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Accounting for Derivative Instruments and Hedging Activities
 3 Months Ended
Mar. 31, 2013
Disclosure - Accounting for Derivative Instruments and Hedging Activities [Abstract]  
Accounting for Derivative Instruments and Hedging Activities

NOTE 6—ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company enters into derivative transactions primarily to protect against interest rate risk on the value of certain assets, liabilities and future cash flows. Cash flow hedges, which include a combination of interest rate swaps, forward-starting swaps and purchased options, including caps and floors, are used primarily to reduce the variability of future cash flows associated with existing variable-rate assets and liabilities and forecasted issuances of liabilities. Fair value hedges, which include interest rate swaps and swaptions, are used to offset exposure to changes in value of certain fixed-rate assets and liabilities. The Company also recognizes certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative. Each derivative is recorded on the consolidated balance sheet at fair value as a freestanding asset or liability. The following table summarizes the fair value amounts of derivatives designated as hedging instruments reported in the consolidated balance sheet at March 31, 2013 and December 31, 2012 (dollars in thousands):

 

        Fair Value
     Notional Asset(1) Liability(2) Net(3)
March 31, 2013           
 Interest rate contracts:           
  Cash flow hedges:           
   Pay-fixed rate swaps$ 2,430,000 $ - $ (284,222) $ (284,222)
   Purchased options  1,630,000   8,669   -   8,669
    Total cash flow hedges  4,060,000   8,669   (284,222)   (275,553)
  Fair value hedges:           
   Pay-fixed rate swaps  609,211   7,638   (5,063)   2,575
  Total derivatives designated as hedging instruments(4)$ 4,669,211 $ 16,307 $ (289,285) $ (272,978)
December 31, 2012           
 Interest rate contracts:           
  Cash flow hedges:           
   Pay-fixed rate swaps$ 2,205,000 $ - $ (310,079) $ (310,079)
   Purchased options  2,325,000   13,391   -   13,391
    Total cash flow hedges  4,530,000   13,391   (310,079)   (296,688)
  Fair value hedges:           
   Pay-fixed rate swaps  514,180   1,343   (18,385)   (17,042)
  Total derivatives designated as hedging instruments(4)$ 5,044,180 $ 14,734 $ (328,464) $ (313,730)
                
                
(1) Reflected in the other assets line item on the consolidated balance sheet.
(2) Reflected in the other liabilities line item on the consolidated balance sheet.
(3) Represents derivative assets net of derivative liabilities for disclosure purposes only.
(4) All derivatives were designated as hedging instruments as of March 31, 2013 and December 31, 2012.

Cash Flow Hedges

 

The effective portion of changes in fair value of the derivative instruments that hedge cash flows is reported as a component of accumulated other comprehensive loss, net of tax in the consolidated balance sheet, for both active and discontinued hedges. Amounts are included in net operating interest income as a yield adjustment in the same period the hedged forecasted transaction affects earnings. The ineffective portion of changes in fair value of the derivative instrument, which is equal to the excess of the cumulative change in the fair value of the actual derivative over the cumulative change in the fair value of a hypothetical derivative which is created to match the exact terms of the underlying instruments being hedged, is reported in the gains on loans and securities, net line item in the consolidated statement of income.

 

If it becomes probable that a hedged forecasted transaction will not occur, amounts included in accumulated other comprehensive loss related to the specific hedging instruments would be immediately reclassified into the gains on loans and securities, net line item in the consolidated statement of income. If hedge accounting is discontinued because a derivative instrument is sold, terminated or otherwise de-designated, amounts included in accumulated other comprehensive loss related to the specific hedging instrument continue to be reported in accumulated other comprehensive loss until the forecasted transaction affects earnings.

 

The future issuances of liabilities, including repurchase agreements, are largely dependent on the market demand and liquidity in the wholesale borrowings market. As of March 31, 2013, the Company believes the forecasted issuance of all debt in cash flow hedge relationships is probable. However, unexpected changes in market conditions in future periods could impact the ability to issue this debt. The Company believes the forecasted issuance of debt in the form of repurchase agreements is most susceptible to an unexpected change in market conditions.

