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 not to 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, 2019, for additional information on the Company's accounting policies related to derivative instruments and hedging activities. For derivatives cleared through central clearing houses the variation margin payments made are legally characterized as settlements of the derivatives. As a result, these variation margin payments are netted against the fair value of the respective derivative contracts in the balance sheet and related disclosures and there is no fair value presented for these contracts. 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.



	September 30, 2020						December 31, 2019
			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	$	3,496,086	$	12,408	$	837	$	3,623,950	$	10,633	$	354
Total fair value hedges			12,408		837				10,633		354
Cash flow hedges:
Interest rate contracts:
Swaps related to commercial loans	10,000,000		—		—		10,000,000		—		—
Swaps related to FHLB advances	120,000		—		3,000		120,000		—		2,864
Foreign currency contracts:
Forwards related to currency fluctuations	1,178		—		87		2,597		102		—
Total cash flow hedges			—		3,087				102		2,864
Total derivatives designated as hedging instruments			$	12,408	$	3,924			$	10,735	$	3,218

Free-standing derivatives not designated as hedging instruments:
Interest rate contracts:
Forward contracts related to held for sale mortgages	$	794,989	$	638	$	1,993	$	289,990	$	148	$	514
Option contracts related to mortgage servicing rights	—		—		—		60,000		38		—
Interest rate lock commitments	636,349		16,305		—		146,941		3,088		—
Equity contracts:
Purchased equity option related to equity-linked CDs	50,831		774		—		152,130		4,460		—
Written equity option related to equity-linked CDs	41,065		—		625		128,620		—		3,765
Foreign exchange contracts:
Forwards and swaps related to commercial loans	385,230		2,678		1,883		443,493		167		3,872
Spots related to commercial loans	336		—		1		48,626		7		68
Swap associated with sale of Visa, Inc. Class B shares	172,368		—		6,435		161,904		—		5,904
Futures contracts (3)	2,240,000		—		—		2,110,000		—		—
Trading account assets and liabilities:
Interest rate contracts for customers	40,169,859		711,389		155,542		35,503,973		313,573		97,881
Foreign exchange contracts for customers	1,400,345		37,928		35,640		1,039,507		22,766		20,678
Total trading account assets and liabilities			749,317		191,182				336,339		118,559
Total free-standing derivative instruments not designated as hedging instruments			$	769,712	$	202,119			$	344,247	$	132,682


(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.

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 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 and nine months ended September 30, 2020 and 2019, related to hedged firm commitments no longer qualifying as a fair value hedge. At September 30, 2020, the fair value hedges had a weighted average expected remaining term of 2.7 years.

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 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 and nine months ended September 30, 2020 and 2019.

At September 30, 2020, cash flow hedges not terminated had a net fair value of $(3) million and a weighted average life of 2.4 years. Net gains of $173.1 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 4.2 years.

The following table presents the effect of hedging derivative instruments on the Company’s Unaudited Condensed Consolidated Statements of Income.



	Interest Income			Interest Expense
	Interest and fees on loans			Interest on FHLB and other borrowings
	(In Thousands)
Three Months Ended September 30, 2020
Total amounts presented in the unaudited condensed consolidated statements of income	$	644,643		$	14,644

Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Amounts related to interest settlements and amortization on derivatives	$	—		$	12,247
Recognized on derivatives	—			(12,407		)
Recognized on hedged items	—			12,058
Net income (expense) recognized on fair value hedges	$	—		$	11,898

Gain (losses) on cash flow hedging relationships: (1)
Interest rate contracts:
Realized gains (losses) reclassified from AOCI into net income (2)	$	43,671		$	(832	)
Net income (expense) recognized on cash flow hedges	$	43,671		$	(832	)

Three Months Ended September 30, 2019
Total amounts presented in the unaudited condensed consolidated statements of income	$	771,245		$	32,975

Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Amounts related to interest settlements and amortization on derivatives	$	—		$	(136	)
Recognized on derivatives	—			9,369
Recognized on hedged items	—			(8,999		)
Net income (expense) recognized on fair value hedges	$	—		$	234

Gain (losses) on cash flow hedging relationships: (1)
Interest rate contracts:
Realized losses reclassified from AOCI into net income (2)	$	(295	)	$	(254	)
Net income (expense) recognized on cash flow hedges	$	(295	)	$	(254	)


(1)	See Note 10, Comprehensive Income, for gain or loss recognized for cash flow hedges in accumulated other comprehensive income.


(2)	Pre-tax



	Interest Income			Interest Expense
	Interest and fees on loans			Interest on FHLB and other borrowings
	(In Thousands)
Nine Months Ended September 30, 2020
Total amounts presented in the unaudited condensed consolidated statements of income	$	2,029,886		$	57,756

Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Amounts related to interest settlements and amortization on derivatives	$	—		$	21,906
Recognized on derivatives	—			100,598
Recognized on hedged items	—			(95,575		)
Net income (expense) recognized on fair value hedges	$	—		$	26,929

Gain (losses) on cash flow hedging relationships: (1)
Interest rate contracts:
Realized gains (losses) reclassified from AOCI into net income (2)	$	82,963		$	(1,841	)
Net income (expense) recognized on cash flow hedges	$	82,963		$	(1,841	)

Nine Months Ended September 30, 2019
Total amounts presented in the unaudited condensed consolidated statements of income	$	2,359,500		$	104,901

Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Amounts related to interest settlements and amortization on derivatives	$	—		$	(4,192	)
Recognized on derivatives	—			76,315
Recognized on hedged items	—			(72,510		)
Net income (expense) recognized on fair value hedges	$	—		$	(387	)

Gain (losses) on cash flow hedging relationships: (1)
Interest rate contracts:
Realized losses reclassified from AOCI into net income (2)	$	(2,765	)	$	(584	)
Net income (expense) recognized on cash flow hedges	$	(2,765	)	$	(584	)


(1)	See Note 10, Comprehensive Income, for gain or loss recognized for cash flow hedges in accumulated other comprehensive income.


