Derivatives and Hedging

The Company is a party to derivative instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. The Company has made an accounting policy decision to not offset derivative fair value amounts under master netting agreements. See Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 for additional information on the Company's accounting policies related to derivative instruments and hedging activities. The following table reflects the notional amount and fair value of derivative instruments included on the Company’s Unaudited Condensed Consolidated Balance Sheets on a gross basis.



	March 31, 2017 (4)						December 31, 2016
			Fair Value						Fair Value
	Notional Amount		Derivative Assets (1)		Derivative Liabilities (2)		Notional Amount		Derivative Assets (1)		Derivative Liabilities (2)
	(In Thousands)
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate swaps related to long-term debt	$	2,123,950	$	32,003	$	16,169	$	2,123,950	$	38,890	$	14,226
Total fair value hedges			32,003		16,169				38,890		14,226
Cash flow hedges:
Interest rate contracts:
Swaps related to commercial loans	8,950,000		4		25,369		7,625,000		2,340		11,570
Swaps related to FHLB advances	120,000		—		6,333		120,000		—		7,093
Foreign currency contracts:
Forwards related to currency fluctuations	4,907		433		—		3,618		—		380
Total cash flow hedges			437		31,702				2,340		19,043
Total derivatives designated as hedging instruments			$	32,440	$	47,871			$	41,230	$	33,269

Free-standing derivatives not designated as hedging instruments:
Interest rate contracts:
Forward contracts related to held for sale mortgages	$	254,000	$	374	$	1,053	$	251,500	$	2,479	$	493
Interest rate lock commitments	156,991		3,178		1		150,616		2,424		32
Equity contracts:
Purchased equity option related to equity-linked CDs	818,832		60,829		—		833,763		57,198		—
Written equity option related to equity-linked CDs	750,485		—		56,178		770,632		—		53,044
Foreign exchange contracts:
Forwards and swaps related to commercial loans	514,870		869		3,144		424,155		3,741		1,723
Spots related to commercial loans	56,775		34		25		54,599		134		—
Swap associated with sale of Visa, Inc. Class B shares	77,807		—		1,945		68,308		—		1,708
Futures contracts (3)	119,000		—		—		104,000		—		—
Trading account assets and liabilities:
Interest rate contracts for customers	28,964,141		244,525		193,258		28,000,014		290,238		228,748
Foreign exchange contracts for customers	859,575		23,633		21,560		870,084		28,367		26,317
Total trading account assets and liabilities			268,158		214,818				318,605		255,065
Total free-standing derivative instruments not designated as hedging instruments			$	333,442	$	277,164			$	384,581	$	312,065


(1)	Derivative assets, except for trading account assets that are recorded as a component of trading account assets on the Company's Unaudited Condensed Consolidated Balance Sheets, are recorded in other assets on the Company’s Unaudited Condensed Consolidated Balance Sheets.


(2)	Derivative liabilities are recorded in accrued expenses and other liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets.


(3)	Changes in fair value are cash settled daily; therefore, there is no ending balance at any given reporting period.

(4)

In January 2017, a clearing organization adopted a rule change that requires transactions to be considered settled-to-market each day. Beginning in the first quarter of 2017, to the extent the Company determined transactions with this clearing organization to be settled-to-market, the impact was a reduction to the derivative assets and liabilities as well as a corresponding decrease in cash collateral.

Hedging Derivatives

The Company uses derivative instruments to manage the risk of earnings fluctuations caused by interest rate volatility. For those financial instruments that qualify and are designated as a hedging relationship, either a fair value hedge or cash flow hedge, the effect of interest rate movements on the hedged assets or liabilities will generally be offset by change in fair value of the derivative instrument.

Fair Value Hedges

The Company enters into fair value hedging relationships using interest rate swaps to mitigate the Company’s exposure to losses in value as interest rates change. Derivative instruments that are used as part of the Company’s interest rate risk management strategy include interest rate swaps that relate to the pricing of specific balance sheet assets and liabilities. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date.

Interest rate swaps are used to convert the Company’s fixed rate long-term debt to a variable rate. The critical terms of the interest rate swaps match the terms of the corresponding hedged items. All components of each derivative instrument’s gain or loss are included in the assessment of hedge effectiveness.

