Derivative Financial Instruments

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

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, which may include currency exchange rate risks and interest rate risks. 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 on our variable-interest rate loan portfolio, we enter into interest rate swap contracts to hedge against future changes in interest rates by using hedging instruments to lock in future cash inflows that would otherwise be impacted by movements in the market interest rates. We designate these interest rate swap contracts as cash flow hedges that qualify for hedge accounting under ASC 815, Derivatives and Hedging ("ASC 815"), and record them in other assets and other liabilities. For qualifying cash flow hedges, changes in the fair value of the derivative are recorded in accumulated other comprehensive income and recognized in earnings as the hedged item affects earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item in the line item "Loans" as part of interest income, a component of consolidated net income.

We assess hedge effectiveness under ASC 815 on a quarterly basis to ensure all hedges remain highly effective to ensure hedge accounting under ASC 815 can be applied. If the hedging relationship no longer exists or no longer qualifies as a hedge per ASC 815, any amounts remaining as gain or loss in accumulated other comprehensive income are reclassified into earnings in the line item "Loans" as part of interest income, a component of consolidated net income. As of June 30, 2019, no derivatives classified as hedges were terminated or were disqualified for hedge accounting. The maximum length of time over which the forecasted transactions are hedged is approximately six years.

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 recorded in the line item “Other” as part of noninterest income, a component of consolidated net 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 in the line item “Other” as part of noninterest income, a component of consolidated net income.

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 2018 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 and fair value of our derivative financial instruments at June 30, 2019 and December 31, 2018 were as follows:

	June 30, 2019						December 31, 2018
	Notional or Contractual Amount		Fair Value				Notional or Contractual Amount		Fair Value
(Dollars in thousands)			Derivative Assets (1)		Derivative Liabilities (1)				Derivative Assets (1)		Derivative Liabilities (1)
Derivatives designated as hedging instruments:
Interest rate risks:
Interest rate swaps	$	1,015,000	$	19,558	$	—	$	—	$	—	$	—
Interest rate swaps	250,000		—		391		—		—		—
Derivatives not designated as hedging instruments:
Currency exchange risks:
Foreign exchange forwards	37,120		1,081		—		263,733		4,767		—
Foreign exchange forwards	275,704		—		4,210		178,310		—		1,094
Other derivative instruments:
Equity warrant assets	221,013		158,048		—		223,532		149,238		—
Client foreign exchange forwards	3,447,213		92,623		—		2,759,878		93,876		—
Client foreign exchange forwards	3,137,742		—		81,489		2,568,085		—		85,706
Client foreign currency options	87,439		758		—		93,556		1,759		—
Client foreign currency options	87,538		—		758		93,579		—		1,759
Client interest rate derivatives (2)	1,159,613		19,440		—		1,020,416		8,499		—
Client interest rate derivatives (2)	1,237,704		—		25,803		1,337,328		—		9,491
Total derivatives not designated as hedging instruments			271,950		112,260				258,139		98,050
Total derivatives			$	291,508	$	112,651			$	258,139	$	98,050

(1) Derivative assets and liabilities are included in "Accrued interest receivable and other assets" and "Other liabilities", respectively, on our consolidated balance sheets.

(2) The amount reported for June 30, 2019 reflects rule changes implemented by two central clearing houses that require entities to treat derivative assets, liabilities and the related variation margin as settlement of the related derivative fair values for legal and accounting purposes, as opposed to presenting gross derivative assets and liabilities. As a result, client interest rate derivatives reflect reductions of approximately $4.2 million and $0.4 million of derivative assets at June 30, 2019 and December 31, 2018, respectively.

A summary of our derivative activity and the related impact on our consolidated statements of income for the three and six months ended June 30, 2019 and 2018 is as follows:

