XML 31 R20.htm IDEA: XBRL DOCUMENT
v3.10.0.1

Derivative Financial Instruments | 6 Months Ended
--- | ---
Jun. 30, 2018
Derivative Financial Instruments |
Derivative Financial Instruments | 12. 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 interim 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 June 30, 2018 and December 31, 2017:
|  | June 30, 2018 |  | December 31, 2017
|  |  |  |  | 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 |  | $ | 193,022 |  | $ | 266 |  | $ | (312) |  | $ | 194,687 |  | $ | — |  | $ | (2,032)
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | 2,156,450 |  |  | 5,117 |  |  | (22,932) |  |  | 1,820,442 |  |  | 14,658 |  |  | (13,017)
Funding swap |  |  | 58,237 |  |  | — |  |  | (4,114) |  |  | 43,113 |  |  | — |  |  | (5,439)
Foreign exchange contracts |  |  | 4,801 |  |  | 1 |  |  | (69) |  |  | 3,658 |  |  | 24 |  |  | —
| (1) |  | The positive fair values of derivative assets are included in other assets.
| (2) |  | The negative fair values of derivative liabilities are included in other liabilities.
Certain interest rate swaps noted above, are cleared through clearinghouses, rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and variation margin payments depending on the contracts being in a net asset or liability position. The amount of initial margin cash collateral posted by the Company was $1.8 million and $2.9 million as of June 30, 2018 and December 31, 2017, respectively. Effective January 3, 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook to legally characterize variation margin payments, for derivative contracts that are referred to as settled-to-market (“STM”), as settlements of the derivative’s mark-to-market exposure and not collateral. Based on these changes, the Company has treated the CME variation margin as a settlement, which has resulted in a decrease in our cash collateral, and a corresponding decrease in our derivative asset and liability. The change was applied prospectively effective January 3, 2017. As of June 30, 2018 and December 31, 2017, the CME variation margin was $0.5 million and $3.1 million, respectively. Effective January 16, 2018, the London Clearing House (“LCH”) also amended its rulebook to legally characterize variation margin payments, for derivative contracts that are referred to as STM, as settlements of the derivative’s mark-to-market exposure and not collateral. Consistent with the CME’s amended requirements discussed above, the Company has treated the LCH variation margin as a settlement, which has resulted in a decrease in our cash collateral, and a corresponding decrease in our derivative asset and liability. The change was applied prospectively effective January 16, 2018. As of June 30, 2018, the LCH variation margin was $16.6 million. As of June 30, 2018, the Company pledged $28.6 million in financial instruments and $2.0 million in cash as collateral for interest rate swaps. As of June 30, 2018, the cash collateral includes the excess initial margin for interest rate swaps cleared through clearinghouses and cash collateral for interest rate swaps with financial institution counterparties. As of December 31, 2017, the Company pledged $22.6 million in financial instruments and $4.9 million in cash as collateral for interest rate swaps. As of December 31, 2017, the cash collateral includes the excess initial margin for interest rate swaps cleared through clearinghouses, the LCH variation margin which was not treated as settlements prior to January 16, 2018 and cash collateral for interest rate swaps with financial institution counterparties. 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 June 30, 2018, the Company carried interest rate swaps with notional amounts totaling $43.0 million with a positive fair value of $0.3 million and a negative fair value of nil 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, 2017, the Company carried interest rate swaps with notional amounts totaling $44.7 million with a positive fair value of nil and a negative fair value of $0.5 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 six months ended June 30, 2018 and 2017:
|  | Three Months Ended |  | Six Months Ended
|  | June 30, |  | June 30,
(dollars in thousands) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Interest expense recorded in net interest income |  | $ | (65) |  | $ | (171) |  | $ | (172) |  | $ | (369)
Gains (losses) recorded in noninterest income: |  |  |  |  |  |  |  |  |  |  |  |
Recognized on derivatives |  |  | 408 |  |  | (95) |  |  | 958 |  |  | 124
Recognized on hedged item |  |  | (325) |  |  | 199 |  |  | (1,088) |  |  | 2
Net gains (losses) recognized on fair value hedges (ineffective portion) |  |  | 83 |  |  | 104 |  |  | (130) |  |  | 126
Net gains (losses) recognized on fair value hedges |  | $ | 18 |  | $ | (67) |  | $ | (302) |  | $ | (243)
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 six months ended June 30, 2018 and 2017. As of June 30, 2018 and December 31, 2017, the Company carried two interest rate swaps with notional amounts totaling $150.0 million, with a negative fair value of $0.3 million as of June 30, 2018 and a negative fair value of $1.5 million as of December 31, 2017, in order to reduce exposure to interest rate increases associated with short-term fixed-rate liabilities. The swaps mature in December 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 $0.4 million and $0.6 million during the three months ended June 30, 2018 and 2017, respectively, and $0.9 million and $1.3 million during the six months ended June 30, 2018 and 2017, respectively. The following table summarizes the effect of cash flow hedging relationships for the three and six months ended June 30, 2018 and 2017:
