commits to deliver an individual mortgage loan to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the Company for a loan is specified prior to the loan being funded. These commitments are considered derivative instruments once the underlying loans are funded.  The notional amount of forward loan sale commitment derivatives was $2 million and $1 million at September 30, 2015 and December 31, 2014, respectively. The fair value of loan commitment and forward sale commitment derivatives was nominal at September 30, 2015 and December 31, 2014.