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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2017
Derivative Financial Instruments |
Derivative Financial Instruments | 10. Derivative Financial Instruments The Company enters into derivative contracts primarily to manage its interest rate risk, as well as for customer accommodation purposes. Derivatives used for risk management purposes consist of interest rate swaps that are designated as either a fair value hedge or a cash flow hedge. The derivatives are recognized on the unaudited consolidated balance sheets as either assets or liabilities at fair value. Derivatives entered into for customer accommodation purposes consist of various free-standing interest rate derivative products and foreign exchange contracts. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The following table summarizes notional amounts and fair values of derivatives held by the Company as of September 30, 2017 and December 31, 2016:
|  | September 30, 2017 |  | December 31, 2016
|  |  |  |  | Fair Value |  |  |  |  | Fair Value
|  | Notional |  | Asset |  | Liability |  | Notional |  | Asset |  | Liability
(dollars in thousands) |  | Amount |  | Derivatives (1) |  | Derivatives (2) |  | Amount |  | Derivatives (1) |  | Derivatives (2)
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 196,173 |  | $ | — |  | $ | (3,343) |  | $ | 200,504 |  | $ | — |  | $ | (5,296)
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | 1,727,957 |  |  | 19,743 |  |  | (15,503) |  |  | 1,297,101 |  |  | 15,982 |  |  | (18,299)
Funding swap |  |  | 41,536 |  |  | — |  |  | (5,975) |  |  | 37,143 |  |  | — |  |  | (7,460)
Foreign exchange contracts |  |  | 3,442 |  |  | 88 |  |  | (12) |  |  | 3,664 |  |  | — |  |  | (147)
| (1) |  | The positive fair value of derivative assets is included in other assets.
| (2) |  | The negative fair value of derivative liabilities is included in other liabilities.
As of September 30, 2017, the Company pledged $23.7 million in financial instruments and $12.5 million in cash as collateral for interest rate swaps. As of December 31, 2016, the Company pledged $12.1 million in financial instruments and $18.3 million in cash as collateral for interest rate swaps. Fair Value Hedges To manage the risk related to the Company’s net interest margin, interest rate swaps are utilized to hedge certain fixed-rate loans. These swaps have maturity, amortization and prepayment features that correspond to the loans hedged, and are designated and qualify as fair value hedges. Any gain or loss on the swaps, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized in current period earnings. At September 30, 2017, the Company carried interest rate swaps with notional amounts totaling $46.2 million with a positive fair value of nil and fair value losses of $1.0 million that were categorized as fair value hedges for commercial and industrial loans and commercial real estate loans. The Company received 6-month London Interbank Offered Rate (“LIBOR”) and paid fixed rates ranging from 2.59% to 3.44%. The swaps mature between 2019 and 2023. At December 31, 2016, the Company carried interest rate swaps with notional amounts totaling $50.5 million with a positive fair value of nil and a negative fair value of $1.5 million that were categorized as fair value hedges for commercial and industrial loans and commercial real estate loans. The following table shows the net gains and losses recognized in income related to derivatives in fair value hedging relationships for the three and nine months ended September 30, 2017 and 2016:
|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
(dollars in thousands) |  | 2017 |  | 2016 |  | 2017 |  | 2016
Interest expense recorded in net interest income |  | $ | (142) |  | $ | (279) |  | $ | (511) |  | $ | (973)
Gains (losses) recorded in noninterest income: |  |  |  |  |  |  |  |  |  |  |  |
Recognized on derivatives |  |  | 150 |  |  | 479 |  |  | 274 |  |  | (1,039)
Recognized on hedged item |  |  | (224) |  |  | (481) |  |  | (222) |  |  | 1,065
Net gains (losses) recognized on fair value hedges (ineffective portion) |  |  | (74) |  |  | (2) |  |  | 52 |  |  | 26
Net losses recognized on fair value hedges |  | $ | (216) |  | $ | (281) |  | $ | (459) |  | $ | (947)
Cash Flow Hedges The Company utilizes interest rate swaps to reduce exposure to interest rates associated with short-term fixed-rate liabilities. The Company enters into interest rate swaps paying fixed rates and receiving LIBOR. The LIBOR index will correspond to the short-term fixed-rate nature of the liabilities being hedged. If interest rates rise, the increase in interest received on the swaps will offset increases in interest costs associated with these liabilities. By hedging with interest rate swaps, the Company minimizes the adverse impact on interest expense associated with increasing rates on short-term liabilities. The interest rate swaps are designated and qualify as cash flow hedges. The effective portion of the gain or loss on the interest rate swaps is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. There were no recognized expenses related to the ineffective portion of the change in fair value of derivatives designated as a cash flow hedge for the three and nine months ended September 30, 2017 and 2016. As of September 30, 2017 and December 31, 2016, the Company carried two interest rate swaps with notional amounts totaling $150.0 million, with a negative fair value of $2.3 million as of September 30, 2017 and a negative fair value of $3.8 million as of December 31, 2016, in order to reduce exposure to interest rate increases associated with short-term fixed-rate liabilities. The swaps mature in 2018. The Company received 6-month LIBOR and paid fixed rates ranging from 2.98% to 3.03%. The interest rate swaps designated as cash flow hedges resulted in net interest expense of $0.6 million and $0.8 million during the three months ended September 30, 2017 and 2016, respectively, and $1.9 million and $2.5 million during the nine months ended September 30, 2017 and 2016, respectively. The following table summarizes the effect of cash flow hedging relationships for the three and nine months ended September 30, 2017 and 2016:
