Derivative Instruments

The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. At September 30, 2018, with the exception of the interest rate floor (discussed below), the Company’s derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.



(In thousands)	September 30, 2018		December 31, 2017
Interest rate swaps	$	1,922,172	$	1,741,412
Interest rate floor	500,000		—
Interest rate caps	30,416		31,776
Credit risk participation agreements	158,764		133,488
Foreign exchange contracts	6,087		11,826
Mortgage loan commitments	24,997		17,110
Mortgage loan forward sale contracts	2,720		2,566
Forward TBA contracts	27,000		25,000
Total notional amount	$	2,672,156	$	1,963,178

The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by matching contracts purchased by the Company from other financial dealer institutions. Contracts with dealers that require central clearing are novated to a regulated clearinghouse, which becomes the Company's legal counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings.

Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions or instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.

During the third quarter of 2018, the Company entered into an interest rate floor with a notional value of $500.0 million to hedge the risk of declining interest rates on certain floating rate commercial loans. The premium paid for this floor totaled $9.5 million and is forward starting beginning on January 1, 2020. The interest rate floor matures on January 1, 2026. The interest rate floor qualified and was designated as a cash flow hedge and was assessed for effectiveness using regression analysis. The change in the fair value of the interest rate floor is recorded in AOCI, net of the amortization of the premium paid for the interest rate floor, which is recorded against interest and fees on loans in the consolidated statements of income. As of September 30, 2018, net deferred losses on the interest rate floor totaled $1.4 million (pre-tax) and was recorded in AOCI in the consolidated balance sheet. As of September 30, 2018, over the next twelve months, it is expected that $1.3 million (pre-tax), representing the floor premium amortization, will be reclassified from AOCI into earnings.

The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 5 on Guarantees. In addition, the Company enters into foreign exchange contracts, which are mainly comprised of contracts to purchase or deliver foreign currencies for customers at specific future dates.

Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale commitments. Changes in the fair values of the loan commitments and funded loans prior to sale that are due to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the security settlement date.

The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 15 on Fair Value Measurements in the 2017 Annual Report on Form 10-K.

The Company's policy is to present its derivative assets and derivative liabilities on a gross basis in its consolidated balance sheets, and these are reported in other assets and other liabilities. However, in January 2017, a clearinghouse rule change required that variation margin on centrally cleared derivatives, formerly treated as collateral, be treated as settlements of derivative exposure. As a result, the fair values of the respective derivative contracts must be reduced by variation margin payments and reported as a single, net amount. Accordingly, at September 30, 2018 in the table below, the positive fair values of cleared swaps were reduced by $19.1 million and the negative fair values of cleared swaps were reduced by $687 thousand. At December 31, 2017, the positive fair values of cleared swaps were reduced by $4.5 million and the negative fair values of cleared swaps were reduced by $4.3 million.



	Asset Derivatives				Liability Derivatives
	Sept. 30, 2018		Dec. 31, 2017		Sept. 30, 2018			Dec. 31, 2017
(In thousands)	Fair Value				Fair Value
Derivatives designated as hedging instruments:
Interest rate floor	$	7,829	$	—	$	—		$	—
Total derivatives designated as hedging instruments	$	7,829	$	—	$	—		$	—
Derivative instruments:
Interest rate swaps	$	4,476	$	7,674	$	(22,916	)	$	(7,857	)
Interest rate caps	18		16		(18		)	(16		)
Credit risk participation agreements	24		46		(58		)	(123		)
Foreign exchange contracts	57		21		(14		)	(40		)
Mortgage loan commitments	679		580		—			—
Mortgage loan forward sale contracts	9		8		(2		)	(7		)
Forward TBA contracts	111		4		(4		)	(31		)
Total derivatives not designated as hedging instruments	$	5,374	$	8,349	$	(23,012	)	$	(8,074	)
Total	$	13,203	$	8,349	$	(23,012	)	$	(8,074	)

The pre-tax effects of derivative instruments on the consolidated statements of income are shown in the tables below.



	Amount of Gain or (Loss) Recognized in OCI						Location of Gain (Loss) Reclassified from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income
	For the Three Months Ended September 30			For the Nine Months Ended September 30				For the Three Months Ended September 30			For the Nine Months Ended September 30
(In thousands)	2018			2018				2018			2018
Derivatives in cash flow hedging relationships:
Interest rate floor* ^(a)	$	(1,625	)	$	(1,625	)	Interest and fees on loans	$	(253	)	$	(253	)
Total	$	(1,625	)	$	(1,625	)		$	(253	)	$	(253	)

* No hedging relationship existed during 2017.

(a) Amounts shown herein were excluded from the assessment of effectiveness, as they represent the time value component of derivative gains (losses).



	Location of Gain or (Loss) Recognized in Income on Derivatives	Amount of Gain or (Loss) Recognized in Income on Derivatives
		For the Three Months Ended September 30						For the Nine Months Ended September 30
(In thousands)		2018			2017			2018		2017
Derivative instruments:
Interest rate swaps	Other non-interest income	$	692		$	702		$	2,924	$	1,301
Credit risk participation agreements	Other non-interest income	(7		)	7			173		18
Foreign exchange contracts	Other non-interest income	(120		)	51			62		(24		)
Mortgage loan commitments	Loan fees and sales	(50		)	(114		)	99		408
Mortgage loan forward sale contracts	Loan fees and sales	—			8			6		70
Forward TBA contracts	Loan fees and sales	113			(322		)	646		(580		)
Total		$	628		$	332		$	3,910	$	1,193

The following table shows the extent to which assets and liabilities relating to derivative instruments have been offset in the consolidated balance sheets. It also provides information about these instruments which are subject to an enforceable master netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset. Also shown is collateral received or pledged in the form of other financial instruments, which is generally cash or marketable securities. The collateral amounts in this table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus amounts of excess collateral are not shown. Most of the derivatives in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.

Collateral exchanged between the Company and dealer bank counterparties is generally subject to thresholds and transfer minimums, and usually consists of marketable securities. By contract, these may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash or securities to its clearing agent. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.



							Gross Amounts Not Offset in the Balance Sheet
(In thousands)	Gross Amount Recognized		Gross Amounts Offset in the Balance Sheet		Net Amounts Presented in the Balance Sheet		Financial Instruments Available for Offset			Collateral Received/Pledged			Net Amount
September 30, 2018
Assets:
Derivatives subject to master netting agreements	$	12,485	$	—	$	12,485	$	(580	)	$	(10,168	)	$	1,737
Derivatives not subject to master netting agreements	718		—		718
Total derivatives	13,203		—		13,203
Liabilities:
Derivatives subject to master netting agreements	$	22,943	$	—	$	22,943	$	(580	)	$	(220	)	$	22,143
Derivatives not subject to master netting agreements	69		—		69
Total derivatives	23,012		—		23,012
December 31, 2017
Assets:
Derivatives subject to master netting agreements	$	7,726	$	—	$	7,726	$	(233	)	$	(824	)	$	6,669
Derivatives not subject to master netting agreements	623		—		623
Total derivatives	8,349		—		8,349
Liabilities:
Derivatives subject to master netting agreements	$	7,935	$	—	$	7,935	$	(233	)	$	(1,570	)	$	6,132
Derivatives not subject to master netting agreements	139		—		139
Total derivatives	8,074		—		8,074