Derivative Instruments

3 Months Ended

Mar. 31, 2015

Derivative Instruments

Derivative Financial Instruments

Note 11. Derivative Instruments

The Company may use interest-rate swaps to mitigate interest-rate risk associated with changes to (1) the fair value of certain fixed-rate deposits and borrowings (fair value hedges) and (2) certain cash flows related to future interest payments on variable rate loans (cash flow hedges). Interest-rate swap agreements involve the exchange of fixed and variable rate interest payments between counterparties based upon a notional principal amount and maturity date. The Company recognizes derivatives as assets or liabilities on the consolidated balance sheets at their fair value. The treatment of changes in the fair value of derivatives depends on the character of the transaction. The Company also offers various derivative products to clients and enters into derivative transactions in due course. These transactions are not linked to specific Company assets or liabilities in the consolidated balance sheets or to forecasted transactions in a hedge relationship and, therefore, do not qualify for hedge accounting.

The following table summarizes the fair value and balance sheet classification of derivative instruments as of March 31, 2015 and December 31, 2014. The notional amount of the contract is not recorded on the consolidated balance sheets, but is used as the basis for determining the amount of interest payments to be exchanged between the counterparties. If a counterparty fails to perform, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset.

Notional Amounts and Fair Values of Derivative Instruments

	March 31, 2015						December 31, 2014
(in millions) (1)	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives not designated as hedging instruments
Interest rate contracts:
Swaps	$	3,221.1	$	59.8	$	61.0	$	3,094.5	$	44.7	$	45.2
Interest-rate caps, floors and collars	438.9		0.4		0.4		437.3		0.8		0.8
Total interest-rate contracts	3,660.0		60.2		61.4		3,531.8		45.5		46.0
Option contracts	1.8		0.3		—		1.9		0.4		—
Foreign exchange contracts:
Spot and forward contracts	866.2		15.1		15.7		802.7		6.1		6.6
Options purchased	3.0		0.1		0.1		3.0		0.1		0.1
Options written	3.0		0.2		0.2		3.0		0.2		0.2
Total foreign exchange contracts	872.2		15.4		16.0		808.7		6.4		6.9
Equity warrants	3.2		1.2		—		2.3		0.9		—
Total derivatives not designated as hedging instruments	$	4,537.2	$	77.1	$	77.4	$	4,344.7	$	53.2	$	52.9

(1) The Company offsets mark-to-market adjustments, interest receivable, interest payable and cash collateral received on interest-rate swaps that are executed with the same counterparty under a master netting agreement, and reports the net balance in other assets or other liabilities in the consolidated balance sheets. For purposes of this disclosure, mark-to-market adjustments, interest receivable and interest payable are presented on a gross basis and cash collateral is excluded from fair value amounts.

Derivatives Designated as Hedging Instruments

The Company had no hedging instruments as of March 31, 2015 and December 31, 2014.

Derivatives Not Designated as Hedging Instruments

Derivative contracts not designated as hedges are composed primarily of interest-rate contracts with certain commercial clients that are largely offset by paired trades with unrelated bank counterparties. The Company also enters into foreign exchange contracts with its clients and counterparty banks primarily for the purpose of offsetting or hedging the clients’ transaction and economic exposures arising out of commercial transactions. The Company also obtains equity warrants in association with certain lending transactions. Derivative contracts not designated as hedges are carried at fair value each reporting period with changes in fair value recorded as a part of Noninterest income in the consolidated statements of income. The table below provides the amount of gains and losses on these derivative contracts for the three months ended March 31, 2015 and 2014:

(in millions)		For the three months ended
Derivatives Not Designated as	Location in Consolidated	March 31,
Hedging Instruments	Statements of Income	2015			2014
Interest-rate contracts	Other noninterest income	$	(0.7	)	$	(0.5	)
Option contracts	Other noninterest income	(0.1		)	0.1
Foreign exchange contracts (1)	International services income	7.5			7.2
Total income		$	6.7		$	6.8

(1)  Includes spread and translation gains (losses) on foreign exchange spot, forward and option contracts.

In the course of negotiating credit facilities, the Company may obtain rights to acquire stock in the form of equity warrants in primarily private, venture-backed technology companies. The warrants grant the Company an option to purchase a specific number of shares of stock in the underlying company at a specific price within a specific time period. The warrant agreements typically contain a net share settlement provision (cashless exercise) which gives the Company the option to receive at exercise a number of shares equal to the intrinsic value of the warrant divided by the share price. Equity warrants are accounted for as derivatives under ASC Topic 815, Derivatives and Hedging, and are recorded as derivative assets at their estimated fair value on the grant date. The warrant portfolio is reviewed quarterly for changes in fair value. Subsequent changes in the fair value of warrants are recognized in Other noninterest income in the consolidated statements of income. If a warrant is exercised or paid out for cash, the gain is recorded in Other noninterest income in the consolidated statements of income.

Credit Risk Exposure and Collateral

The Company’s swap agreements require the deposit of cash or marketable debt securities as collateral based on certain risk thresholds. These requirements apply individually to the Corporation and to the Bank. Additionally, certain of the Company’s swap contracts contain security agreements that include credit-risk-related contingent features. Under these agreements, the collateral requirements are based on the Company’s credit rating from the major credit rating agencies. The amount of collateral required may vary by counterparty based on a range of credit ratings that correspond with exposure thresholds established in the derivative agreements. If the credit ratings on the Company’s debt were to fall below the level associated with a particular exposure threshold and the derivatives with a counterparty are in a net liability position that exceeds that threshold, the counterparty could request immediate payment or delivery of collateral for the difference between the net liability amount and the exposure threshold. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on March 31, 2015 was $23.7 million. The Company delivered collateral in the form of securities valued at $14.5 million and cash totaling $41.4 million on swap agreements that had credit-risk-related contingent features and were in a net liability position at March 31, 2015.

The Company’s interest-rate swaps had no credit risk exposure at March 31, 2015 and December 31, 2014, respectively. The credit exposure represents the cost to replace, on a present value basis and at current market rates, all contracts by trading counterparty having an aggregate positive market value, net of margin collateral received. The Company enters into master netting agreements with swap counterparties to mitigate credit risk. Under these agreements, the net amount due from or payable to each counterparty is settled on the contract payment date. No collateral had been received from swap counterparties at March 31, 2015 and December 31, 2014. The Company delivered collateral valued at $6.6 million on swap agreements that did not have credit-risk-related contingent features at March 31, 2015.

At March 31, 2015 the Company had delivered and received cash collateral on foreign exchange contracts totaling $2.1 million and $1.9 million, respectively.

See Note 12, Balance Sheet Offsetting, of the Notes to the Unaudited Consolidated Financial Statements for additional information about the Company’s derivative instruments subject to master netting agreements.