|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
(dollars in thousands) |  | 2017 |  | 2016 |  | 2017 |  | 2016
Pretax gains recognized in other comprehensive income on derivatives (effective portion) |  | $ | 675 |  | $ | 1,545 |  | $ | 1,531 |  | $ | 917
There were no gains or losses reclassified from accumulated other comprehensive loss to earnings during the three and nine months ended September 30, 2017 and 2016. Free-Standing Derivative Instruments For the derivatives that are not designated as hedges, changes in fair value are reported in current period earnings. The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the unaudited consolidated statements of income for the three and nine months ended September 30, 2017 and 2016:
|  | Net gains (losses) recognized |  | Three Months Ended |  | Nine Months Ended
|  | in the consolidated statements |  | September 30, |  | September 30,
(dollars in thousands) |  | of income line item |  | 2017 |  | 2016 |  | 2017 |  | 2016
Derivatives Not Designated As Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | Other noninterest income |  | $ | 234 |  | $ | 378 |  | $ | 587 |  | $ | (17)
Funding swap |  | Other noninterest income |  |  | (41) |  |  | 6 |  |  | (74) |  |  | 25
Foreign exchange contracts |  | Other noninterest income |  |  | (149) |  |  | 72 |  |  | 78 |  |  | (50)
As of September 30, 2017, the Company carried multiple interest rate swaps with notional amounts totaling $1.7 billion, including $1.6 billion related to the Company’s customer swap program, with a positive fair value of $19.7 million and a negative fair value of $15.5 million. The Company received 1-month and 3-month LIBOR and paid fixed rates ranging from 1.24% to 5.33%. The swaps mature between 2018 and 2037. As of December 31, 2016, the Company carried multiple interest rate swaps with notional amounts totaling $1.3 billion, including $1.2 billion related to the Company’s customer swap program, with a positive fair value of $16.0 million and a negative fair value of $18.3 million. The Company received 1-month and 3-month LIBOR and paid fixed rates ranging from 0.77% to 4.90%. The swaps mature between 2018 and 2035. These swaps resulted in net interest expense of $0.2 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively, and net interest expense of $0.7 million and $0.8 million for the nine months ended September 30, 2017 and 2016, respectively. The Company’s customer swap program is designed by offering customers a variable-rate loan that is swapped to fixed-rate through an interest-rate swap. The Company simultaneously executes an offsetting interest-rate swap with a swap dealer. Upfront fees on the dealer swap are recorded in other noninterest income and totaled $1.3 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively, and $5.9 million and $4.3 million for the nine months ended September 30, 2017 and 2016, respectively. Interest rate swaps related to the program had asset fair values of $19.7 million and $16.0 million as of September 30, 2017 and December 31, 2016, respectively, and liability fair values of $13.8 million and $16.0 million as of September 30, 2017 and December 31, 2016, respectively. In conjunction with the 2016 sale of Class B restricted shares of common stock issued by Visa, the Company entered into a funding swap agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion ratio to unrestricted Class A common shares. A derivative liability (“Visa derivative”) of $6.0 million and $7.5 million was included in the unaudited consolidated balance sheets at September 30, 2017 and December 31, 2016, respectively, to provide for the fair value of this liability. Under the terms of the funding swap agreement, the Company will make monthly payments to the buyer based on Visa’s Class A stock price and the number of Visa Class B restricted shares that were sold until the date on which the covered litigation is settled. There were no sales of these shares prior to 2016. See “Note 14. Fair Value” for more information. Counterparty Credit Risk By using derivatives, the Company is exposed to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset, net of cash or other collateral received, and net of derivatives in a loss position with the same counterparty to the extent master netting arrangements exist. The Company minimizes counterparty credit risk through credit approvals, limits, monitoring procedures, executing master netting arrangements and obtaining collateral, where appropriate. Counterparty credit risk related to derivatives is considered in determining fair value. The Company’s interest rate swap agreements include bilateral collateral agreements with collateral requirements which begin with exposures in excess of $0.5 million. For each counterparty, the Company reviews the interest rate swap collateral daily. Collateral for customer interest rate swap agreements, calculated as the pledged property less loan balance, requires valuation of the property pledged. Counterparty credit risk adjustments of nil and $0.1 million were recognized for the three months ended September 30, 2017 and 2016, respectively and $0.1 million and $0.2 million were recognized for the nine months ended September 30, 2017 and 2016, respectively.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41620-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624163-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579240-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624177-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41641-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579245-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624258-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708775-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708773-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5618551-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624181-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 + Details
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