Derivative Financial Instruments

We primarily use derivative financial instruments to manage interest rate risk, currency exchange rate risk, and to assist customers with their risk management objectives. Also, in connection with negotiating credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology and life science & healthcare industries.

Interest Rate Risk

Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our interest rate-sensitive assets and liabilities and changes in market interest rates. To manage interest rate risk for our 6.05% Subordinated Notes, we entered into a fixed-for-floating interest rate swap agreement at the time of debt issuance based upon LIBOR with matched-terms. Net cash benefits associated with our interest rate swap is recorded as a reduction in “Interest expense—Borrowings,” a component of net interest income. The fair value of our interest rate swaps is calculated using a discounted cash flow method and adjusted for credit valuation associated with counterparty risk. Changes in fair value of the interest rate swaps are reflected in either other assets (for swaps in an asset position) or other liabilities (for swaps in a liability position).

We assess hedge effectiveness under ASC 815, Derivatives and Hedging, using the long-haul method. Any differences associated with our interest rate swap that arise as a result of hedge ineffectiveness is recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Currency Exchange Risk

We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure risk associated with the net difference between foreign currency denominated assets and liabilities. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting. Gains or losses from changes in currency rates on foreign currency denominated instruments are included in other noninterest income, a component of noninterest income. We may experience ineffectiveness in the economic hedging relationship, because the instruments are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in other assets and loss positions in other liabilities, while net changes in fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income. Additionally, through our global banking operations we maintain customer deposits denominated in a variety of global currencies, which are used to fund certain loans in these currencies to limit our exposure to currency fluctuations.

Other Derivative Instruments

Also included in our derivative instruments are equity warrant assets and client forward and option contracts, and client interest rate contracts. For further description of these other derivative instruments, refer to Note 2-“Summary of Significant Accounting Policies" under Part II, Item 8 of our 2014 Form 10-K.

Counterparty Credit Risk

We are exposed to credit risk if counterparties to our derivative contracts do not perform as expected. We mitigate counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate. With respect to measuring counterparty credit risk for derivative instruments, we measure the fair value of a group of financial assets and financial liabilities on a net risk basis by counterparty portfolio.

The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at September 30, 2015 and December 31, 2014 were as follows:



		September 30, 2015										December 31, 2014
(Dollars in thousands)	Balance Sheet Location	Notional or Contractual Amount		Fair Value			Collateral (1)		Net Exposure (2)			Notional or Contractual Amount		Fair Value			Collateral (1)		Net Exposure (2)
Derivatives designated as hedging instruments:
Interest rate risks:
Interest rate swaps	Other assets	$	45,964	$	3,485		$	—	$	3,485		$	45,964	$	4,609		$	2,970	$	1,639
Derivatives not designated as hedging instruments:
Currency exchange risks:
Foreign exchange forwards	Other assets	17,038		594			—		594			200,957		5,050			2,441		2,609
Foreign exchange forwards	Other liabilities	37,609		(1,075		)	—		(1,075		)	6,226		(489		)	—		(489		)
Net exposure				(481		)	—		(481		)			4,561			2,441		2,120
Other derivative instruments:
Equity warrant assets	Other assets	208,270		130,091			—		130,091			197,878		116,604			—		116,604
Other derivatives:
Client foreign exchange forwards	Other assets	733,204		32,431			3,756		28,675			801,487		28,954			2,370		26,584
Client foreign exchange forwards	Other liabilities	695,403		(27,618		)	—		(27,618		)	774,355		(27,647		)	—		(27,647		)
Client foreign currency options	Other assets	28,390		246			—		246			34,926		227			—		227
Client foreign currency options	Other liabilities	28,390		(246		)	—		(246		)	34,926		(227		)	—		(227		)
Client interest rate derivatives	Other assets	459,614		5,164			—		5,164			387,410		2,546			—		2,546
Client interest rate derivatives	Other liabilities	459,614		(5,719		)	—		(5,719		)	387,410		(2,748		)	—		(2,748		)
Net exposure				4,258			3,756		502					1,105			2,370		(1,265		)
Net				$	137,353		$	3,756	$	133,597				$	126,879		$	7,781	$	119,098


(1)	Cash collateral received from our counterparties in relation to market value exposures of derivative contracts in our favor is recorded as a component of “short-term borrowings” on our consolidated balance sheets.


(2)	Net exposure for contracts in a gain position reflects the replacement cost in the event of nonperformance by all such counterparties. The credit ratings of our institutional counterparties as of September 30, 2015 remain at investment grade or higher and there were no material changes in their credit ratings during the three and nine months ended September 30, 2015.

