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DERIVATIVE FINANCIAL INSTRUMENTS AND BALANCE SHEET OFFSETTING | 3 Months Ended
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Mar. 31, 2014
DERIVATIVE FINANCIAL INSTRUMENTS AND BALANCE SHEET OFFSETTING |
DERIVATIVE FINANCIAL INSTRUMENTS AND BALANCE SHEET OFFSETTING | NOTE 7 — DERIVATIVE FINANCIAL INSTRUMENTS AND BALANCE SHEET OFFSETTING The following table summarizes the fair value and balance sheet classification of derivative instruments as of March 31, 2014 and December 31, 2013. The notional amount of the contract is not recorded on the condensed consolidated balance sheets, but is used as the basis for determining the amount of interest payments to be exchanged between the counterparties. If the counterparty fails to perform, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset. The valuation methodology of derivative instruments is disclosed in Note 4 to the Company’s condensed consolidated financial statements.
|  | Fair Values of Derivative Instruments |
|  | March 31, 2014 |  | December 31, 2013 |
|  | Notional |  | Derivative |  | Derivative |  | Notional |  | Derivative |  | Derivative |
|  | Amount |  | Assets (1) |  | Liabilities (1) |  | Amount |  | Assets (1) |  | Liabilities (1) |
|  | (In thousands) |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps on certificates of deposit—fair value |  | $ | 135,000 |  | $ | — |  | $ | 14,202 |  | $ | 135,000 |  | $ | — |  | $ | 16,906 |
Total derivatives designated as hedging instruments |  | $ | 135,000 |  | $ | — |  | $ | 14,202 |  | $ | 135,000 |  | $ | — |  | $ | 16,906 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange options |  | $ | 85,614 |  | $ | 5,915 |  | $ | 3,398 |  | $ | 85,614 |  | $ | 6,290 |  | $ | 3,655 |
Interest rate swaps |  | 2,024,211 |  | 26,293 |  | 25,503 |  | 1,915,474 |  | 28,078 |  | 26,352 |
Foreign exchange contracts |  | 486,669 |  | 4,378 |  | 3,675 |  | 440,848 |  | 6,181 |  | 3,349 |
Total derivatives not designated as hedging instruments |  | $ | 2,596,494 |  | $ | 36,586 |  | $ | 32,576 |  | $ | 2,441,936 |  | $ | 40,549 |  | $ | 33,356 |
(1) Derivative assets, which are a component of other assets, include the estimated settlement of the derivative asset position. Derivative liabilities, which are a component of other liabilities and deposits, include the estimated settlement of the derivative liability position. Derivatives Designated as Hedging Instruments Interest Rate Swaps on Certificates of Deposit — The Company is exposed to changes in the fair value of certain fixed rate certificates of deposit due to changes in the benchmark interest rate, LIBOR. Interest rate swaps designated as fair value hedges involve the receipt of fixed rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. The interest rate swaps and the associated certificates of deposits have the same maturity dates. As of March 31, 2014 and December 31, 2013, the total notional amount of the interest rate swaps on the certificates of deposit was $135.0 million. The fair value of the interest rate swaps amounted to a $14.2 million and $16.9 million liability, respectively, as of March 31, 2014 and December 31, 2013. During the three months ended March 31, 2014 and 2013, the Company recognized a net reduction of $199 thousand and $87 thousand, respectively, in expense related to hedge ineffectiveness. The Company also recognized a net reduction to interest expense of $2.0 million and $385 thousand, for the three months ended March 31, 2014 and 2013, respectively, related to net settlements on the derivatives. Derivatives Not Designated as Hedging Instruments Foreign Exchange Options — During 2010, the Company entered into foreign exchange option contracts with major brokerage firms to economically hedge against currency exchange rate fluctuations in a certificate of deposit product available to bank customers. This product, which has a term of 5 years, pays interest based on the performance of the Chinese currency Renminbi (“RMB”) relative to the U.S. Dollar. Under ASC 815, a certificate of deposit that pays interest based on changes in currency exchange rates is a hybrid instrument with an embedded derivative that must be accounted for separately from the host contract (i.e. the certificate of deposit). In accordance with ASC 815, both the embedded derivative instruments and the freestanding foreign exchange option contracts are marked-to-market