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Derivative financial instruments
 9 Months Ended
Sep. 30, 2019
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative financial instruments

11. 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 material as of September 30, 2019.

The net effect of interest rate swap agreements was to increase net interest income by $1 million during the three-month period ended September 30, 2019 and decrease net interest income by $23 million during the nine-month period ended September 30, 2019, compared with decreases of $8 million and $12 million during the three-month and nine-month periods ended September 30, 2018, 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:

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Rate

 

 

 

 

 

 

 

Notional

 

 

Average

 

 

 

 

 

 

 

 

 

 

Estimated

Fair Value

 

 

 

Amount

 

 

Maturity

 

 

Fixed

 

 

Variable

 

 

Gain (Loss) (a)

 

 

 

(In thousands)

 

 

(In years)

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate long-term borrowings (b)

 

$

3,800,000

 

 

 

2.5

 

 

 

2.51

%

 

 

2.55

%

 

$

(1,086

)

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Interest payments on variable rate commercial real

         estate loans (b)(c)

 

 

43,600,000

 

 

 

1.4

 

 

 

2.38

%

 

 

2.06

%

 

 

(5,056

)

     Total

 

$

47,400,000

 

 

 

1.5

 

 

 

 

 

 

 

 

 

 

$

(6,142

)

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate long-term borrowings (b)

 

$

4,450,000

 

 

 

2.8

 

 

 

2.47

%

 

 

3.02

%

 

$

4,219

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Interest payments on variable rate commercial real

         estate loans (b)(d)

 

 

15,400,000

 

 

 

1.3

 

 

 

1.52

%

 

 

2.35

%

 

 

1,311

 

     Total

 

$

19,850,000

 

 

 

1.7

 

 

 

 

 

 

 

 

 

 

$

5,530

 

 

(a)

Certain clearinghouse exchanges consider payments by counterparties for variation margin on derivative instruments to be settlements of those positions. The impact of such treatment at September 30, 2019 and December 31, 2018 was a reduction of the estimated fair value gains on interest rate swap agreements designated as fair value hedges of $64.0 million and fair value losses of $54.7 million, respectively, and on interest rate swaps designated as cash flow hedges a reduction of fair value gains of $208.5 million and a reduction of fair value losses of $9.1 million, respectively.

(b)

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

(c)

Includes notional amount and terms of $30.3 billion of forward-starting interest rate swap agreements that become effective in 2019, 2020 and 2021.

(d)

Includes notional amount and terms of $12.6 billion of forward-starting interest rate swap agreements that become effective in  2019 and 2020.

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 $47.6 billion and $42.9 billion at September 30, 2019 and December 31, 2018, respectively.  The notional amounts of foreign currency and other

11. Derivative financial instruments, continued

option and futures contracts entered into for trading account purposes aggregated $843 million and $763 million at September 30, 2019 and December 31, 2018, 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

 

 

 

September 30,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Derivatives designated and qualifying as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements (a)

 

$

47

 

 

$

5,530

 

 

$

6,189

 

 

$

—

 

Commitments to sell real estate loans (a)

 

 

1,339

 

 

 

1,090

 

 

 

1,928

 

 

 

6,434

 

 

 

 

1,386

 

 

 

6,620

 

 

 

8,117

 

 

 

6,434

 

Derivatives not designated and qualifying as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-related commitments to originate real estate loans

    for sale (a)

 

 

24,463

 

 

 

9,304

 

 

 

189

 

 

 

1,592

 

Commitments to sell real estate loans (a)

 

 

2,079

 

 

 

3,702

 

 

 

13,402

 

 

 

4,535

 

Trading:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts (b)

 

 

532,070

 

 

 

118,687

 

 

 

72,098

 

 

 

169,255

 

Foreign exchange and other option and futures contracts (b)

 

 

11,280

 

 

 

10,549

 

 

 

9,944

 

 

 

8,870

 

 

 

 

569,892

 

 

 

142,242

 

 

 

95,633

 

 

 

184,252

 

Total derivatives

 

$

571,278

 

 

$

148,862

 

 

$

103,750

 

 

$

190,686

 

(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.  The impact of variation margin payments at September 30, 2019 and December 31, 2018 was a reduction of the estimated fair value of interest rate contracts in the trading account in an asset position of $17.2 million and $170.7 million, respectively, and in a liability position of $390.6 million and $49.7 million, respectively.