The Company recognized no gains or losses for the three months ended March 31, 2017 and 2016 related to hedged firm commitments no longer qualifying as a fair value hedge. At March 31, 2017, the fair value hedges had a weighted average expected remaining term of 3.9 years.

The following table reflects the change in fair value for interest rate contracts and the related hedged items as well as other gains and losses related to fair value hedges including gains and losses recognized because of hedge ineffectiveness.



		Gain (Loss) for the
	Condensed Consolidated	Three Months Ended March 31,
	Statements of Income Caption	2017			2016
		(In Thousands)
Change in fair value of interest rate contracts:
Interest rate swaps hedging long term debt	Interest on FHLB and other borrowings	$	(8,830	)	$	48,876
Hedged long term debt	Interest on FHLB and other borrowings	8,493			(44,731		)
Other gains on interest rate contracts:
Interest and amortization related to interest rate swaps on hedged long term debt	Interest on FHLB and other borrowings	8,864			10,790

Cash Flow Hedges

The Company enters into cash flow hedging relationships using interest rate swaps and options, such as caps and floors, to mitigate exposure to the variability in future cash flows or other forecasted transactions associated with its floating rate assets and liabilities. The Company uses interest rate swaps and options to hedge the repricing characteristics of its floating rate commercial loans and FHLB advances. The Company also uses foreign currency forward contracts to hedge its exposure to fluctuations in foreign currency exchange rates due to a portion of money transfer expense being denominated in foreign currency. All components of each derivative instrument’s gain or loss are included in the assessment of hedge effectiveness. The initial assessment of expected hedge effectiveness is based on regression analysis. The ongoing periodic measures of hedge ineffectiveness are based on the expected change in cash flows of the hedged item caused by changes in the benchmark interest rate. There was $(749) thousand of cash flow hedging gains or losses recognized because of hedge ineffectiveness for the three months ended March 31, 2017 and there was no material cash flow hedging gains or losses recognized because of hedge ineffectiveness for the three months ended March 31, 2016. There were no gains or losses reclassified from other comprehensive income because of the discontinuance of cash flow hedges related to certain forecasted transactions that are probable of not occurring for the three months ended March 31, 2017 and 2016.

At March 31, 2017, cash flow hedges not terminated had a net fair value of $(31.3) million and a weighted average life of 1.6 years. Net losses of $34.4 million are expected to be reclassified to income over the next 12 months as net settlements occur. The maximum length of time over which the entity is hedging its exposure to the variability in future cash flows for forecasted transactions is 4.3 years.

The following table presents the effect of derivative instruments designated and qualifying as cash flow hedges on the Company’s Unaudited Condensed Consolidated Balance Sheets and the Company’s Unaudited Condensed Consolidated Statements of Income.



	Gain (Loss) for the
	Three Months Ended March 31,
	2017			2016
	(In Thousands)
Interest rate and foreign currency exchange contracts:
Net change in amount recognized in other comprehensive income	$	(9,866	)	$	2,739
Amount reclassified from accumulated other comprehensive income (loss) into net income	5,694			519
Amount of ineffectiveness recognized in net income	(749		)	—

Derivatives Not Designated As Hedges

Derivatives not designated as hedges include those that are entered into as either economic hedges as part of the Company’s overall risk management strategy or to facilitate client needs. Economic hedges are those that do not qualify to be treated as a fair value hedge, cash flow hedge or foreign currency hedge for accounting purposes, but are necessary to economically manage the risk exposure associated with the assets and liabilities of the Company.

The Company also enters into a variety of interest rate contracts, commodity contracts and foreign exchange contracts in its trading activities. The primary purpose for using these derivative instruments in the trading account is to facilitate customer transactions. The interest rate contract portfolio classified as trading is actively managed and hedged with similar products to limit market value risk of the portfolio. Changes in the estimated fair value of contracts in the trading account along with the related interest settlements on the contracts are recorded in noninterest income as corporate and correspondent investment sales in the Company's Unaudited Condensed Consolidated Statements of Income.