(2)	Pre-tax

The following table presents the carrying amount and associated cumulative basis adjustment related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities on the Company's Unaudited Condensed Consolidated Balance Sheets in fair value hedging relationships.



			Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Liabilities
	Carrying Amount of Hedged Liabilities		Hedged Items Currently Designated		Hedged Items No Longer Designated
	(In Thousands)
September 30, 2020
FHLB and other borrowings	$	3,259,422	$	120,610	$	1,224

December 31, 2019
FHLB and other borrowings	$	3,483,177	$	25,092	$	1,883

Derivatives Not Designated As Hedges

Derivatives not designated as hedges include those that are entered into as either economic hedges to facilitate client needs or as part of the Company’s overall risk management strategy. 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 holds a portfolio of futures, forwards and interest rate lock commitments as well as options related to its equity-linked CDs to mitigate its economic risk exposure. The Company also enters into a variety of interest rate contracts and foreign exchange contracts in its trading activities. See Note 13, Derivatives and Hedging, in the Notes to the December 31, 2019, Consolidated Financial Statements for a description of the Company's derivatives not designated as hedges.

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 September 30,						Nine Months Ended September 30,
	Statements of Income Caption	2020			2019			2020			2019
		(In Thousands)
Futures contracts	Mortgage banking income and corporate and correspondent investment sales	$	(12	)	$	14		$	(764	)	$	(1,365	)
Interest rate contracts:
Interest rate lock commitments	Mortgage banking income	(4,438		)	191			13,217			2,026
Option contracts related to mortgage servicing rights	Mortgage banking income	—			285			1,528			1,313
Forward contracts related to residential mortgage loans held for sale	Mortgage banking income	2,115			530			(989		)	481
Interest rate contracts for customers	Corporate and correspondent investment sales	(62		)	7,398			18,762			13,490
Equity contracts:
Purchased equity option related to equity-linked CDs	Other expense	(1,094		)	(2,187		)	(3,686		)	(7,196		)
Written equity option related to equity-linked CDs	Other expense	930			1,942			3,140			6,469
Foreign currency contracts:
Forward and swap contracts related to commercial loans	Other income	(15,885		)	13,787			(4,694		)	15,484
Spot contracts related to commercial loans	Other income	2,076			(1,263		)	4,900			(1,065		)
Foreign currency exchange contracts for customers	Corporate and correspondent investment sales	3,400			4,085			12,024			11,547

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 September 30, 2020, interest rate swap agreements and options classified as trading were substantially matched. The Company had credit risk of $749 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 and nine months ended September 30, 2020 and 2019. At September 30, 2020 and December 31, 2019, there were 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 September 30, 2020, have credit risk of $12 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 and nine months ended September 30, 2020 and 2019. At September 30, 2020 and December 31, 2019, there were no nonperforming derivative positions classified as nontrading.

As of September 30, 2020 and December 31, 2019, the Company had recorded the right to reclaim cash collateral of $221 million and $150 million, respectively, within other assets on the Company’s Unaudited Condensed Consolidated Balance Sheets. At both September 30, 2020 and December 31, 2019, the Company had recorded the obligation to return cash collateral of $12 million 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 September 30, 2020, was $76 million for which the Company has collateral requirements of $74 million in the normal course of business. If the credit risk-related contingent features underlying these agreements had been triggered on September 30, 2020, the Company’s collateral requirements to its counterparties would increase by $2 million. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a liability position on December 31, 2019, was $47 million for which the Company had collateral requirements of $45 million in the normal course of business. If the credit risk-related contingent features underlying these agreements had been triggered on December 31, 2019, the Company’s collateral requirements to its counterparties would have increased by $2 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 with respect to, 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)
September 30, 2020
Derivative financial assets:
Subject to a master netting arrangement	$	46,217	$	—	$	46,217	$	—	$	3,502	$	42,715
Not subject to a master netting arrangement	735,903		—		735,903		—		—		735,903
Total derivative financial assets	$	782,120	$	—	$	782,120	$	—	$	3,502	$	778,618

Derivative financial liabilities:
Subject to a master netting arrangement	$	174,188	$	—	$	174,188	$	—	$	174,188	$	—
Not subject to a master netting arrangement	31,855		—		31,855		—		—		31,855
Total derivative financial liabilities	$	206,043	$	—	$	206,043	$	—	$	174,188	$	31,855

December 31, 2019
Derivative financial assets:
Subject to a master netting arrangement	$	41,390	$	—	$	41,390	$	—	$	5,860	$	35,530
Not subject to a master netting arrangement	313,592		—		313,592		—		—		313,592
Total derivative financial assets	$	354,982	$	—	$	354,982	$	—	$	5,860	$	349,122

Derivative financial liabilities:
Subject to a master netting arrangement	$	94,979	$	—	$	94,979	$	—	$	94,979	$	—
Not subject to a master netting arrangement	40,921		—		40,921		—		—		40,921
Total derivative financial liabilities	$	135,900	$	—	$	135,900	$	—	$	94,979	$	40,921


(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.