each reporting period with resulting changes in fair value reported in the condensed consolidated statements of income. As of March 31, 2014 and December 31, 2013 the notional amount of the foreign exchange options totaled $85.6 million, respectively. The fair values of the foreign exchange options and embedded derivative liability for these contracts amounted to a $5.9 million asset and a $3.4 million liability as of March 31, 2014. The fair values of the foreign exchange options and embedded derivative liability for these contracts amounted to a $6.3 million asset and a $3.7 million liability as of December 31, 2013. The Company did not deliver collateral, in the form of securities to counterparty institutions as of March 31, 2014 and December 31, 2013. Interest Rate Swaps — The Company enters into interest rate swap contracts with institutional counterparties to economically hedge against interest rate swap products offered to bank customers. This product allows borrowers to lock in attractive intermediate and long-term interest rates by entering into a interest rate swap contract with the Company, resulting in the customer obtaining a synthetic fixed rate loan. The Company does not assume any interest rate risk since the swap agreements mirror each other. As of March 31, 2014, the total notional amount of the interest rate swaps, including mirror transactions, with the institutional counterparties and the bank customers totaled a $2.02 billion asset and a $2.01 billion liability. In comparison, as of December 31, 2013, the total notional amount of the interest rate swaps, including mirror transactions, with the institutional counterparties and the bank customers totaled a $1.92 billion asset and a $1.92 billion liability. The interest rate swap agreements are marked-to-market each reporting period with resulting changes in fair value reported in the condensed consolidated statements of income. The fair values of the interest rate swap contracts with the institutional counterparties and the bank customers amounted to a $26.3 million asset and a $25.5 million liability, as of March 31, 2014. The fair values of the interest rate swap contracts with the institutional counterparty and the bank customers amounted to a $28.1 million asset and a $26.4 million liability, as of December 31, 2013. Foreign Exchange Contracts — The Company enters into short-term forward foreign exchange contracts on a regular basis to economically hedge against foreign exchange rate fluctuations. As of March 31, 2014 and December 31, 2013 the notional amount of the short-term foreign exchange contracts totaled $472.2 million and $426.0 million, respectively. The fair values of the short-term foreign exchange contracts amounted to a $4.1 million asset and a $3.4 million liability, as of March 31, 2014. The fair values of the short-term foreign exchange contracts amounted to a $6.0 million asset and a $3.2 million liability, as of December 31, 2013. The gross aggregate value of the short-term foreign exchange contracts by counterparty was a liability of $547 thousand as of March 31, 2014 and an asset of $1.5 million as of December 31, 2013. The Company also entered into long-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future. As of March 31, 2014 and December 31, 2013 the notional amount of the long-term foreign exchange contracts totaled $14.5 million and $14.8 million, respectively. The fair values of the long-term foreign exchange contracts amounted to a $249 thousand asset and a $230 thousand liability, as of March 31, 2014. The fair values of the long-term foreign exchange contracts amounted to a $200 thousand asset and a $183 thousand liability, as of December 31, 2013. The table below presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of income for the three months ended March 31, 2014 and 2013:
|  | Location in |  | Three Months Ended |
|  | Condensed Consolidated |  | March 31, |
|  | Statements of Income |  | 2014 |  | 2013 |
|  |  |  | (In thousands) |
Derivatives designated as hedging instruments |  |  |  |  |  |  |
Interest rate swaps on certificates of deposit—fair value |  | Interest expense |  | $ | 2,704 |  | $ | (905 | )
|  | Total net income (expense) |  | $ | 2,704 |  | $ | (905 | )
Derivatives not designated as hedging instruments |  |  |  |  |  |  |
Foreign exchange options |  | Noninterest income |  | (119 | ) | 140 |
Foreign exchange options |  | Noninterest expense |  | 1 |  | 8 |
