Derivative Financial Instruments

The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued interest payable and other liabilities in the accompanying consolidated balance sheets and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows.

Interest Rate Derivatives. We utilize interest rate swaps, caps and floors to mitigate exposure to interest rate risk and to facilitate the needs of our customers. Our objectives for utilizing these derivative instruments are described in our 2017 Form 10-K.

The notional amounts and estimated fair values of interest rate derivative contracts are presented in the following table. The fair values of interest rate derivative contracts are estimated utilizing internal valuation models with observable market data inputs, or as determined by the Chicago Mercantile Exchange (“CME”) for centrally cleared derivative contracts. CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives' exposure rather than collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. Variation margin, as determined by the CME, is settled daily. As a result, derivative contracts that clear through the CME have an estimated fair value of zero as of September 30, 2018 and December 31, 2017.



	September 30, 2018					December 31, 2017
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Derivatives designated as hedges of fair value:
Financial institution counterparties:
Loan/lease interest rate swaps – assets	$	11,284	$	314		$	13,679	$	242
Loan/lease interest rate swaps – liabilities	4,226		(201		)	11,147		(593		)
Non-hedging interest rate derivatives:
Financial institution counterparties:
Loan/lease interest rate swaps – assets	780,531		6,179			430,449		1,418
Loan/lease interest rate swaps – liabilities	341,987		(5,133		)	541,496		(12,820		)
Loan/lease interest rate caps – assets	102,487		920			114,619		480
Customer counterparties:
Loan/lease interest rate swaps – assets	341,987		7,017			541,496		17,882
Loan/lease interest rate swaps – liabilities	780,531		(20,613		)	430,449		(4,861		)
Loan/lease interest rate caps – liabilities	102,487		(920		)	114,619		(480		)

The weighted-average rates paid and received for interest rate swaps outstanding at September 30, 2018 were as follows:



	Weighted-Average
	Interest Rate Paid		Interest Rate Received
Interest rate swaps:
Fair value hedge loan/lease interest rate swaps	2.45	%	2.16	%
Non-hedging interest rate swaps – financial institution counterparties	4.09	%	3.73	%
Non-hedging interest rate swaps – customer counterparties	3.73	%	4.09	%

The weighted-average strike rate for outstanding interest rate caps was 2.96% at September 30, 2018.

Commodity Derivatives. We enter into commodity swaps and option contracts that are not designated as hedging instruments primarily to accommodate the business needs of our customers. Upon the origination of a commodity swap or option contract with a customer, we simultaneously enter into an offsetting contract with a third party financial institution to mitigate the exposure to fluctuations in commodity prices.

The notional amounts and estimated fair values of non-hedging commodity swap and option derivative positions outstanding are presented in the following table. We obtain dealer quotations and use internal valuation models with observable market data inputs to value our commodity derivative positions.



		September 30, 2018				December 31, 2017
	Notional Units	Notional Amount	Estimated Fair Value			Notional Amount	Estimated Fair Value
Financial institution counterparties:
Oil – assets	Barrels	622	$	917		253	$	193
Oil – liabilities	Barrels	2,889	(34,941		)	2,731	(13,448		)
Natural gas – assets	MMBTUs	7,939	427			5,927	1,399
Natural gas – liabilities	MMBTUs	8,382	(598		)	3,917	(326		)
Customer counterparties:
Oil – assets	Barrels	2,889	35,083			2,731	13,709
Oil – liabilities	Barrels	622	(917		)	253	(187		)
Natural gas – assets	MMBTUs	9,588	682			3,917	340
Natural gas – liabilities	MMBTUs	6,734	(392		)	5,927	(1,366		)

Foreign Currency Derivatives. We enter into foreign currency forward contracts that are not designated as hedging instruments primarily to accommodate the business needs of our customers. Upon the origination of a foreign currency denominated transaction with a customer, we simultaneously enter into an offsetting contract with a third party financial institution to negate the exposure to fluctuations in foreign currency exchange rates. We also utilize foreign currency forward contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in foreign currency exchange rates on foreign currency holdings and certain short-term, non-U.S. dollar denominated loans. The notional amounts and fair values of open foreign currency forward contracts were as follows:



		September 30, 2018				December 31, 2017
	Notional Currency	Notional Amount	Estimated Fair Value			Notional Amount	Estimated Fair Value
Financial institution counterparties:
Forward contracts – assets	EUR	1,097	$	9		4,014	$	77
Forward contracts – assets	GBP	793	9			127	1
Forward contracts – liabilities	EUR	—	—			4,846	(37		)
Forward contracts – liabilities	CAD	22,971	(189		)	25,413	(142		)
Forward contracts – liabilities	GBP	—	—			1,178	(9		)
Forward contracts – liabilities	AUD	54	—			—	—
Customer counterparties:
Forward contracts – assets	EUR	—	—			3,867	58
Forward contracts – assets	CAD	22,918	245			25,282	279
Forward contracts – liabilities	EUR	—	—			4,041	(51		)
Forward contracts – liabilities	GBP	—	—			127	—

Gains, Losses and Derivative Cash Flows. For fair value hedges, the changes in the fair value of both the derivative hedging instrument and the hedged item are included in other non-interest income or other non-interest expense. The extent that such changes in fair value do not offset represents hedge ineffectiveness. Net cash flows from interest rate swaps on commercial loans/leases designated as hedging instruments in effective hedges of fair value are included in interest income on loans. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other non-interest income and other non-interest expense.

Amounts included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018			2017
Commercial loan/lease interest rate swaps:
Amount of gain (loss) included in interest income on loans	$	12	$	(149	)	$	1		$	(592	)
Amount of (gain) loss included in other non-interest expense	—		(2		)	(1		)	(5		)

As stated above, we enter into non-hedge related derivative positions primarily to accommodate the business needs of our customers. Upon the origination of a derivative contract with a customer, we simultaneously enter into an offsetting derivative contract with a third party financial institution. We recognize immediate income based upon the difference in the bid/ask spread of the underlying transactions with our customers and the third party. Because we act only as an intermediary for our customer, subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact our results of operations.

Amounts included in the consolidated statements of income related to non-hedging interest rate, commodity and foreign currency derivative instruments are presented in the table below.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018			2017
Non-hedging interest rate derivatives:
Other non-interest income	$	699	$	1,085	$	2,889		$	2,062
Other non-interest expense	2		—		(2		)	1
Non-hedging commodity derivatives:
Other non-interest income	456		231		492			387
Non-hedging foreign currency derivatives:
Other non-interest income	53		83		203			101

Counterparty Credit Risk. Our credit exposure relating to interest rate swaps, commodity swaps/options and foreign currency forward contracts with bank customers was approximately $41.0 million at September 30, 2018. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. Our credit exposure, net of collateral pledged, relating to interest rate swaps, commodity swaps/options and foreign currency forward contracts with upstream financial institution counterparties was approximately $431 thousand at September 30, 2018. This amount was primarily related to excess collateral we posted to counterparties. Collateral levels for upstream financial institution counterparties are monitored and adjusted as necessary. See Note 9 – Balance Sheet Offsetting and Repurchase Agreements for additional information regarding our credit exposure with upstream financial institution counterparties.

The aggregate fair value of securities we posted as collateral related to derivative contracts totaled $7.0 million at September 30, 2018. At such date, we also had $26.7 million in cash collateral on deposit with other financial institution counterparties.