Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2019

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 liabilities that 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. Changes in the fair value of interest rate swaps designated as cash flow hedging instruments are reported in 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 three months ended March 31, 2019 and 2018 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 ISDA master agreements, central clearing mechanisms 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 CME legally characterizes variation margin payments for centrally cleared derivatives as settlements of the derivatives' exposures rather than collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. The Company's clearing agent for interest rate derivative contracts centrally cleared through the CME settles the variation margin daily with the CME; therefore, those interest rate derivative contracts the Company clears through the CME are reported at a fair value of approximately zero at March 31, 2019 and December 31, 2018.

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):

	March 31, 2019
		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 variable rate borrowings	2.43%	3-Month Libor	4.1	$	2,701,000	Other assets / Other liabilities	$	1,372	$	—
Derivatives not designated as hedges:
Pay-fixed interest rate swaps		4.11%	Indexed to 1-month Libor	5.8	1,038,701		Other assets / Other liabilities	8,201		(8,063		)
Pay-variable interest rate swaps		Indexed to 1-month Libor	4.11%	5.8	1,038,701		Other assets / Other liabilities	17,277		(8,685		)
Interest rate caps purchased, indexed to 1-month Libor			3.44%	0.9	98,129		Other assets	—		—
Interest rate caps sold, indexed to 1-month Libor		3.44%		0.9	98,129		Other liabilities	—		—
					$	4,974,660		$	26,850	$	(16,748	)

	December 31, 2018
		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 variable rate borrowings	2.38%	3-Month Libor	4.0	$	2,846,000	Other assets / Other liabilities	$	3,405	$	—
Derivatives not designated as hedges:
Pay-fixed interest rate swaps		4.10%	Indexed to 1-month Libor	6.0	1,048,196		Other assets / Other liabilities	14,883		(6,991		)
Pay-variable interest rate swaps		Indexed to 1-month Libor	4.10%	6.0	1,048,196		Other assets / Other liabilities	11,318		(16,874		)
Interest rate caps purchased, indexed to 1-month Libor			3.43%	1.2	98,407		Other assets	9		—
Interest rate caps sold, indexed to 1-month Libor		3.43%		1.2	98,407		Other liabilities	—		(9		)
					$	5,139,206		$	29,615	$	(23,874	)

The following table provides information about the amount of gain (loss) related to derivatives designated as cash flow hedges reclassified from AOCI into interest expense for the periods indicated (dollars in thousands):

	Three Months Ended March 31,
	2019		2018			Location of Gain (Loss) Reclassified from AOCI into Income
Interest rate contracts	$	2,723	$	(939	)	Interest expense on borrowings

During the three months ended March 31, 2019 and 2018, 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 March 31, 2019, the amount of net gain expected to be reclassified from AOCI into earnings during the next twelve months was $2.0 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. Currently, there are no circumstances that would trigger these provisions of the agreements.

The Company does not offset assets and liabilities under master netting agreements for financial reporting purposes. Information on interest rate swaps subject to these agreements is as follows at the dates indicated (in thousands):

	March 31, 2019
				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	$	9,556		$	—	$	9,556		$	(5,282	)	$	(3,030	)	$	1,244
Derivative liabilities	(8,063		)	—		(8,063		)	5,282			2,837			56
	$	1,493		$	—	$	1,493		$	—		$	(193	)	$	1,300

	December 31, 2018
				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	$	18,297		$	—	$	18,297		$	(5,264	)	$	(13,129	)	$	(96	)
Derivative liabilities	(6,991		)	—		(6,991		)	5,264			436			(1,291		)
	$	11,306		$	—	$	11,306		$	—		$	(12,693	)	$	(1,387	)

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 March 31, 2019, the Company had pledged net financial collateral of $3.7 million as collateral for interest rate swaps in a liability position that are not centrally cleared. Financial collateral of $3.0 million was pledged by counterparties to the Company for interest rate swaps in an asset position. The amount of collateral required to be posted varies based on the settlement value of outstanding swaps and in some cases may include initial margin requirements.