|  | Three Months Ended |  | Six Months Ended
(dollars in thousands) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Pretax gains recognized in other comprehensive income on derivatives (effective portion) |  | $ | 425 |  | $ | 258 |  | $ | 1,163 |  | $ | 856
There were no gains or losses reclassified from accumulated other comprehensive loss to earnings during the three and six months ended June 30, 2018 and 2017. 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 interim consolidated statements of income for the three and six months ended June 30, 2018 and 2017:
|  | Net gains (losses) recognized |  | Three Months Ended |  |  | Six Months Ended
|  | in the consolidated statements |  | June 30, |  | June 30,
(dollars in thousands) |  | of income line item |  | 2018 |  | 2017 |  | 2018 |  | 2017
Derivatives Not Designated As Hedging Instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | Other noninterest income |  | $ | 227 |  | $ | 100 |  | $ | 631 |  | $ | 353
Funding swap |  | Other noninterest income |  |  | 4 |  |  | (35) |  |  | (80) |  |  | (32)
Foreign exchange contracts |  | Other noninterest income |  |  | (30) |  |  | 21 |  |  | (92) |  |  | 226
As of June 30, 2018, the Company carried multiple interest rate swaps with notional amounts totaling $2.2 billion, including $2.1 billion related to the Company’s customer swap program, with a positive fair value of $5.1 million and a negative fair value of $22.9 million. The Company received 1-month and 3-month LIBOR and paid fixed rates ranging from 1.98% to 5.47%. The swaps mature between 2018 and 2037. As of December 31, 2017, the Company carried multiple interest rate swaps with notional amounts totaling $1.8 billion, including $1.7 billion related to the Company’s customer swap program, with a positive fair value of $14.7 million and a negative fair value of $13.0 million. The Company received 1-month and 3-month LIBOR and paid fixed rates ranging from 1.36% to 5.33%. The swaps mature between 2018 and 2037. These swaps resulted in net interest expense of $0.1 million and $0.2 million for the three months ended June 30, 2018 and 2017, respectively, and $0.3 million and $0.5 million for the six months ended June 30, 2018 and 2017, 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 $1.8 million and $1.7 million for the three months ended June 30, 2018 and 2017, respectively, and $5.0 million and $4.6 million for the six months ended June 30, 2018 and 2017, respectively. Interest rate swaps related to the program had asset fair values of $5.1 million and $14.7 million as of June 30, 2018 and December 31, 2017, respectively, and liability fair values of $22.2 million and $11.7 million as of June 30, 2018 and December 31, 2017, 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 rate to unrestricted Class A common shares. During the three months ended June 30, 2018, Visa funded an escrow account in order to cover litigation claims, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A shares. On July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298 effective June 28, 2018. As of June 30, 2018, the Company recorded an estimated $0.7 million liability to be paid to the buyer as a result of the reduction in the Visa Class B conversion rate. 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. A derivative liability (“Visa derivative”) of $4.1 million and $5.4 million was included in the unaudited interim consolidated balance sheets at June 30, 2018 and December 31, 2017, respectively, to provide for the fair value of this liability. There were no sales of these shares prior to 2016. See “Note 17. 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 asset less loan balance, requires valuation of the pledged asset. Counterparty credit risk adjustments of $0.1 million were recognized during both the six months ended June 30, 2018 and 2017. Credit-Risk Related Contingent Features Certain of our derivative contracts contain provisions whereby if the Company’s credit rating were to be downgraded by certain major credit rating agencies as a result of a merger or material adverse change in the Company’s financial condition, the counterparty could require an early termination of derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with such credit-risk related contingent features that are in a net liability position was $0.8 million and $4.5 million at June 30, 2018 and December 31, 2017, respectively, for which we posted $1.1 million and $4.8 million, respectively, in collateral in the normal course of business. If the Company’s credit rating had been downgraded as of June 30, 2018 or December 31, 2017, we may have been required to settle the contract in an amount equal to its fair value.

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- 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 -URI http://asc.fasb.org/topic&trid=2229140 + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration