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Derivative financial instruments
3 Months Ended
Mar. 31, 2017
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, collateral and/or settlement provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting, collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not significant as of March 31, 2017.

The net effect of interest rate swap agreements was to increase net interest income by $4 million and $10 million for the three-month periods ended March 31, 2017 and 2016, 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

 

 

Estimated Fair

 

 

 

Amount

 

 

Maturity

 

 

Fixed

 

 

Variable

 

 

Value Gain

 

 

 

(In thousands)

 

 

(In years)

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate long-term borrowings (a)

 

$

900,000

 

 

 

.8

 

 

 

3.75

%

 

 

2.24

%

 

$

7,773

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate long-term borrowings (a)

 

$

900,000

 

 

 

1.1

 

 

 

3.75

%

 

 

2.08

%

 

$

11,892

 

 

 (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 $22.3 billion and $21.6 billion at March 31, 2017 and December 31, 2016, respectively.  The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $496 million and $471 million at March 31, 2017 and December 31, 2016, respectively.

10. Derivative financial instruments, continued

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

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

Derivatives designated and qualifying as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements (a)

 

$

7,773

 

 

 

11,892

 

 

$

 

 

 

 

Commitments to sell real estate loans (a)

 

 

825

 

 

 

33,189

 

 

 

2,321

 

 

 

1,347

 

 

 

 

8,598

 

 

 

45,081

 

 

 

2,321

 

 

 

1,347

 

Derivatives not designated and qualifying as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

16,847

 

 

 

8,060

 

 

 

645

 

 

 

735

 

Commitments to sell real estate loans (a)

 

 

4,126

 

 

 

5,210

 

 

 

1,582

 

 

 

399

 

Trading:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts (b)

 

 

109,996

 

 

 

228,810

 

 

 

134,919

 

 

 

167,737

 

Foreign exchange and other option and futures contracts (b)

 

 

4,632

 

 

 

7,908

 

 

 

3,776

 

 

 

6,639

 

 

 

 

135,601

 

 

 

249,988

 

 

 

140,922

 

 

 

175,510

 

Total derivatives

 

$

144,199

 

 

 

295,069

 

 

$

143,243

 

 

 

176,857

 

(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 March 31, 2017

 

 

Three Months Ended March 31, 2016

 

 

 

Derivative

 

 

Hedged Item

 

 

Derivative

 

 

Hedged Item

 

 

 

(In thousands)

 

Derivatives in fair value hedging relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate long-term borrowings (a)

 

$

(4,119

)

 

 

4,012

 

 

$

(2,633

)

 

 

1,870

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts (b)

 

$

1,950

 

 

 

 

 

 

$

974

 

 

 

 

 

Foreign exchange and other option and futures contracts (b)

 

 

1,836

 

 

 

 

 

 

 

1,212

 

 

 

 

 

Total

 

$

3,786

 

 

 

 

 

 

$

2,186

 

 

 

 

 

 

(a)

Reported as other revenues from operations.  

 

(b)

Reported as trading account and foreign exchange gains.  

  10. Derivative financial instruments, continued

The Company also 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 $24 million and $28 million at March 31, 2017 and December 31, 2016, 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 or settlement 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 $26 million and $34 million at March 31, 2017 and December 31, 2016, respectively.  After consideration of such netting arrangements, the net liability positions with counterparties aggregated $25 million and $30 million at March 31, 2017 and December 31, 2016, respectively.  The Company was required to post collateral relating to those positions of $23 million and $27 million at March 31, 2017 and December 31, 2016, 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 March 31, 2017 was less than $1 million, for which the Company was not required to post collateral in the normal course of business.  If the credit risk-related contingent features had been triggered on March 31, 2017, the Company would not have been required to post any collateral to counterparties.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $14 million and $15 million at March 31, 2017 and December 31, 2016, respectively.  After consideration of such netting arrangements, the net asset positions with counterparties aggregated $13 million and $11 million at March 31, 2017 and December 31, 2016, respectively.  Counterparties posted collateral relating to those positions of $12 million and $9 million at March 31, 2017 and December 31, 2016, 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 (“variation margin”) depending on the contracts being in a net asset or liability position. The amount of initial margin posted by the Company was $83 million and $111 million at March 31, 2017 and December 31, 2016, respectively.  Effective January 2017, certain clearinghouse exchanges revised their rules to re-characterize required collateral postings for variation margin as legal settlements of those positions.  As a result, the fair value asset and liability amounts of derivative contracts at March 31, 2017 have been reduced by contractual settlements of $112 million and $25 million, respectively.  Variation margin on derivative contracts not affected by the rule changes continue to represent collateral posted or received by the Company.  For those contracts, the net fair values of derivative financial instruments cleared through clearinghouses for which variation margin is required was a net asset position of $1 million and $63 million at March 31, 2017 and December 31, 2016, respectively. Collateral posted by the clearinghouses associated with that net asset position was $1 million and $81 million at March 31, 2017 and December 31, 2016, respectively.