Derivative Financial Instruments

The Company primarily enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.

The derivative financial instruments currently used by the Company to manage its exposure to interest rate risk include: (1) interest rate swaps and caps to manage the interest rate risk of certain fixed and variable rate assets and variable rate liabilities; (2) interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market; (3) forward commitments for the future delivery of such mortgage loans to protect the Company from adverse changes in interest rates and corresponding changes in the value of mortgage loans held-for-sale; and (4) covered call options to economically hedge specific investment securities and receive fee income effectively enhancing the overall yield on such securities to compensate for net interest margin compression. The Company also enters into derivatives (typically interest rate swaps) with certain qualified borrowers to facilitate the borrowers’ risk management strategies and concurrently enters into mirror-image derivatives with a third party counterparty, effectively making a market in the derivatives for such borrowers. Additionally, the Company enters into foreign currency contracts to manage foreign exchange risk associated with certain foreign currency denominated assets.

The Company recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. The Company records derivative assets and derivative liabilities on the Consolidated Statements of Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent they are effective hedges, are recorded as a component of other comprehensive income, net of deferred taxes, and reclassified to earnings when the hedged transaction affects earnings. Changes in fair values of derivative financial instruments not designated in a hedging relationship pursuant to ASC 815, including changes in fair value related to the ineffective portion of cash flow hedges, are reported in non-interest income during the period of the change. Derivative financial instruments are valued by a third party and are corroborated by comparison with valuations provided by the respective counterparties. Fair values of certain mortgage banking derivatives (interest rate lock commitments and forward commitments to sell mortgage loans) are estimated based on changes in mortgage interest rates from the date of the loan commitment. The fair value of foreign currency derivatives is computed based on changes in foreign currency rates stated in the contract compared to those prevailing at the measurement date.

The table below presents the fair value of the Company’s derivative financial instruments as of June 30, 2017, December 31, 2016 and June 30, 2016:



	Derivative Assets						Derivative Liabilities
(Dollars in thousands)	June 30, 2017		December 31, 2016		June 30, 2016		June 30, 2017		December 31, 2016		June 30, 2016
Derivatives designated as hedging instruments under ASC 815:
Interest rate derivatives designated as Cash Flow Hedges	$	8,644	$	8,011	$	12	$	—	$	—	$	1,577
Interest rate derivatives designated as Fair Value Hedges	2,074		2,228		—		26		—		999
Total derivatives designated as hedging instruments under ASC 815	$	10,718	$	10,239	$	12	$	26	$	—	$	2,576
Derivatives not designated as hedging instruments under ASC 815:
Interest rate derivatives	$	35,929	$	38,974	$	89,024	$	35,317	$	37,665	$	88,316
Interest rate lock commitments	2,875		4,265		11,435		182		1,325		2,973
Forward commitments to sell mortgage loans	78		2,037		—		1,961		—		6,496
Foreign exchange contracts	103		879		581		165		849		551
Total derivatives not designated as hedging instruments under ASC 815	$	38,985	$	46,155	$	101,040	$	37,625	$	39,839	$	98,336
Total Derivatives	$	49,703	$	56,394	$	101,052	$	37,651	$	39,839	$	100,912

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of payments at the end of each period in which the interest rate specified in the contract exceeds the agreed upon strike price.

As of June 30, 2017, the Company had four interest rate swap derivatives designated as cash flow hedges of variable rate deposits. The interest rate swap derivatives had notional amounts of $200.0 million, $250.0 million, $275.0 million and $200.0 million and mature in June 2019, July 2019, August 2019 and June 2020, respectively. Additionally, as of June 30, 2017, the Company had two interest rate caps designated as hedges of the variable cash outflows associated with interest expense on the Company’s junior subordinated debentures. These cap derivatives had notional amounts of $50.0 million and $40.0 million, respectively, both maturing in September 2017. The effective portion of changes in the fair value of these cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified to interest expense as interest payments are made on the Company’s variable rate junior subordinated debentures. The changes in fair value (net of tax) are separately disclosed in the Consolidated Statements of Comprehensive Income. The ineffective portion of the change in fair value of these derivatives is recognized directly in earnings; however, no hedge ineffectiveness was recognized during the six months ended June 30, 2017 or June 30, 2016. The Company uses the hypothetical derivative method to assess and measure hedge effectiveness.

