Derivative Financial Instruments

We primarily use derivative financial instruments to manage interest rate risk, currency exchange rate risk, and to assist customers with their risk management objectives. Also, in connection with negotiating credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology and life science/healthcare industries.

Interest Rate Risk

Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our interest rate sensitive assets and liabilities and changes in market interest rates. To manage interest rate risk for our 6.05% Subordinated Notes, we entered into a fixed-for-floating interest rate swap agreement at the time of debt issuance based upon LIBOR with matched-terms. The net cash benefit associated with our interest rate swap is recorded as a reduction in “Interest expense—Borrowings,” a component of net interest income. The fair value of our interest rate swaps is calculated using a discounted cash flow method and adjusted for credit valuation associated with counterparty risk. Changes in fair value of the interest rate swaps are reflected in either other assets (for swaps in an asset position) or other liabilities (for swaps in a liability position).

We assess hedge effectiveness under ASC 815, Derivatives and Hedging, using the long-haul method. Any differences associated with our interest rate swap that arise as a result of hedge ineffectiveness are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Currency Exchange Risk

We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure risk associated with the net difference between foreign currency denominated assets and liabilities. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting. Gains or losses from changes in currency rates on foreign currency denominated instruments are included in other noninterest income, a component of noninterest income. We may experience ineffectiveness in the economic hedging relationship, because the instruments are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in other assets and loss positions in other liabilities, while net changes in fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Other Derivative Instruments

Also included in our derivative instruments are equity warrant assets and client forward and option contracts, and client interest rate contracts. For further description of these other derivative instruments, refer to Note 2-“Summary of Significant Accounting Policies" under Part II, Item 8 of our 2015 Form 10-K.

Counterparty Credit Risk

We are exposed to credit risk if counterparties to our derivative contracts do not perform as expected. We mitigate counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate. With respect to measuring counterparty credit risk for derivative instruments, we measure the fair value of a group of financial assets and financial liabilities on a net risk basis by counterparty portfolio.

The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at September 30, 2016 and December 31, 2015 were as follows:



		September 30, 2016										December 31, 2015
(Dollars in thousands)	Balance Sheet Location	Notional or Contractual Amount		Fair Value			Collateral (1)		Net Exposure (2)			Notional or Contractual Amount		Fair Value			Collateral (1)		Net Exposure (2)
Derivatives designated as hedging instruments:
Interest rate risks:
Interest rate swaps	Other assets	$	45,964	$	1,324		$	—	$	1,324		$	45,964	$	2,768		$	—	$	2,768
Derivatives not designated as hedging instruments:
Currency exchange risks:
Foreign exchange forwards	Other assets	138,796		1,676			—		1,676			49,287		809			—		809
Foreign exchange forwards	Other liabilities	53,051		(576		)	—		(576		)	6,586		(669		)	—		(669		)
Net exposure				1,100			—		1,100					140			—		140
Other derivative instruments:
Equity warrant assets	Other assets	212,802		145,340			—		145,340			210,102		137,105			—		137,105
Other derivatives:
Client foreign exchange forwards	Other assets	1,056,821		44,636			2,421		42,215			935,514		29,722			1,900		27,822
Client foreign exchange forwards	Other liabilities	869,914		(36,188		)	—		(36,188		)	841,182		(24,978		)	—		(24,978		)
Client foreign currency options	Other assets	243,860		2,750			—		2,750			46,625		706			—		706
Client foreign currency options	Other liabilities	243,860		(2,750		)	—		(2,750		)	46,625		(706		)	—		(706		)
Client interest rate derivatives	Other assets	520,081		8,759			—		8,759			422,741		3,973			—		3,973
Client interest rate derivatives	Other liabilities	558,962		(9,324		)	—		(9,324		)	422,741		(4,384		)	—		(4,384		)
Net exposure				7,883			2,421		5,462					4,333			1,900		2,433
Net				$	155,647		$	2,421	$	153,226				$	144,346		$	1,900	$	142,446


(1)	Cash collateral received from our counterparties in relation to market value exposures of derivative contracts in our favor is recorded as a component of “short-term borrowings” on our consolidated balance sheets.


(2)	Net exposure for contracts in a gain position reflects the replacement cost in the event of nonperformance by all such counterparties. The credit ratings of our institutional counterparties as of September 30, 2016 remain at investment grade or higher and there were no material changes in their credit ratings during the three and nine months ended September 30, 2016.