		Three months ended June 30,						Six months ended June 30,
(Dollars in thousands)	Statement of income location	2019			2018			2019			2018
Derivatives designated as hedging instruments:
Interest rate risks:
Amounts reclassified from accumulated other comprehensive income into income	Interest income—loans	$	(508	)	$	—		$	(511	)	$	—
Derivatives not designated as hedging instruments:
Currency exchange risks:
Gains (losses) on revaluations of internal foreign currency instruments, net	Other noninterest income	$	2,491		$	(319	)	$	3,541		$	2,607
(Losses) gains on internal foreign exchange forward contracts, net	Other noninterest income	(3,274		)	459			(3,743		)	(3,053		)
Net (losses) gains associated with internal currency risk		$	(783	)	$	140		$	(202	)	$	(446	)
Other derivative instruments:
Gains (losses) on revaluations of client foreign currency instruments, net	Other noninterest income	$	959		$	(2,748	)	$	(12,612	)	$	4,905
Gains (losses) on client foreign exchange forward contracts, net	Other noninterest income	411			2,844			13,065			(4,270		)
Net gains associated with client currency risk		$	1,370		$	96		$	453		$	635
Net gains on equity warrant assets	Gains on equity warrant assets, net	$	48,347		$	19,061		$	69,652		$	38,252
Net (losses) gains on other derivatives	Other noninterest income	$	(1,131	)	$	(10	)	$	(1,496	)	$	421

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 June 30, 2019 and December 31, 2018:

	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		Gross Amounts Not Offset in the Statement of Financial Position but Subject to Master Netting Arrangements						Net Amount
(Dollars in thousands)							Financial Instruments			Cash Collateral Received (1)
June 30, 2019
Derivative assets:
Interest rate swaps	$	19,558	$	—	$	19,558	$	(19,558	)	$	—		$	—
Foreign exchange forwards	93,704		—		93,704		(30,435		)	(24,171		)	39,098
Foreign currency options	758		—		758		(246		)	(59		)	453
Client interest rate derivatives	19,440		—		19,440		(19,418		)	(22		)	—
Total derivative assets	133,460		—		133,460		(69,657		)	(24,252		)	39,551
Reverse repurchase, securities borrowing, and similar arrangements	291,678		—		291,678		(291,678		)	—			—
Total	$	425,138	$	—	$	425,138	$	(361,335	)	$	(24,252	)	$	39,551
December 31, 2018
Derivative assets:
Foreign exchange forwards	$	98,643	$	—	$	98,643	$	(38,213	)	$	(11,825	)	$	48,605
Foreign currency options	1,759		—		1,759		(613		)	(90		)	1,056
Client interest rate derivatives	8,499		—		8,499		(8,416		)	(83		)	—
Total derivative assets	108,901		—		108,901		(47,242		)	(11,998		)	49,661
Reverse repurchase, securities borrowing, and similar arrangements	123,611		—		123,611		(123,611		)	—			—
Total	$	232,512	$	—	$	232,512	$	(170,853	)	$	(11,998	)	$	49,661

(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.

The following table summarizes our liabilities subject to enforceable master netting arrangements as of June 30, 2019 and December 31, 2018:

	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		Gross Amounts Not Offset in the Statement of Financial Position but Subject to Master Netting Arrangements						Net Amount
(Dollars in thousands)							Financial Instruments			Cash Collateral Pledged (1)
June 30, 2019
Derivative liabilities:
Interest rate swaps	$	391	$	—	$	391	$	(391	)	$	—		$	—
Foreign exchange forwards	85,699		—		85,699		(17,096		)	(29,296		)	39,307
Foreign currency options	758		—		758		(475		)	—			283
Client interest rate derivatives	25,803		—		25,803		—			(25,579		)	224
Total derivative liabilities	112,651		—		112,651		(17,962		)	(54,875		)	39,814
Repurchase, securities lending, and similar arrangements	—		—		—		—			—			—
Total	$	112,651	$	—	$	112,651	$	(17,962	)	$	(54,875	)	$	39,814
December 31, 2018
Derivative liabilities:
Foreign exchange forwards	$	86,800	$	—	$	86,800	$	(24,778	)	$	(20,732	)	$	41,290
Foreign currency options	1,759		—		1,759		(1,054		)	—			705
Client interest rate derivatives	9,491		—		9,491		—			(9,207		)	284
Total derivative liabilities	98,050		—		98,050		(25,832		)	(29,939		)	42,279
Repurchase, securities lending, and similar arrangements	319,414		—		319,414		—			—			319,414
Total	$	417,464	$	—	$	417,464	$	(25,832	)	$	(29,939	)	$	361,693

(1)

Cash collateral pledged to our counterparties in relation to market value exposures of derivative contracts in a liability position and repurchase agreements are recorded as a component of “Cash and cash equivalents" on our consolidated balance sheets.