The table below provides details on each of these cash flow hedges as of June 30, 2017:



	June 30, 2017
(Dollars in thousands)	Notional		Fair Value
Maturity Date	Amount		Asset (Liability)
Interest Rate Swaps:
June 2019	$	200,000	$	96
July 2019	250,000		3,750
August 2019	275,000		4,671
June 2020	200,000		122
Total Interest Rate Swaps	$	925,000	$	8,639
Interest Rate Caps:
September 2017	$	50,000	$	—
September 2017	40,000		5
Total Interest Rate Caps	$	90,000	$	5
Total Cash Flow Hedges	$	1,015,000	$	8,644

A rollforward of the amounts in accumulated other comprehensive loss related to interest rate derivatives designated as cash flow hedges follows:



	Three months ended						Six months ended
(Dollars in thousands)	June 30, 2017			June 30, 2016			June 30, 2017		June 30, 2016
Unrealized gain (loss) at beginning of period	$	8,559		$	(3,051	)	$	6,944	$	(3,529	)
Amount reclassified from accumulated other comprehensive loss to interest expense on deposits and junior subordinated debentures	821			832			1,037		1,555
Amount of (loss) gain recognized in other comprehensive income	(1,131		)	(1,355		)	268		(1,600		)
Unrealized gain (loss) at end of period	$	8,249		$	(3,574	)	$	8,249	$	(3,574	)

As of June 30, 2017, the Company estimates that during the next twelve months, $2.3 million will be reclassified from accumulated other comprehensive gain as an increase to interest expense.

Fair Value Hedges of Interest Rate Risk

Interest rate swaps designated as fair value hedges involve the payment of fixed amounts to a counterparty in exchange for the Company receiving variable payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2017, the Company has eleven interest rate swaps with an aggregate notional amount of $121.1 million that were designated as fair value hedges associated with fixed rate commercial and industrial and commercial franchise loans as well as life insurance premium finance receivables.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged item in the same line item as the offsetting loss or gain on the related derivatives. The Company recognized a net gain of $40,000 and $17,000 in other income related to hedge ineffectiveness for the three months ended June 30, 2017 and 2016, respectively. On a year-to-date basis, the Company recognized a net gain of $29,000 and a net loss of $22,000 in other income related to hedge ineffectiveness for the six months ended June 30, 2017 and 2016, respectively.

The following table presents the gain/(loss) and hedge ineffectiveness recognized on derivative instruments and the related hedged items that are designated as a fair value hedge accounting relationship as of June 30, 2017 and 2016:



(Dollars in thousands) Derivatives in Fair Value Hedging Relationships	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Loss Recognized in Income on Derivative Three Months Ended						Amount of Gain Recognized in Income on Hedged Item Three Months Ended				Income Statement Gain due to Hedge Ineffectiveness Three Months Ended
	Location of Gain/(Loss) Recognized in Income on Derivative	June 30, 2017			June 30, 2016			June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016
Interest rate swaps	Trading losses, net	$	(333	)	$	(329	)	$	373	$	346	$	40	$	17



(Dollars in thousands) Derivatives in Fair Value Hedging Relationships	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Loss Recognized in Income on Derivative Six Months Ended						Amount of Gain Recognized in Income on Hedged Item Six Months Ended				Income Statement Gain/ (Loss) due to Hedge Ineffectiveness Six Months Ended
	Location of Gain/(Loss) Recognized in Income on Derivative	June 30, 2017			June 30, 2016			June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016
Interest rate swaps	Trading losses, net	$	(181	)	$	(883	)	$	210	$	861	$	29	$	(22	)

Non-Designated Hedges

The Company does not use derivatives for speculative purposes. Derivatives not designated as accounting hedges are used to manage the Company’s economic exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

Interest Rate Derivatives—The Company has interest rate derivatives, including swaps and option products, resulting from a service the Company provides to certain qualified borrowers. The Company’s banking subsidiaries execute certain derivative products (typically interest rate swaps) directly with qualified commercial borrowers to facilitate their respective risk management strategies. For example, these arrangements allow the Company’s commercial borrowers to effectively convert a variable rate loan to a fixed rate. In order to minimize the Company’s exposure on these transactions, the Company simultaneously executes offsetting derivatives with third parties. In most cases, the offsetting derivatives have mirror-image terms, which result in the positions’ changes in fair value substantially offsetting through earnings each period. However, to the extent that the derivatives are not a mirror-image and because of differences in counterparty credit risk, changes in fair value will not completely offset resulting in some earnings impact each period. Changes in the fair value of these derivatives are included in non-interest income. At June 30, 2017, the Company had interest rate derivative transactions with an aggregate notional amount of approximately $4.8 billion (all interest rate swaps and caps with customers and third parties) related to this program. These interest rate derivatives had maturity dates ranging from July 2017 to February 2045.

Mortgage Banking Derivatives—These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. It is the Company’s practice to enter into forward commitments for the future delivery of a portion of our residential mortgage loan production when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale. The Company’s mortgage banking derivatives have not been designated as being in hedge relationships. At June 30, 2017, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $824.3 million and interest rate lock commitments with an aggregate notional amount of approximately $446.2 million. The fair values of these derivatives were estimated based on changes in mortgage rates from the dates of the commitments. Changes in the fair value of these mortgage banking derivatives are included in mortgage banking revenue.

