Derivative Instruments And Hedging Activities

6 Months Ended

Jun. 30, 2014

Summary of Derivative Instruments [Abstract]

Derivative Instruments And Hedging Activities

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We record all derivatives on the balance sheet at fair value. Note 10 discusses the process to estimate fair value for derivatives. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as fair value hedges, the effective portion of changes in the fair value of the derivative are recognized in earnings together with changes in the fair value of the related hedged item. The net amount, if any, representing hedge ineffectiveness, is reflected in earnings. In previous periods, we used fair value hedges to manage interest rate exposure to certain long-term debt. These hedges have been terminated and their remaining balances are being amortized to earnings, as discussed subsequently.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded in OCI and recognized in earnings when the hedged transaction affects earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized directly in earnings.

No derivatives have been designated for hedges of investments in foreign operations.

We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows on the derivative hedging instrument with the changes in fair value or cash flows on the designated hedged item or transaction. For derivatives not designated as accounting hedges, changes in fair value are recognized in earnings.

Our objectives in using derivatives are to add stability to interest income or expense, to modify the duration of specific assets or liabilities as we consider advisable, to manage exposure to interest rate movements or other identified risks, and/or to directly offset derivatives sold to our customers. To accomplish these objectives, we use interest rate swaps as part of our cash flow hedging strategy. These derivatives are used to hedge the variable cash flows associated with designated loans.

Exposure to credit risk arises from the possibility of nonperformance by counterparties. These counterparties primarily consist of financial institutions that are well established and well capitalized. We control this credit risk through credit approvals, limits, pledges of collateral, and monitoring procedures. No losses on derivative instruments have occurred as a result of counterparty nonperformance. Nevertheless, the related credit risk is considered and measured when and where appropriate.

Our derivative contracts require us to pledge collateral for derivatives that are in a net liability position at a given balance sheet date. Certain of these derivative contracts contain credit-risk-related contingent features that include the requirement to maintain a minimum debt credit rating. We may be required to pledge additional collateral if a credit-risk-related feature were triggered, such as a downgrade of our credit rating. However, in past situations, not all counterparties have demanded that additional collateral be pledged when provided for under their contracts. At June 30, 2014, the fair value of our derivative liabilities was $56.6 million, for which we were required to pledge cash collateral of approximately $44.3 million in the normal course of business. If our credit rating were downgraded one notch by either Standard & Poor’s or Moody’s at June 30, 2014, the additional amount of collateral we could be required to pledge is approximately $1.6 million. Since July 2013, as required by the Dodd-Frank Act, all newly eligible derivatives entered into are cleared through a central clearinghouse. Derivatives that are centrally cleared do not have credit-risk-related features that require additional collateral if our credit rating were downgraded.

Interest rate swap agreements designated as cash flow hedges involve the receipt of fixed-rate amounts in exchange for variable rate payments over the life of the agreements without exchange of the underlying principal amount. Derivatives not designated as accounting hedges, including basis swap agreements, are not speculative and are used to economically manage our exposure to interest rate movements and other identified risks, but do not meet the strict hedge accounting requirements.

Selected information with respect to notional amounts and recorded gross fair values at June 30, 2014 and December 31, 2013, and the related gain (loss) of derivative instruments for the three and six months endedJune 30, 2014 and 2013 is summarized as follows:

	June 30, 2014						December 31, 2013
	Notional amount		Fair value				Notional amount		Fair value
(In thousands)			Other assets		Other liabilities				Other assets		Other liabilities
Derivatives designated as hedging instruments
Asset derivatives
Cash flow hedges:
Interest rate swaps	$	200,000	$	1,280	$	63	$	100,000	$	202	$	583
Total derivatives designated as hedging instruments	200,000		1,280		63		100,000		202		583
Derivatives not designated as hedging instruments
Interest rate swaps	15,890		—		153		65,850		420		421
Interest rate swaps for customers 2	2,820,479		48,911		50,379		2,902,776		55,447		54,688
Foreign exchange	358,462		6,952		5,979		751,066		9,614		8,643
Total return swap	—		—		—		1,159,686		—		4,062
Total derivatives not designated as hedging instruments	3,194,831		55,863		56,511		4,879,378		65,481		67,814
Total derivatives	$	3,394,831	$	57,143	$	56,574	$	4,979,378	$	65,683	$	68,397

