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 December 31, 2018, with the exception of the interest rate floors (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.



	December 31
(In thousands)	2018		2017
Interest rate swaps	$	2,006,280	$	1,741,412
Interest rate floors	1,000,000		—
Interest rate caps	62,163		31,776
Credit risk participation agreements	143,460		133,488
Foreign exchange contracts	6,206		11,826
Mortgage loan commitments	14,544		17,110
Mortgage loan forward sale contracts	5,768		2,566
Forward TBA contracts	16,500		25,000
Total notional amount	$	3,254,921	$	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. The customers are engaged in a variety of businesses, including real estate, manufacturing, retail product distribution, education, and retirement communities. These customer 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 clearing agency who becomes the Company's 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 arrangements 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 can require instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.

During the year ended December 31, 2018, the Company entered into interest rate floors, with a combined notional value of $1.0 billion, to hedge the potential risk of declining interest rates on certain floating rate commercial loans. The premiums paid for these floors totaled $20.7 million. As of December 31, 2018, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is approximately 6 years, and the floors are forward starting, beginning in 2020. The interest rate floors qualified and were designated as cash flow hedges and were assessed for effectiveness using regression analysis. The change in the fair value of the interest rate floors are recorded in AOCI, net of the amortization of the premium paid, which is recorded against interest and fees on loans in the consolidated statements of income. As of December 31, 2018, net deferred gains on the interest rate floors totaled $9.1 million (pre-tax) and were recorded in AOCI in the consolidated balance sheet. As of December 31, 2018, it is expected that $2.8 million (pre-tax) of interest rate floor premium amortization will be reclassified from AOCI into earnings over the next twelve months.

The Company’s foreign exchange activity involves the purchase and sale of forward foreign exchange contracts, which are commitments to purchase or deliver a specified amount of foreign currency at a specific future date. This activity enables customers involved in international business to hedge their exposure to foreign currency exchange rate fluctuations. The Company minimizes its related exposure arising from these customer transactions with offsetting contracts for the same currency and time frame with approved, reputable counterparties. Risk arises from changes in the currency exchange rate and from the potential for counterparty nonperformance. These risks are controlled by adherence to a foreign exchange trading policy which contains control limits on currency amounts, open positions, maturities and losses, and procedures for approvals, record-keeping, monitoring and reporting. Hedge accounting has not been applied to these foreign exchange activities.

Credit risk participation agreements arise when the Company contracts, as a guarantor or beneficiary, with other financial institutions to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third party default on the underlying swap. The Company’s risks and responsibilities as guarantor are further discussed in Note 20 on Commitments, Contingencies and Guarantees.

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 contracts. 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 are shown in the table below. Information about the valuation methods used to measure fair value is provided in Note 16 on Fair Value Measurements. Derivative instruments with a positive fair value (asset derivatives) are reported in other assets in the consolidated balance sheets while derivative instruments with a negative fair value (liability derivatives) are reported in other liabilities in the consolidated balance sheets. As mentioned in Note 16, effective January 2017, certain collateral posted to and from the Company's clearing counterparty has been offset against the fair values of cleared swaps, such that at December 31, 2018 in the table below, the positive fair values of cleared swaps were reduced by $8.1 million and the negative fair values of cleared swaps were reduced by $6.5 million. 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
	December 31				December 31
	2018		2017		2018			2017
(In thousands)	Fair Value				Fair Value
Derivatives designated as hedging instruments:
Interest rate floors	$	29,031	$	—	$	—		$	—
Total derivatives designated as hedging instruments	$	29,031	$	—	$	—		$	—
Derivatives not designated as hedging instruments:
Interest rate swaps	$	11,537	$	7,674	$	(13,110	)	$	(7,857	)
Interest rate caps	24		16		(24		)	(16		)
Credit risk participation agreements	47		46		(93		)	(123		)
Foreign exchange contracts	20		21		(8		)	(40		)
Mortgage loan commitments	536		580		—			—
Mortgage loan forward sale contracts	15		8		(8		)	(7		)
Forward TBA contracts	—		4		(178		)	(31		)
Total derivatives not designated as hedging instruments	$	12,179	$	8,349	$	(13,421	)	$	(8,074	)
Total	$	41,210	$	8,349	$	(13,421	)	$	(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 Year Ended December 31			For the Year Ended December 31
(In thousands)	2018			2018
Derivatives in cash flow hedging relationships:
Interest rate floors* ^(a)	$	8,381	Interest and fees on loans	$	(760	)
Total	$	8,381		$	(760	)

* No hedging relationship existed during 2017 and 2016.

(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 Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
		For the Years Ended December 31
(In thousands)		2018			2017			2016
Derivative instruments:
Interest rate swaps	Other non-interest income	$	3,914		$	1,978		$	5,927
Interest rate caps	Other non-interest income	11			—			—
Credit risk participation agreements	Other non-interest income	150			35			(44		)
Foreign exchange contracts:	Other non-interest income	31			(80		)	55
Mortgage loan commitments	Loan fees and sales	(45		)	231			87
Mortgage loan forward sale contracts	Loan fees and sales	5			64			(63		)
Forward TBA contracts	Loan fees and sales	414			(648		)	79
Total		$	4,480		$	1,580		$	6,041

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.

While the Company is party to master netting arrangements with most of its swap derivative counterparties, the Company does not offset derivative assets and liabilities under these arrangements on its consolidated balance sheet. Collateral, usually in the form of marketable securities, is exchanged between the Company and dealer bank counterparties and is generally subject to thresholds and transfer minimums. By contract, it 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 to its clearing agency. 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
December 31, 2018
Assets:
Derivatives subject to master netting agreements	$	40,613	$	—	$	40,613	$	(2,992	)	$	(26,174	)	$	11,447
Derivatives not subject to master netting agreements	597		—		597
Total derivatives	41,210		—		41,210
Liabilities:
Derivatives subject to master netting agreements	13,333		—		13,333		(2,992		)	(261		)	10,080
Derivatives not subject to master netting agreements	88		—		88
Total derivatives	13,421		—		13,421
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