Foreign Currency Derivatives—These derivatives include foreign currency contracts used to manage the foreign exchange risk associated with foreign currency denominated assets and transactions. Foreign currency contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. As a result of fluctuations in foreign currencies, the U.S. dollar-equivalent value of the foreign currency denominated assets or forecasted transactions increase or decrease. Gains or losses on the derivative instruments related to these foreign currency denominated assets or forecasted transactions are expected to substantially offset this variability. As of June 30, 2017 the Company held foreign currency derivatives with an aggregate notional amount of approximately $39.7 million.

Other Derivatives—Periodically, the Company will sell options to a bank or dealer for the right to purchase certain securities held within the banks’ investment portfolios (covered call options). These option transactions are designed primarily to mitigate overall interest rate risk and to increase the total return associated with the investment securities portfolio. These options do not qualify as accounting hedges pursuant to ASC 815, and, accordingly, changes in fair value of these contracts are recognized as other non-interest income. There were no covered call options outstanding as of June 30, 2017, December 31, 2016 or June 30, 2016.

Amounts included in the Consolidated Statements of Income related to derivative instruments not designated in hedge relationships were as follows:



(Dollars in thousands)		Three Months Ended						Six Months Ended
Derivative	Location in income statement	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Interest rate swaps and caps	Trading losses, net	$	(365	)	$	(432	)	$	(668	)	$	(356	)
Mortgage banking derivatives	Mortgage banking revenue	(48		)	(2,707		)	690			(843		)
Covered call options	Fees from covered call options	890			4,649			1,649			6,361
Foreign exchange contracts	Trading losses, net	(64		)	(173		)	(92		)	(236		)

Credit Risk

Derivative instruments have inherent risks, primarily market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the risk that the counterparty will fail to perform according to the terms of the agreement. The amounts potentially subject to market and credit risks are the streams of interest payments under the contracts and the market value of the derivative instrument and not the notional principal amounts used to express the volume of the transactions. Market and credit risks are managed and monitored as part of the Company's overall asset-liability management process, except that the credit risk related to derivatives entered into with certain qualified borrowers is managed through the Company's standard loan underwriting process since these derivatives are secured through collateral provided by the loan agreements. Actual exposures are monitored against various types of credit limits established to contain risk within parameters. When deemed necessary, appropriate types and amounts of collateral are obtained to minimize credit exposure.

The Company has agreements with certain of its interest rate derivative counterparties that contain cross-default provisions, which provide that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain of its derivative counterparties that contain a provision allowing the counterparty to terminate the derivative positions if the Company fails to maintain its status as a well or adequately capitalized institution, which would require the Company to settle its obligations under the agreements. As of June 30, 2017, the fair value of interest rate derivatives in a net liability position that were subject to such agreements, which includes accrued interest related to these agreements, was $11.3 million. If the Company had breached any of these provisions and the derivatives were terminated as a result, the Company would have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

The Company is also exposed to the credit risk of its commercial borrowers who are counterparties to interest rate derivatives with the banks. This counterparty risk related to the commercial borrowers is managed and monitored through the banks' standard underwriting process applicable to loans since these derivatives are secured through collateral provided by the loan agreement. The counterparty risk associated with the mirror-image swaps executed with third parties is monitored and managed in connection with the Company's overall asset liability management process.

The Company records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative assets and liabilities on the Consolidated Statements of Condition. The tables below summarize the Company's interest rate derivatives and offsetting positions as of the dates shown.



	Derivative Assets									Derivative Liabilities
	Fair Value									Fair Value
(Dollars in thousands)	June 30, 2017			December 31, 2016			June 30, 2016			June 30, 2017			December 31, 2016			June 30, 2016
Gross Amounts Recognized	$	46,647		$	49,213		$	89,036		$	35,343		$	37,665		$	90,892
Less: Amounts offset in the Statements of Financial Condition	—			—			—			—			—			—
Net amount presented in the Statements of Financial Condition	$	46,647		$	49,213		$	89,036		$	35,343		$	37,665		$	90,892
Gross amounts not offset in the Statements of Financial Condition
Offsetting Derivative Positions	(15,828		)	(14,441		)	(161		)	(15,828		)	(14,441		)	(161		)
Collateral Posted ⁽¹⁾	(3,150		)	(8,530		)	—			(19,515		)	(12,400		)	(90,731		)
Net Credit Exposure	$	27,669		$	26,242		$	88,875		$	—		$	10,824		$	—


(1)	As of June 30, 2017 and June 30, 2016, the Company posted collateral of $21.0 million and $94.2 million, respectively, which resulted in excess collateral with its counterparties. For purposes of this disclosure, the amount of posted collateral is limited to the amount offsetting the derivative liability.