NOTE 7 — DERIVATIVE FINANCIAL INSTRUMENTS AND BALANCE SHEET OFFSETTING

The following table presents the fair values and balance sheet classification of derivative instruments as of June 30, 2014 and December 31, 2013. The valuation methodology of derivative instruments is disclosed in Note 4 to the Company’s consolidated financial statements.

	Fair Values of Derivative Instruments
	June 30, 2014						December 31, 2013
	Notional		Derivative		Derivative		Notional		Derivative		Derivative
	Amount		Assets (1)		Liabilities (1)		Amount		Assets (1)		Liabilities (1)
	(In thousands)
Derivatives designated as hedging instruments:
Interest rate swaps on certificates of deposit—fair value	$	135,000	$	—	$	11,157	$	135,000	$	—	$	16,906
Total derivatives designated as hedging instruments	$	135,000	$	—	$	11,157	$	135,000	$	—	$	16,906
Derivatives not designated as hedging instruments:
Foreign exchange options	$	85,614	$	6,049	$	3,362	$	85,614	$	6,290	$	3,655
Interest rate swaps and caps	2,109,922		30,233		29,573		1,915,474		28,078		26,352
Foreign exchange contracts	476,700		4,499		4,296		440,848		6,181		3,349
Total derivatives not designated as hedging instruments	$	2,672,236	$	40,781	$	37,231	$	2,441,936	$	40,549	$	33,356

(1) Derivative assets, which are a component of other assets, include the estimated settlement of the derivative asset position. Derivative liabilities, which are a component of other liabilities and deposits, include the estimated settlement of the derivative liability position.

Derivatives Designated as Hedging Instruments

Interest Rate Swaps on Certificates of Deposit — The Company is exposed to changes in the fair value of certain fixed rate certificates of deposit due to changes in the benchmark interest rate, London Interbank Offering Rate (“LIBOR”). Interest rate swaps designated as fair value hedges involve the receipt of fixed rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. The interest rate swaps and the associated certificates of deposit have the same maturity dates.

As of June 30, 2014 and December 31, 2013, the total notional amount of the interest rate swaps on the certificates of deposit was $135.0 million. The fair value of the interest rate swaps amounted to a $11.2 million and $16.9 million liability, respectively, as of June 30, 2014 and December 31, 2013. During the three and six months ended June 30, 2014, the Company recognized a net increase of $538 thousand and $339 thousand, respectively, in expense related to hedge ineffectiveness. In addition, the Company recognized a net increase to interest expense of $2.0 million and $4.0 million, for the three and six months ended June 30, 2014, related to net settlements on the derivatives.

Derivatives Not Designated as Hedging Instruments

Foreign Exchange Options — During 2010, the Company entered into foreign exchange option contracts with major brokerage firms to economically hedge against currency exchange rate fluctuations in a certificate of deposit product available to bank customers. This product, which has a term of 5 years, pays interest based on the performance of the Chinese currency Renminbi (“RMB”) relative to the USD. Under ASC 815, a certificate of deposit that pays interest based on changes in currency exchange rates is a hybrid instrument with an embedded derivative that must be accounted for separately from the host contract (i.e., the certificate of deposit). In accordance with ASC 815, both the embedded derivative instruments and the freestanding foreign exchange option contracts are marked-to-market each reporting period with resulting changes in fair value reported in the consolidated statements of income.

As of June 30, 2014 and December 31, 2013 the notional amount of the foreign exchange options totaled $85.6 million. The fair values of the foreign exchange options and embedded derivative liability for these contracts amounted to a $6.0 million asset and a $3.4 million liability as of June 30, 2014. The fair values of the foreign exchange options and embedded derivative liability for these contracts amounted to a $6.3 million asset and a $3.7 million liability as of December 31, 2013.

Interest Rate Swaps and Caps — The Company enters into interest rate derivatives including interest rate swap and caps with its customers allowing them to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against interest rate risks in offering such products, the Company also enters into mirror interest rate contracts with institutional counterparties. Thus, the Company does not assume any interest rate risk since the contracts mirror each other. As of June 30, 2014, the total notional amounts of the interest rate swaps and caps, including mirror transactions, with the institutional counterparties and the bank customers totaled a $2.11 billion asset and a $2.11 billion liability. In comparison, as of December 31, 2013, the total notional amounts of the interest rate swaps and caps, including mirror transactions, with the institutional counterparties and the bank customers totaled a $1.92 billion asset and a $1.92 billion liability. The interest rate contracts are marked-to-market each reporting period with resulting changes in fair value reported in the consolidated statements of income.

The fair values of the interest rate swap and cap contracts with the institutional counterparties and the bank customers amounted to a $30.2 million asset and a $29.6 million liability, as of June 30, 2014. The fair values of the interest rate swap and cap contracts with the institutional counterparty and the bank customers amounted to a $28.1 million asset and a $26.4 million liability, as of December 31, 2013.

Foreign Exchange Contracts — The Company enters into short-term foreign exchange forward contracts on a regular basis to economically hedge against foreign exchange rate fluctuations. As of June 30, 2014 and December 31, 2013, the notional amount of the short-term foreign exchange contracts totaled $462.8 million and $426.0 million, respectively. The fair values of the short-term foreign exchange contracts amounted to a $4.3 million asset and a $4.1 million liability, as of June 30, 2014. The fair values of the short-term foreign exchange contracts amounted to a $6.0 million asset and a $3.2 million liability, as of December 31, 2013. The gross aggregate value of the short-term foreign exchange contracts by counterparty was a liability of $923 thousand as of June 30, 2014 and an asset of $1.5 million as of December 31, 2013.