The Company enters into forward contracts to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. Revaluation gains and losses from free-standing derivatives related to mortgage banking activity are recorded as a component of mortgage banking income in the Company’s Unaudited Condensed Consolidated Statements of Income.

Interest rate lock commitments issued on residential mortgage loan commitments to be held for resale are also considered free-standing derivative instruments, and the interest rate exposure on these commitments is economically hedged primarily with forward contracts. Revaluation gains and losses from free-standing derivatives related to mortgage banking activity are recorded as a component of mortgage banking income in the Company's Unaudited Condensed Consolidated Statements of Income.

In conjunction with the sale of its Visa, Inc. Class B shares in 2009, the Company entered into a total return swap in which the Company will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. This total return swap is accounted for as a free-standing derivative.

The Company offers its customers equity-linked CDs that have a return linked to individual equities and equity indices. Under appropriate accounting guidance, a CD that pays interest based on changes in an equity index is a hybrid instrument that requires separation into a host contract (the CD) and an embedded derivative contract (written equity call option). The Company has entered into an offsetting derivative contract in order to economically hedge the exposure related to the issuance of equity-linked CDs. Both the embedded derivative and derivative contract entered into by the Company are classified as free-standing derivative instruments that are recorded at fair value with offsetting gains and losses recognized within noninterest expense in the Company's Unaudited Condensed Consolidated Statements of Income.

The Company also enters into foreign currency contracts to hedge its exposure to fluctuations in foreign currency exchange rates due to its funding of commercial loans in foreign currencies.

The net gains and losses recorded in the Company's Unaudited Condensed Consolidated Statements of Income from free-standing derivative instruments not designated as hedging instruments are summarized in the following table.



		Gain (Loss) for the
	Condensed Consolidated	Three Months Ended March 31,
	Statements of Income Caption	2017			2016
		(In Thousands)
Futures contracts	Mortgage banking income and corporate and correspondent investment sales	$	(3	)	$	(240	)
Option contracts related to mortgage servicing rights	Mortgage banking income	—			(105		)
Interest rate contracts:
Forward contracts related to residential mortgage loans held for sale	Mortgage banking income	(2,665		)	(1,455		)
Interest rate lock commitments	Mortgage banking income	785			822
Interest rate contracts for customers	Corporate and correspondent investment sales	6,796			3,540
Commodity contracts:
Commodity contracts for customers	Corporate and correspondent investment sales	—			(2		)
Equity contracts:
Purchased equity option related to equity-linked CDs	Other expense	3,630			5,291
Written equity option related to equity-linked CDs	Other expense	(3,134		)	(4,556		)
Foreign currency contracts:
Forward and swap contracts related to commercial loans	Other income	(6,958		)	(13,947		)
Spot contracts related to commercial loans	Other income	996			(1,108		)
Foreign currency exchange contracts for customers	Corporate and correspondent investment sales	2,350			431

Derivatives Credit and Market Risks

By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the Company’s fair value gain in a derivative. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty owes the Company and, therefore, creates a credit risk for the Company. When the fair value of a derivative instrument contract is negative, the Company owes the counterparty and, therefore, it has no credit risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically. Credit losses are also mitigated through collateral agreements and other contract provisions with derivative counterparties.

Market risk is the adverse effect that a change in interest rates or implied volatility rates has on the value of a financial instrument. The Company manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken.

The Company’s derivatives activities are monitored by its Asset/Liability Committee as part of its risk-management oversight. The Company’s Asset/Liability Committee is responsible for mandating various hedging strategies that are developed through its analysis of data from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into the Company’s overall interest rate risk management and trading strategies.

Entering into interest rate swap agreements and options involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts but also interest rate risk associated with unmatched positions. At March 31, 2017, interest rate swap agreements and options classified as trading were substantially matched. The Company had credit risk of $268 million related to derivative instruments in the trading account portfolio, which does not take into consideration master netting arrangements or the value of the collateral. There were no credit losses associated with derivative instruments classified as trading for the three months ended March 31, 2017 and 2016. At March 31, 2017 and December 31, 2016, there was no material nonperforming derivative positions classified as trading.