 

The following table summarizes the effect of interest rate contracts designated and qualifying as hedging instruments in cash flow hedges on accumulated other comprehensive loss and on the consolidated statement of income for the three months ended March 31, 2013 and 2012 (dollars in thousands):

           For the Three Months Ended March 31,
           2013 2012
Gains on derivatives recognized in OCI (effective portion), net of tax $ 5,975 $ 8,396
Losses reclassified from AOCI into earnings (effective portion), net of tax $ (20,128) $ (19,327)
Cash flow hedge ineffectiveness gains (losses) (1) $ (145) $ 311
                
                
(1)The cash flow hedge ineffectiveness is reflected in the gains on loans and securities, net line item on the statement of consolidated income.

During the upcoming twelve months, the Company expects to include a pre-tax amount of approximately $134.1 million of net unrealized losses that are currently reflected in accumulated other comprehensive loss in net operating interest income as a yield adjustment in the same periods in which the related hedged items affect earnings. The maximum length of time over which transactions are hedged is 10 years.

 

The following table shows the balance in accumulated other comprehensive loss attributable to active and discontinued cash flow hedges at March 31, 2013 and December 31, 2012 (dollars in thousands):

          March 31, December 31,
          2013 2012
Accumulated other comprehensive loss balance (net of tax) related to:      
 Discontinued cash flow hedges    $(233,933) $(247,983)
 Active cash flow hedges      (192,305)  (204,358)
  Total cash flow hedges     $(426,238) $(452,341)

The following table shows the balance in accumulated other comprehensive loss attributable to cash flow hedges by type of hedged item at March 31, 2013 and December 31, 2012 (dollars in thousands):

    March 31, December 31,
    2013 2012
Repurchase agreements $ (544,246) $ (579,763)
FHLB advances   (137,010)   (146,253)
Home equity lines of credit   5,474   7,854
Other   393   116
 Total balance of cash flow hedges, before tax   (675,389)   (718,046)
Tax benefit   249,151   265,705
 Total balance of cash flow hedges, net of tax $ (426,238) $ (452,341)

Fair Value Hedges

  

Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair value of the asset or liability being hedged on the consolidated balance sheet. Changes in the fair value of both the derivatives and the underlying assets or liabilities are recognized in the gains on loans and securities, net line item in the consolidated statement of income. To the extent that the hedge is ineffective, the changes in the fair values will not offset and the difference, or hedge ineffectiveness, is reflected in the gains on loans and securities, net line item in the consolidated statement of income.

 

Hedge accounting is discontinued for fair value hedges if a derivative instrument is sold, terminated or otherwise de-designated. If fair value hedge accounting is discontinued, the previously hedged item is no longer adjusted for changes in fair value through the consolidated statement of income and the cumulative net gain or loss on the hedged asset or liability at the time of de-designation is amortized to interest income or interest expense using the effective interest method over the expected remaining life of the hedged item. Changes in the fair value of the derivative instruments after de-designation of fair value hedge accounting are recorded in the gains on loans and securities, net line item in the consolidated statement of income.

 

The following table summarizes the effect of interest rate contracts designated and qualifying as hedging instruments in fair value hedges and related hedged items on the consolidated statement of income for the three months ended March 31, 2013, and 2012 (dollars in thousands):

    Three Months Ended March 31,
    2013 2012
    Hedging Instrument Hedged Item Hedge Ineffectiveness(1) Hedging Instrument Hedged Item Hedge Ineffectiveness(1)
                   
Agency debentures $ 15,988 $ (15,903) $ 85 $ 31,848 $ (30,117) $ 1,731
Agency mortgage-backed                   
 securities   (104)   51   (53)   4,331   (4,331)   -
FHLB advances   -   -   -   (1,276)   (791)   (2,067)
 Total gains (losses)                  
  included in earnings $ 15,884 $ (15,852) $ 32 $ 34,903 $ (35,239) $ (336)
                     
                     
(1)Reflected in the gains on loans and securities, net line item on the consolidated statement of income.