The Company also entered into long-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future. As of June 30, 2014 and December 31, 2013, the notional amount of the long-term foreign exchange contracts totaled $13.9 million and $14.8 million, respectively. The fair values of the long-term foreign exchange contracts amounted to a $188 thousand asset and a $203 thousand liability, as of June 30, 2014. The fair values of the long-term foreign exchange contracts amounted to a $200 thousand asset and a $183 thousand liability, as of December 31, 2013.

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of income for the three and six months ended June 30, 2014 and 2013:

	Location in	Three Months Ended						Six Months Ended
	Consolidated	June 30,						June 30,
	Statements of Income	2014			2013			2014			2013
		(In thousands)
Derivatives designated as hedging instruments
Interest rate swaps on certificates of deposit—fair value	Interest expense	$	3,045		$	(3,810	)	$	5,750		$	(4,715	)
	Total net income (expense)	$	3,045		$	(3,810	)	$	5,750		$	(4,715	)
Derivatives not designated as hedging instruments
Foreign exchange options	Noninterest income	173			97			54			238
Foreign exchange options	Noninterest expense	(3		)	(1		)	(2		)	6
Interest rate swaps and caps	Noninterest income	(130		)	1,864			(1,066		)	2,080
Foreign exchange contracts	Noninterest income	(500		)	(719		)	(2,629		)	(762		)
	Total net (expense) income	$	(460	)	$	1,241		$	(3,643	)	$	1,562

Credit Risk-Related Contingent Features — The Company has agreements with some of its derivative counterparties that contain a provision where 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 some of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. Similarly, the Company could be required to settle its obligations under certain of its agreements if the Company was issued a notice of prompt corrective action.

Balance Sheet Offsetting — The Company has entered into agreements with all counterparty financial institutions, which include master netting agreements. However, the Company elects to account for all derivatives with counterparty institutions on a gross basis, excluding certain foreign exchange options which are not under agreements that include master netting terms. The Company has also entered into securities purchased under resale agreements (“resale agreements”), and securities sold under agreements to repurchase (“repurchase agreements”) which have master netting agreements that allow for the netting of collateral positions. These repurchase and resale agreements of securities are not eligible for offset in the consolidated balance sheet.

The following tables show the gross derivatives, resale agreements and repurchase agreements in the consolidated balance sheets and for each the respective collateral received or pledged in the form of other financial instruments, which are generally marketable securities. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability (after netting is applied); thus instances of overcollateralization are not shown. All of the assets and liabilities in the following tables were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default. Collateral accepted or pledged in resale and repurchase agreements with other financial institutions also may be sold or re-pledged by the secured party, but is usually delivered to and held by third party trustees.

	As of June 30, 2014 (In thousands)

					Net Amounts of
			Gross Amounts		Assets Presented		Gross Amounts Not Offset in the
	Gross Amounts		Offset in the		in the		Consolidated Balance Sheets
Assets	of Recognized Assets		Consolidated Balance Sheets		Consolidated Balance Sheets		Financial Instruments			Collateral Received			Net Amount
Derivatives	$	9,711	$	—	$	9,711	$	(5,122	)	$	(4,589	)(1)	$	—
Resale Agreements	$	1,275,000	$	—	$	1,275,000	$	(475,000	)	$	(800,000	)(2)	$	—

					Net Amounts of
			Gross Amounts		Liabilities		Gross Amounts Not Offset in the
	Gross Amounts		Offset in the		Presented in the		Consolidated Balance Sheets
Liabilities	of Recognized Liabilities		Consolidated Balance Sheets		Consolidated Balance Sheets		Financial Instruments			Collateral Posted			Net Amount
Derivatives	$	40,459	$	—	$	40,459	$	(5,122	)	$	(35,337	)(3)	$	—
Repurchase Agreements	$	1,005,211	$	—	$	1,005,211	$	(475,000	)	$	(530,211	)(4)	$	—

	As of December 31, 2013 (In thousands)

					Net Amounts of
			Gross Amounts		Assets Presented		Gross Amounts Not Offset in the
	Gross Amounts		Offset in the		in the		Consolidated Balance Sheets
Assets	of Recognized Assets		Consolidated Balance Sheets		Consolidated Balance Sheets		Financial Instruments			Collateral Received			Net Amount
Derivatives	$	16,043	$	—	$	16,043	$	(11,363	)	$	(4,680	)(1)	$	—
Resale Agreements	$	1,400,000	$	—	$	1,400,000	$	(495,000	)	$	(905,000	)(2)	$	—

					Net Amounts of
			Gross Amounts		Liabilities		Gross Amounts Not Offset in the
	Gross Amounts		Offset in the		Presented in the		Consolidated Balance Sheets
Liabilities	of Recognized Liabilities		Consolidated Balance Sheets		Consolidated Balance Sheets		Financial Instruments			Collateral Posted			Net Amount
Derivatives	$	33,849	$	—	$	33,849	$	(11,363	)	$	(22,486	)(3)	$	—
Repurchase Agreements	$	995,000	$	—	$	995,000	$	(495,000	)	$	(500,000	)(4)	$	—

(1) Represents cash and securities received against derivative assets with the same counterparty that are subject to enforceable master netting arrangements. Includes approximately $3.6 million of cash collateral received as of June 30, 2014.

(2) Represents the fair value of securities the Company has received under resale agreements, limited for table presentation purposes to the amount of the recognized asset due from each counterparty.

(3) Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements. Includes approximately $7.5 million and $187 thousand of cash collateral posted as of June 30, 2014 and December 31, 2013, respectively.

(4) Represents the fair value of securities the Company has pledged under repurchase agreements, limited for table presentation purposes to the amount of the recognized liability owed to each counterparty.