The Company’s derivative positions designated as hedging instruments are primarily executed in the over-the-counter market. These positions at March 31, 2017 have credit risk of $32 million, which does not take into consideration master netting arrangements or the value of the collateral.

There were no credit losses associated with derivative instruments classified as nontrading for the three months ended March 31, 2017 and 2016. At March 31, 2017 and December 31, 2016, there were no nonperforming derivative positions classified as nontrading.

As of March 31, 2017 and December 31, 2016, the Company had recorded the right to reclaim cash collateral of $87 million and $103 million, respectively, within other assets on the Company’s Unaudited Condensed Consolidated Balance Sheets and had recorded the obligation to return cash collateral of $44 million and $37 million, respectively, within deposits on the Company’s Unaudited Condensed Consolidated Balance Sheets.

Contingent Features

Certain of the Company’s derivative instruments contain provisions that require the Company’s debt maintain a certain credit rating from each of the major credit rating agencies. If the Company’s debt were to fall below this rating, it would be in violation of these provisions, and the counterparties to the derivative instruments could demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on March 31, 2017 was $31 million for which the Company has collateral requirements of $31 million in the normal course of business. If the credit risk-related contingent features underlying these agreements had been triggered on March 31, 2017, the Company’s collateral requirements to its counterparties would require no additional increases. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a liability position on December 31, 2016 was $30 million for which the Company had collateral requirements of $29 million in the normal course of business. If the credit risk-related contingent features underlying these agreements had been triggered on December 31, 2016, the Company’s collateral requirements to its counterparties would have increased by $1 million.

Netting of Derivative Instruments

The Company is party to master netting arrangements with its financial institution counterparties for some of its derivative and hedging activities. The Company does not offset assets and liabilities under these master netting arrangements for financial statement presentation purposes. The master netting arrangements provide for single net settlement of all derivative instrument arrangements, as well as collateral, in the event of default, or termination of, any one contract with the respective counterparties. Cash collateral is usually posted by the counterparty with a net liability position in accordance with contract thresholds.

The following table represents the Company’s total gross derivative instrument assets and liabilities subject to an enforceable master netting arrangement. The derivative instruments the Company has with its customers are not subject to an enforceable master netting arrangement.



	Gross Amounts Recognized		Gross Amounts Offset in the Condensed Consolidated Balance Sheets		Net Amount Presented in the Condensed Consolidated Balance Sheets		Financial Instruments Collateral Received/Pledged (1)		Cash Collateral Received/ Pledged (1)		Net Amount
	(In Thousands)
March 31, 2017
Derivative financial assets:
Subject to a master netting arrangement	$	203,289	$	—	$	203,289	$	—	$	41,212	$	162,077
Not subject to a master netting arrangement	162,593		—		162,593		—		—		162,593
Total derivative financial assets	$	365,882	$	—	$	365,882	$	—	$	41,212	$	324,670

Derivative financial liabilities:
Subject to a master netting arrangement	$	220,530	$	—	$	220,530	$	8,384	$	86,569	$	125,577
Not subject to a master netting arrangement	104,505		—		104,505		—		—		104,505
Total derivative financial liabilities	$	325,035	$	—	$	325,035	$	8,384	$	86,569	$	230,082

December 31, 2016
Derivative financial assets:
Subject to a master netting arrangement	$	234,002	$	—	$	234,002	$	—	$	33,212	$	200,790
Not subject to a master netting arrangement	191,809		—		191,809		—		—		191,809
Total derivative financial assets	$	425,811	$	—	$	425,811	$	—	$	33,212	$	392,599

Derivative financial liabilities:
Subject to a master netting arrangement	$	248,669	$	—	$	248,669	$	9,685	$	102,603	$	136,381
Not subject to a master netting arrangement	96,665		—		96,665		—		—		96,665
Total derivative financial liabilities	$	345,334	$	—	$	345,334	$	9,685	$	102,603	$	233,046


(1)	The actual amount of collateral received/pledged is limited to the asset/liability balance and does not include excess collateral received/pledged. When excess collateral exists, the collateral shown in the table above has been allocated based on the percentage of the actual amount of collateral posted.