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Derivative financial instruments
6 Months Ended
Jun. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative financial instruments
10. Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not material as of June 30, 2016.

The net effect of interest rate swap agreements was to increase net interest income by $10 million and $11 million for the three-month periods ended June 30, 2016 and 2015, respectively, and $20 million and $22 million for the six-month periods ended June 30, 2016 and 2015, respectively.

Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:

 

     Notional      Average      Weighted-
average rate
 
     amount      maturity      Fixed     Variable  
     (in thousands)      (in years)               

June 30, 2016

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         1.2         4.42     1.63
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2015

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         1.7         4.42     1.39
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Under the terms of these agreements, the Company receives settlement amounts at a fixed rate and pays at a variable rate.

The Company utilizes commitments to sell residential and commercial real estate loans to hedge the exposure to changes in the fair value of real estate loans held for sale. Such commitments have generally been designated as fair value hedges. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in fair value of certain commitments to originate real estate loans for sale.

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $20.1 billion and $18.4 billion at June 30, 2016 and December 31, 2015, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $826 million and $1.6 billion at June 30, 2016 and December 31, 2015, respectively.

 

Information about the fair values of derivative instruments in the Company’s consolidated balance sheet and consolidated statement of income follows:

 

     Asset derivatives      Liability derivatives  
     Fair value      Fair value  
     June 30,
2016
     December 31,
2015
     June 30,
2016
     December 31,
2015
 
     (in thousands)  

Derivatives designated and qualifying as hedging instruments

           

Fair value hedges:

           

Interest rate swap agreements (a)

   $ 33,648         43,892         —           —     

Commitments to sell real estate loans (a)

     71         1,844         8,545         656   
  

 

 

    

 

 

    

 

 

    

 

 

 
     33,719         45,736         8,545         656   

Derivatives not designated and qualifying as hedging instruments

           

Mortgage-related commitments to originate real estate loans for sale (a)

     21,431         10,282         48         403   

Commitments to sell real estate loans (a)

     292         533         7,720         846   

Trading:

           

Interest rate contracts (b)

     401,512         203,517         345,681         153,723   

Foreign exchange and other option and futures contracts (b)

     7,975         8,569         6,860         7,022   
  

 

 

    

 

 

    

 

 

    

 

 

 
     431,210         222,901         360,309         161,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 464,929         268,637         368,854         162,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Asset derivatives are reported in other assets and liability derivatives are reported in other liabilities.
(b) Asset derivatives are reported in trading account assets and liability derivatives are reported in other liabilities.

 

     Amount of gain (loss) recognized  
     Three months ended
June 30, 2016
     Three months ended
June 30, 2015
 
     Derivative      Hedged item      Derivative      Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

  

Interest rate swap agreements:

           

Fixed rate long-term borrowings (a)

   $ (7,611      7,146         (9,354      8,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

           

Trading:

           

Interest rate contracts (b)

   $ 5,782            1,772      

Foreign exchange and other option and futures contracts (b)

     2,457            1,621      
  

 

 

       

 

 

    

Total

   $ 8,239            3,393      
  

 

 

       

 

 

    

 

     Amount of gain (loss) recognized  
     Six months ended
June 30, 2016
     Six months ended
June 30, 2015
 
     Derivative      Hedged item      Derivative      Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

           

Interest rate swap agreements:

           

Fixed rate long-term borrowings (a)

   $ (10,244      9,016         (9,750      9,113   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

           

Trading:

           

Interest rate contracts (b)

   $ 6,756            2,432      

Foreign exchange and other option and futures contracts (b)

     3,669            4,410      
  

 

 

       

 

 

    

Total

   $ 10,425            6,842      
  

 

 

       

 

 

    

 

(a) Reported as other revenues from operations.
(b) Reported as trading account and foreign exchange gains.

 

The Company has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately $28 million and $18 million at June 30, 2016 and December 31, 2015, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

The Company does not offset derivative asset and liability positions in its consolidated financial statements. The Company’s exposure to credit risk by entering into derivative contracts is mitigated through master netting agreements and collateral posting requirements. Master netting agreements covering interest rate and foreign exchange contracts with the same party include a right to set-off that becomes enforceable in the event of default, early termination or under other specific conditions.

The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $113 million and $59 million at June 30, 2016 and December 31, 2015, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $108 million and $55 million at June 30, 2016 and December 31, 2015, respectively. The Company was required to post collateral relating to those positions of $102 million and $52 million at June 30, 2016 and December 31, 2015, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt rating were to fall below specified ratings, the counterparties of the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit risk-related contingent features in a net liability position on June 30, 2016 was $21 million, for which the Company had posted collateral of $17 million in the normal course of business. If the credit risk-related contingent features had been triggered on June 30, 2016, the maximum amount of additional collateral the Company would have been required to post to counterparties was $4 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $14 million and $23 million at June 30, 2016 and December 31, 2015, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $9 million and $19 million at June 30, 2016 and December 31, 2015, respectively. Counterparties posted collateral relating to those positions of $9 million and $22 million at June 30, 2016 and December 31, 2015, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit risk standards and often contain collateral provisions.

In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and additional collateral for contracts in a net liability position. The net fair values of derivative instruments cleared through clearinghouses at June 30, 2016 was a net liability position of $212 million and at December 31, 2015 was a net liability position of $50 million.

 

Collateral posted with clearinghouses was $280 million and $99 million at June 30, 2016 and December 31, 2015, respectively.