Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy. The significant accounting policies related to derivative instruments and hedging activities are presented in Note 1, "Summary of Significant Accounting Policies."

Fair Value Hedges

The Company hedges the fair value of fixed rate commercial real estate loans using interest rate swaps through which the Company pays fixed amounts and receives variable amounts. These derivative contracts are designated as fair value hedges.

Fair Value Hedges

(Dollar amounts in thousands)

	As of
	June 30, 2016			December 31, 2015
Gross notional amount outstanding	$	11,016		$	11,620
Derivative liability fair value	(528		)	(643		)
Weighted-average interest rate received	2.37		%	2.25		%
Weighted-average interest rate paid	6.35		%	6.36		%
Weighted-average maturity (in years)	1.49			1.97
Fair value of derivative (1)	$	547		$	665

⁽¹⁾  This amount represents the fair value if credit risk related contingent features were triggered.

Hedge ineffectiveness is recognized in other noninterest income in the Condensed Consolidated Statements of Income. For the quarters and six months ended June 30, 2016 and 2015, gains or losses related to fair value hedge ineffectiveness were not material.

Cash Flow Hedges

As of June 30, 2016, the Company hedged $710.0 million of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $710.0 million of borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements. Forward starting interest rate swaps totaling $325.0 million began on various dates between June of 2015 and June of 2016, and mature between June and August of 2019. The remaining forward starting interest rate swaps begin at various dates between February of 2017 and May of 2018 and mature between February and May of 2020. These derivative contracts are designated as cash flow hedges.

Cash Flow Hedges

(Dollar amounts in thousands)

	As of
	June 30, 2016			December 31, 2015
Gross notional amount outstanding	$	1,420,000		$	1,220,000
Derivative asset fair value	20,683			4,787
Derivative liability fair value	(19,647		)	(8,950		)
Weighted-average interest rate received	1.28		%	1.24		%
Weighted-average interest rate paid	1.01		%	0.75		%
Weighted-average maturity (in years)	3.29			3.91

The effective portion of gains or losses on cash flow hedges is recorded in accumulated other comprehensive loss on an after-tax basis and is subsequently reclassified to interest income or expense in the period that the forecasted hedged item impacts earnings. Hedge effectiveness is determined using a regressionanalysis at the inception of the hedge relationship and on an ongoing basis. For the quarters and six months ended June 30, 2016 and 2015, there were no material gains or losses related to cash flow hedge ineffectiveness. As of June 30, 2016, the Company estimates that $3.8 million will be reclassified from accumulated other comprehensive loss as an increase to interest income over the next twelve months.

Other Derivative Instruments

The Company also enters into derivative transactions with its commercial customers and simultaneously enters into offsetting interest rate derivative transactions with third parties. This transaction allows the Company's customers to effectively convert a variable rate loan into a fixed rate loan. Due to the offsetting nature of these transactions, the Company does not apply hedge accounting treatment. The Company's credit exposure on these derivative transactions results primarily from counterparty credit risk. The credit valuation adjustment ("CVA") is a fair value adjustment to the derivative to account for this risk. As of June 30, 2016 and December 31, 2015, the Company's credit exposure was fully secured by the underlying collateral on customer loans, therefore, no CVA was recorded. Transaction fees related to commercial customer derivative instruments of $2.1 million and $5.3 million were recorded in noninterest income for the quarter and six months ended June 30, 2016, respectively. There were $818,000 and $1.5 million of transaction fees recorded for the quarter and six months ended June 30,2015, respectively.

Other Derivative Instruments

(Dollar amounts in thousands)

	As of
	June 30, 2016			December 31, 2015
Gross notional amount outstanding	$	1,242,040		$	853,385
Derivative asset fair value	31,868			11,446
Derivative liability fair value	(31,868		)	(11,446		)
Fair value of derivative (1)	32,426			11,939

⁽¹⁾  This amount represents the fair value if credit risk related contingent features were triggered.

The Company occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of the credit risk related to customer transactions. The amounts of these instruments were not material for any periods presented. The Company had no other derivative instruments as of June 30, 2016 and December 31, 2015. The Company does not enter into derivative transactions for purely speculative purposes.

Credit Risk

Derivative instruments are inherently subject to credit risk, which represents the Company's risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing the aggregate amount of net unrealized losses by transaction, monitoring the size and the maturity structure of the derivatives, and applying uniform credit standards. Company policy establishes limits on credit exposure to any single counterparty. In addition, the Company established bilateral collateral agreements with derivative counterparties that provide for exchanges of marketable securities or cash to collateralize either party's net losses above a stated minimum threshold. As of June 30, 2016 and December 31, 2015, these collateral agreements covered 100% of the fair value of the Company's outstanding fair value hedges. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.

Certain derivative instruments are subject to master netting agreements with counterparties. The Company records these transactions at their gross fair values and does not offset derivative assets and liabilities in the Consolidated Statements of Financial Condition. The following table presents the fair value of the Company's derivatives and offsetting positions as of June 30, 2016 and December 31, 2015.

Fair Value of Offsetting Derivatives

(Dollar amounts in thousands)

	As of June 30, 2016						As of December 31, 2015
	Assets			Liabilities			Assets			Liabilities
Gross amounts recognized	$	52,551		$	52,043		$	16,233		$	21,039
Less: amounts offset in the Consolidated Statements of   Financial Condition	—			—			—			—
Net amount presented in the Consolidated Statements of   Financial Condition (1)	52,551			52,043			16,233			21,039
Gross amounts not offset in the Consolidated Statements of   Financial Condition:
Offsetting derivative positions	(20,830		)	(20,830		)	(4,791		)	(4,791		)
Cash collateral pledged	—			(31,213		)	—			(16,248		)
Net credit exposure	$	31,721		$	—		$	11,442		$	—

⁽¹⁾  Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.

As of June 30, 2016 and December 31, 2015, the Company's derivative instruments generally contained provisions that require the Company's debt to remain above a certain credit rating by each of the major credit rating agencies or that the Company maintain certain capital levels. If the Company's debt were to fall below that credit rating or the Company's capital were to fall below the required levels, it would be in violation of those provisions, and the counterparties to the derivative instruments could terminate the swap transaction and demand cash settlement of the derivative instrument in an amount equal to the derivative liability fair value. As of June 30, 2016 and December 31, 2015 the Company was in compliance with these provisions.