A summary of our derivative activity and the related impact on our consolidated statements of income for the three and nine months ended September 30, 2016 and 2015 is as follows:



		Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	Statement of income location	2016			2015			2016			2015
Derivatives designated as hedging instruments:
Interest rate risks:
Net cash benefit associated with interest rate swaps	Interest expense—borrowings	$	580		$	631		$	1,778		$	1,903
Changes in fair value of interest rate swaps	Gains on derivative instruments, net	(3		)	(8		)	(33		)	(22		)
Net gains associated with interest rate risk derivatives		$	577		$	623		$	1,745		$	1,881
Derivatives not designated as hedging instruments:
Currency exchange risks:
(Losses) gains on revaluations of internal foreign currency instruments, net	Other noninterest income	$	(1,406	)	$	186		$	(4,222	)	$	(11,667	)
Gains (losses) on internal foreign exchange forward contracts, net	Gains on derivative instruments, net	1,352			(218		)	3,067			11,626
Net losses associated with internal currency risk		$	(54	)	$	(32	)	$	(1,155	)	$	(41	)
Other derivative instruments:
Gains (losses) on revaluations of client foreign currency instruments, net	Other noninterest income	$	3,488		2			$	7,009		(177		)
(Losses) gains on client foreign exchange forward contracts, net	Gains on derivative instruments, net	(3,194		)	179			(8,780		)	459
Net gains (losses) associated with client currency risk		$	294		$	181		$	(1,771	)	$	282
Net gains on equity warrant assets	Gains on derivative instruments, net	$	21,558		$	10,685		$	33,252		$	54,579
Net gains (losses) on other derivatives	Gains on derivative instruments, net	$	31		$	(394	)	$	(659	)	$	(352	)

Balance Sheet Offsetting

Certain of our derivative and other financial instruments are subject to enforceable master netting arrangements with our counterparties. These agreements provide for the net settlement of multiple contracts with a single counterparty through a single payment, in a single currency, in the event of default on or termination of any one contract.

The following table summarizes our assets subject to enforceable master netting arrangements as of September 30, 2016 and December 31, 2015:



								Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts offset in the Statement of Financial Position			Net Amounts of Assets Presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received			Net Amount
September 30, 2016
Derivative Assets:
Interest rate swaps	$	1,324	$	—		$	1,324	$	(1,324	)	$	—		$	—
Foreign exchange forwards	46,312		—			46,312		(19,377		)	(2,421		)	24,514
Foreign currency options	2,750		—			2,750		(1,246		)	—			1,504
Client interest rate derivatives	8,759		—			8,759		(8,719		)	—			40
Total derivative assets:	59,145		—			59,145		(30,666		)	(2,421		)	26,058
Reverse repurchase, securities borrowing, and similar arrangements	163,719		—			163,719		(163,719		)	—			—
Total	$	222,864	$	—		$	222,864	$	(194,385	)	$	(2,421	)	$	26,058
December 31, 2015
Derivative Assets:
Interest rate swaps	$	2,768	$	—		$	2,768	$	(2,768	)	$	—		$	—
Foreign exchange forwards	30,531		—			30,531		(18,141		)	(1,900		)	10,490
Foreign currency options	711		(5		)	706		(706		)	—			—
Client interest rate derivatives	3,973		—			3,973		(3,973		)	—			—
Total derivative assets:	37,983		(5		)	37,978		(25,588		)	(1,900		)	10,490
Reverse repurchase, securities borrowing, and similar arrangements	125,391		—			125,391		(125,391		)	—			—
Total	$	163,374	$	(5	)	$	163,369	$	(150,979	)	$	(1,900	)	$	10,490

The following table summarizes our liabilities subject to enforceable master netting arrangements as of September 30, 2016 and December 31, 2015:



								Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts offset in the Statement of Financial Position			Net Amounts of Liabilities Presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Pledged		Net Amount
September 30, 2016
Derivative Liabilities:
Foreign exchange forwards	$	36,764	$	—		$	36,764	$	(17,675	)	$	—	$	19,089
Foreign currency options	2,750		—			2,750		(1,925		)	—		825
Client interest rate derivatives	9,324		—			9,324		(9,324		)	—		—
Total derivative liabilities:	48,838		—			48,838		(28,924		)	—		19,914
Repurchase, securities lending, and similar arrangements	—		—			—		—			—		—
Total	$	48,838	$	—		$	48,838	$	(28,924	)	$	—	$	19,914
December 31, 2015
Derivative Liabilities:
Foreign exchange forwards	$	25,647	$	—		$	25,647	$	(10,818	)	$	—	$	14,829
Foreign currency options	711		(5		)	706		—			—		706
Client interest rate derivatives	4,384		—			4,384		(4,384		)	—		—
Total derivative liabilities:	30,742		(5		)	30,737		(15,202		)	—		15,535
Repurchase, securities lending, and similar arrangements	—		—			—		—			—		—
Total	$	30,742	$	(5	)	$	30,737	$	(15,202	)	$	—	$	15,535