A summary of our derivative activity and the related impact on our consolidated statements of income for the three and nine months ended September 30, 2015 and 2014 is as follows:



		Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	Statement of income location	2015			2014			2015			2014
Derivatives designated as hedging instruments:
Interest rate risks:
Net cash benefit associated with interest rate swaps	Interest expense—borrowings	$	631		$	638		$	1,903		$	1,915
Changes in fair value of interest rate swaps	Net gains on derivative instruments	(8		)	(12		)	(22		)	(37		)
Net gains associated with interest rate risk derivatives		$	623		$	626		$	1,881		$	1,878
Derivatives not designated as hedging instruments:
Currency exchange risks:
Gains (losses) on revaluations of foreign currency instruments	Other noninterest income	$	186		$	(12,640	)	$	(11,667	)	$	(12,347	)
(Losses) gains on internal foreign exchange forward contracts, net	Net gains on derivative instruments	(218		)	12,529			11,626			12,038
Net losses associated with currency risk		$	(32	)	$	(111	)	$	(41	)	$	(309	)
Other derivative instruments:
Net gains on equity warrant assets	Net gains on derivative instruments	$	10,685		$	13,157		$	54,579		$	50,859
Gains on client foreign exchange forward contracts, net	Net gains on derivative instruments	$	179		$	886		$	459		$	1,358
Net losses on other derivatives (1)	Net gains on derivative instruments	$	(394	)	$	(22	)	$	(352	)	$	(738	)


(1)	Primarily represents the change in fair value of loan conversion options.

Balance Sheet Offsetting

Certain of our derivative and other financial instruments are subject to enforceable master netting arrangements with our counterparties. These agreements provide for the net settlement of multiple contracts with a single counterparty through a single payment, in a single currency, in the event of default on or termination of any one contract.

The following table summarizes our assets subject to enforceable master netting arrangements as of September 30, 2015 and December 31, 2014:



								Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts offset in the Statement of Financial Position			Net Amounts of Assets Presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received			Net Amount
September 30, 2015
Derivative Assets:
Interest rate swaps	$	3,485	$	—		$	3,485	$	(3,485	)	$	—		$	—
Foreign exchange forwards	33,025		—			33,025		(19,373		)	(3,756		)	9,896
Foreign currency options	322		(76		)	246		(152		)	—			94
Client interest rate derivatives	5,164		—			5,164		(5,164		)	—			—
Total derivative assets:	41,996		(76		)	41,920		(28,174		)	(3,756		)	9,990
Reverse repurchase, securities borrowing, and similar arrangements	214,484		—			214,484		(214,484		)	—			—
Total	$	256,480	$	(76	)	$	256,404	$	(242,658	)	$	(3,756	)	$	9,990
December 31, 2014
Derivative Assets:
Interest rate swaps	$	4,609	$	—		$	4,609	$	(1,639	)	$	(2,970	)	$	—
Foreign exchange forwards	34,004		—			34,004		(17,843		)	(4,811		)	11,350
Foreign currency options	501		(274		)	227		(144		)	—			83
Client interest rate derivatives	2,546		—			2,546		(2,546		)	—			—
Total derivative assets:	41,660		(274		)	41,386		(22,172		)	(7,781		)	11,433
Reverse repurchase, securities borrowing, and similar arrangements	95,611		—			95,611		(95,611		)	—			—
Total	$	137,271	$	(274	)	$	136,997	$	(117,783	)	$	(7,781	)	$	11,433

The following table summarizes our liabilities subject to enforceable master netting arrangements as of September 30, 2015 and December 31, 2014:



								Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts offset in the Statement of Financial Position			Net Amounts of Liabilities Presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Pledged		Net Amount
September 30, 2015
Derivative Liabilities:
Foreign exchange forwards	$	28,693	$	—		$	28,693	$	(10,329	)	$	—	$	18,364
Foreign currency options	322		(76		)	246		(94		)	—		152
Client interest rate derivatives	5,719		—			5,719		(5,719		)	—		—
Total derivative liabilities:	34,734		(76		)	34,658		(16,142		)	—		18,516
Repurchase, securities lending, and similar arrangements	—		—			—		—			—		—
Total	$	34,734	$	(76	)	$	34,658	$	(16,142	)	$	—	$	18,516
December 31, 2014
Derivative Liabilities:
Foreign exchange forwards	$	28,136	$	—		$	28,136	$	(16,808	)	$	—	$	11,328
Foreign currency options	501		(274		)	227		(83		)	—		144
Client interest rate derivatives	2,748		—			2,748		(2,748		)	—		—
Total derivative liabilities:	31,385		(274		)	31,111		(19,639		)	—		11,472
Repurchase, securities lending, and similar arrangements	—		—			—		—			—		—
Total	$	31,385	$	(274	)	$	31,111	$	(19,639	)	$	—	$	11,472