Derivative Instruments

6 Months Ended

Jun. 30, 2020

Derivative Instrument Detail [Abstract]

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 June 30, 2020, 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.


(In thousands)	June 30, 2020		December 31, 2019
Interest rate swaps	$	2,491,862	$	2,606,181
Interest rate floors	1,500,000		1,500,000
Interest rate caps	126,892		59,316
Credit risk participation agreements	387,404		316,225
Foreign exchange contracts	7,359		10,936
Mortgage loan commitments	50,824		13,755
Mortgage loan forward sale contracts	578		1,943
Forward TBA contracts	43,000		17,500
Total notional amount	$	4,607,919	$	4,525,856

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 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.

As of June 30, 2020, the Company has entered into three interest rate floors with a combined notional value of $1.5 billion, to hedge the risk of declining interest rates on certain floating rate commercial loans indexed to one month LIBOR. The first interest rate floor has a purchased strike rate of 2.25% and became effective on January 1, 2020 and matures on January 1, 2026. The second interest rate floor has a purchased strike rate of 2.50% and became effective on June 1, 2020 and matures on June 1, 2026. The third interest rate floor has a purchased strike rate of 2.00% and is effective on December 15, 2020 and matures on December 15, 2026. The premiums paid for these floors totaled $31.3 million. As of June 30, 2020, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is approximately 6.5 years. 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 values 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 June 30, 2020, net deferred gains on the interest rate floors totaled $137.7 million (pre-tax) and was recorded in AOCI in the consolidated balance sheet. As of June 30, 2020, it is expected that $4.1 million (pre-tax) of interest rate floor premium amortization will be reclassified from AOCI into earnings over the next twelve months.

In July 2020, the Company monetized the interest rate floors that became effective on January 1, 2020 and June 1, 2020 and will amortize gains of $43.5 million and $51.5 million, respectively, into earnings through January 1, 2026 and June 1, 2026, the original maturity dates.

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 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 Company has resumed sales of these loans and has entered into forward contracts, as volatility in the TBA market caused by the COVID-19 outbreak has eased.

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 17 on Fair Value Measurements in the 2019 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. Certain collateral posted to and from the Company's clearing counterparty has been applied to the fair values of the cleared swaps, such that at June 30, 2020 in the table below, there were no reductions to the positive fair values of cleared swaps and the negative fair values of cleared swaps were reduced by $83.4 million. At December 31, 2019, the positive fair values of cleared swaps were reduced by $617 thousand and the negative fair values of cleared swaps were reduced by $28.5 million.


	Asset Derivatives						Liability Derivatives
	June 30, 2020		Dec. 31, 2019		June 30, 2020		Dec. 31, 2019
(In thousands)	Fair Value						Fair Value
Derivatives designated as hedging instruments:
Interest rate floors	$	162,426	$	67,192	$	—	$	—
Total derivatives designated as hedging instruments	$	162,426	$	67,192	$	—	$	—
Derivative instruments not designated as hedging instruments:
Interest rate swaps	$	103,543	$	37,774	$	(20,053)	$	(9,916)
Interest rate caps	28		4		(28)		(4)
Credit risk participation agreements	435		140		(1,094)		(230)
Foreign exchange contracts	26		97		(43)		(32)
Mortgage loan commitments	2,547		459		—		—
Mortgage loan forward sale contracts	3		6		—		(2)
Forward TBA contracts	2		2		(155)		(35)
Total derivatives not designated as hedging instruments	$	106,584	$	38,482	$	(21,373)	$	(10,219)
Total	$	269,010	$	105,674	$	(21,373)	$	(10,219)

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

(In thousands)	Total		Included Component		Excluded Component			Total		Included Component		Excluded Component
For the Three Months Ended June 30, 2020
Derivatives in cash flow hedging relationships:
Interest rate floors	$	14,566	$	18,087	$	(3,521)	Interest and fees on loans	$	2,155	$	3,186	$	(1,031)
Total	$	14,566	$	18,087	$	(3,521)	Total	$	2,155	$	3,186	$	(1,031)
For the Six Months Ended June 30, 2020
Derivatives in cash flow hedging relationships:
Interest rate floors	$	99,183	$	125,708	$	(26,525)	Interest and fees on loans	$	1,887	$	3,949	$	(2,062)
Total	$	99,183	$	125,708	$	(26,525)	Total	$	1,887	$	3,949	$	(2,062)
For the Three Months Ended June 30, 2019
Derivatives in cash flow hedging relationships:
Interest rate floors	$	25,378	$	35,264	$	(9,886)	Interest and fees on loans	$	(1,031)	$	—	$	(1,031)
Total	$	25,378	$	35,264	$	(9,886)	Total	$	(1,031)	$	—	$	(1,031)
For the Six Months Ended June 30, 2019
Derivatives in cash flow hedging relationships:
Interest rate floors	$	28,405	$	46,137	$	(17,732)	Interest and fees on loans	$	(1,709)	$	—	$	(1,709)
Total	$	28,405	$	46,137	$	(17,732)	Total	$	(1,709)	$	—	$	(1,709)


	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 June 30						For the Six Months Ended June 30
(In thousands)		2020		2019		2020		2019



Derivative instruments:
Interest rate swaps	Other non-interest income	$	22	$	824	$	288	$	1,127
Interest rate caps	Other non-interest income	—		—		19		—
Credit risk participation agreements	Other non-interest income	267		13		240		41
Foreign exchange contracts	Other non-interest income	(44)		(13)		(82)		3
Mortgage loan commitments	Loan fees and sales	2,548		112		2,089		399
Mortgage loan forward sale contracts	Loan fees and sales	3		(13)		(1)		3
Forward TBA contracts	Loan fees and sales	(153)		859		227		593
Total		$	2,643	$	1,782	$	2,780	$	2,166

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
June 30, 2020
Assets:
Derivatives subject to master netting agreements	$	266,233	$	—	$	266,233	$	(18,112)	$	(142,611)	$	105,510
Derivatives not subject to master netting agreements	2,777		—		2,777
Total derivatives	$	269,010	$	—	$	269,010
Liabilities:
Derivatives subject to master netting agreements	$	21,017	$	—	$	21,017	$	(18,112)	$	(1,411)	$	1,494
Derivatives not subject to master netting agreements	356		—		356
Total derivatives	$	21,373	$	—	$	21,373
December 31, 2019
Assets:
Derivatives subject to master netting agreements	$	105,147	$	—	$	105,147	$	(8,104)	$	(59,525)	$	37,518
Derivatives not subject to master netting agreements	527		—		527
Total derivatives	$	105,674	$	—	$	105,674
Liabilities:
Derivatives subject to master netting agreements	$	10,083	$	—	$	10,083	$	(8,104)	$	(437)	$	1,542
Derivatives not subject to master netting agreements	136		—		136
Total derivatives	$	10,219	$	—	$	10,219