	Three Months Ended June 30, 2014									Six Months Ended June 30, 2014
	Amount of derivative gain (loss) recognized/reclassified
(In thousands)	OCI		Reclassified from AOCI to interest income 3		Noninterest income (expense)			Offset to interest expense		OCI		Reclassified from AOCI to interest income 3		Noninterest income (expense)			Offset to interest expense
Derivatives designated as hedging instruments
Asset derivatives
Cash flow hedges 1:
Interest rate swaps	$	1,988	$	577	$	—				$	2,526	$	928	$	—
	1,988		577		—					2,526		928		—
Liability derivatives
Fair value hedges:
Terminated swaps on long-term debt								$	608								$	1,326
Total derivatives designated as hedging instruments	1,988		577		—			608		2,526		928		—			1,326
Derivatives not designated as hedging instruments
Interest rate swaps					348									354
Interest rate swaps for customers 2					(377		)							(926		)
Foreign exchange					1,998									3,709
Total return swap					(467		)							(7,894		)
Total derivatives not designated as hedging instruments					1,502									(4,757		)
Total derivatives	$	1,988	$	577	$	1,502		$	608	$	2,526	$	928	$	(4,757	)	$	1,326

	Three Months Ended June 30, 2013										Six Months Ended June 30, 2013
	Amount of derivative gain (loss) recognized/reclassified
(In thousands)	OCI			Reclassified from AOCI to interest income 3		Noninterest income (expense)			Offset to interest expense		OCI			Reclassified from AOCI to interest income 3		Noninterest income (expense)			Offset to interest expense
Derivatives designated as hedging instruments
Asset derivatives
Cash flow hedges 1:
Interest rate swaps	$	(2	)	$	777	$	—				$	(6	)	$	2,382	$	—
	(2		)	777		—					(6		)	2,382		—
Liability derivatives
Fair value hedges:
Terminated swaps on long-term debt									$	780									$	1,546
Total derivatives designated as hedging instruments	(2		)	777		—			780		(6		)	2,382		—			1,546
Derivatives not designated as hedging instruments
Interest rate swaps						(20		)								(87		)
Interest rate swaps for customers 2						4,290										5,748
Futures contracts						(1		)								—
Foreign exchange						2,100										4,854
Total return swap						(5,450		)								(11,008		)
Total derivatives not designated as hedging instruments						919										(493		)
Total derivatives	$	(2	)	$	777	$	919		$	780	$	(6	)	$	2,382	$	(493	)	$	1,546

Note: These schedules are not intended to present at any given time the Company’s long/short position with respect to its derivative contracts.

¹  Amounts recognized in OCI and reclassified from accumulated OCI (“AOCI”) represent the effective portion of the derivative gain (loss).

²  Amounts include both the customer swaps and the offsetting derivative contracts.

³  Amounts for the three and six months endedJune 30, of $0.6 million and $0.9 million in 2014, and $0.8 million and $2.4 million in 2013, respectively, are the amounts of reclassification to earnings from AOCI presented in Note 8.

At June 30, the fair values of derivative assets and liabilities were reduced by net credit valuation adjustments of $1.9 million and $0.5 million in 2014, and $2.8 million and $2.2 million in 2013, respectively. These adjustments are required to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk.

We offer interest rate swaps to our customers to assist them in managing their exposure to changing interest rates. Upon issuance, all of these customer swaps are immediately “hedged” by offsetting derivative contracts, such that the Company minimizes its net risk exposure resulting from such transactions. Fee income from customer swaps is included in other service charges, commissions and fees. As with other derivative instruments, we have credit risk for any nonperformance by counterparties.

The remaining balances of any derivative instruments terminated prior to maturity, including amounts in AOCI for swap hedges, are accreted or amortized to interest income or expense over the period corresponding to their previously stated maturity dates.

Amounts in AOCI are reclassified to interest income as interest is earned on variable rate loans and as amounts for terminated hedges are accreted or amortized to earnings. For the 12 months following June 30, 2014, we estimate that an additional$2.7 millionwill be reclassified.

Total Return Swap

Effective April 28, 2014, we canceled the total return swap and related interest rate swaps (“TRS”) relating to a portfolio of $1.16 billion notional amount of our bank and insurance trust preferred CDOs. Prior to cancellation of the TRS, the actual portfolio par balance had been reduced to $545 million due to sales, paydowns and payoffs. As a result of the cancellation, the TRS derivative liability was extinguished at June 30, 2014, and the Company’s regulatory risk weighted assets increased by approximately $0.9 billion at June 30, 2014.