 

 

 

Amount of Gain (Loss) Recognized

 

 

 

Three Months Ended September 30, 2019

 

 

Three Months Ended September 30, 2018

 

 

 

Derivative

 

 

Hedged Item

 

 

Derivative

 

 

Hedged Item

 

 

 

(In thousands)

 

Derivatives in fair value hedging relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate long-term borrowings (a)

 

$

22,582

 

 

 

(22,412

)

 

$

(12,568

)

 

 

12,607

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts (b)

 

$

6,435

 

 

 

 

 

 

$

(1,348

)

 

 

 

 

Foreign exchange and other option and futures contracts (b)

 

 

2,598

 

 

 

 

 

 

 

782

 

 

 

 

 

Total

 

$

9,033

 

 

 

 

 

 

$

(566

)

 

 

 

 

11. Derivative financial instruments, continued

 

 

 

Amount of Gain (Loss) Recognized

 

 

 

Nine Months Ended September 30, 2019

 

 

Nine Months Ended September 30, 2018

 

 

 

Derivative

 

 

Hedged Item

 

 

Derivative

 

 

Hedged Item

 

 

 

(In thousands)

 

Derivatives in fair value hedging relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate long-term borrowings (a)

 

$

113,441

 

 

 

(112,884

)

 

$

(68,315

)

 

 

68,861

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts (b)

 

$

17,639

 

 

 

 

 

 

$

(5,639

)

 

 

 

 

Foreign exchange and other option and futures contracts (b)

 

 

6,690

 

 

 

 

 

 

 

5,778

 

 

 

 

 

Total

 

$

24,329

 

 

 

 

 

 

$

139

 

 

 

 

 

 

(a)

Reported as interest expense.

 

(b)

Reported as trading account and foreign exchange gains.  

 

 

 

Carrying Amount of the Hedged Item

 

 

Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of the

Hedged Item

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

September 30, 2019

 

 

December 31, 2018

 

 

 

(In thousands)

 

Location in the Consolidated Balance Sheet of

   the Hedged Items in Fair Value Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

3,858,490

 

 

$

4,394,109

 

 

$

61,782

 

 

$

(51,102

)

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 $18 million at September 30, 2019 and December 31, 2018, 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.

11. Derivative financial instruments, continued

The aggregate fair value of derivative financial instruments in a liability position and the net liability positions with counterparties, which are subject to enforceable master netting arrangements, was $70 million and $21 million at September 30, 2019 and December 31, 2018, respectively.  The Company was required to post collateral relating to those positions of $68 million and $18 million at September 30, 2019 and December 31, 2018, 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, however, the aggregate fair value of such derivative financial instruments in a net liability position and the amount of incremental collateralization that could be required was not significant at September 30, 2019.

The aggregate fair value of derivative financial instruments in an asset position and the net asset positions with counterparties, which are subject to enforceable master netting arrangements, was $639 thousand and $18 million at September 30, 2019 and December 31, 2018, respectively.  Counterparties posted collateral relating to those positions of $81 thousand and $16 million at September 30, 2019 and December 31, 2018, 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 variation margin payments depending on the contracts being in a net asset or liability position. The amount of initial margin collateral posted by the Company was $129 million and $65 million at September 30, 2019 and December 31, 2018, respectively. The fair value asset and liability amounts of derivative contracts have been reduced by variation margin payments treated as settlements as described herein.  Variation margin on derivative contracts not treated as settlements continues to represent collateral posted or received by the Company.