Interest rate swaps |  | Noninterest income |  | (936 | ) | 216 |
Foreign exchange contracts |  | Noninterest income |  | (2,129 | ) | (43 | )
|  | Total net (expense) income |  | $ | (3,183 | ) | $ | 321 |
Credit Risk-Related Contingent Features — The Company has agreements with some of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with some of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. Similarly, the Company could be required to settle its obligations under certain of its agreements if the Company was issued a notice of prompt corrective action. Balance Sheet Offsetting — The Company has entered into agreements with all counterparty financial institutions, which include master netting agreements. However, the Company elects to account for all derivatives with counterparty institutions on a gross basis, excluding the foreign exchange options which are not under agreements that include master netting terms. The Company has also entered into securities purchased under resale agreements (“resale agreements”), and securities sold under agreements to repurchase (“repurchase agreements”) which have master netting agreements that allow for the netting of collateral positions. These repurchase and resale agreements of securities are not eligible for offset in the condensed consolidated balance sheet. The following tables show the gross derivatives, resale agreements and repurchase agreements in the condensed consolidated balance sheets and for each the respective collateral received or pledged in the form of other financial instruments, which are generally marketable securities. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability (after netting is applied); thus instances of overcollateralization are not shown. Most of the assets and liabilities in the following tables were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default. Collateral accepted or pledged in resale and repurchase agreements with other financial institutions also may be sold or re-pledged by the secured party, but is usually delivered to and held by third party trustees. The Company delivered collateral, in the form of securities to counterparty institutions, for derivatives that were in a net liability position as of March 31, 2014 and December 31, 2013 (refer to the table below). Under the Dodd-Frank legislation, as of June 10, 2013, the Company must clear all LIBOR interest rate swaps through a clearing house. As such the Company is required to pledge cash collateral for the margin. As of March 31, 2014 and December 31, 2013 the Company posted $3.9 million and $187 thousand of cash collateral, respectively.
|  | As of March 31, 2014 |
|  | (In thousands) |
|  |  |  | Gross Amounts Offset in the Condensed |  | Net Amounts of Assets |  | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets |  |  |
Assets |  | Gross Amounts of Recognized Assets |  | Consolidated Balance Sheets |  | Presented in the Condensed Consolidated Balance Sheets |  | Financial Instruments |  | Collateral Received |  | Net Amount |
Derivatives |  | $ | 10,370 |  | $ | — |  | $ | 10,370 |  | $ | (8,203 | ) | $ | (2,167 | ) | $ | — |
Resale Agreements |  | $ | 1,200,000 |  | $ | — |  | $ | 1,200,000 |  | $ | (400,000 | ) | $ | (800,000 | ) | $ | — |
|  | Gross Amounts of |  | Gross Amounts Offset in the Condensed |  | Net Amounts of Liabilities |  | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets |  |  |
Liabilities |  | Recognized Liabilities |  | Consolidated Balance Sheets |  | Presented in the Condensed Consolidated Balance Sheets |  | Financial Instruments |  | Collateral Posted |  | Net Amount |
Derivatives |  | $ | 35,574 |  | $ | — |  | $ | 35,574 |  | $ | (8,203 | ) | $ | (27,371 | ) | $ | — |
Repurchase Agreements |  | $ | 1,005,000 |  | $ | — |  | $ | 1,005,000 |  | $ | (400,000 | ) | $ | (605,000 | ) | $ | — |
|  | As of December 31, 2013 |
|  | (In thousands) |
|  |  |  | Gross Amounts Offset in the Condensed |  | Net Amounts of Assets |  | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets |  |  |
Assets |  | Gross Amounts of Recognized Assets |  | Consolidated Balance Sheets |  | Presented in the Condensed Consolidated Balance Sheets |  | Financial Instruments |  | Collateral Received |  | Net Amount |
Derivatives |  | $ | 16,043 |  | $ | — |  | $ | 16,043 |  | $ | (11,363 | ) | $ | (4,680 | ) | $ | — |
Resale Agreements |  | $ | 1,400,000 |  | $ | — |  | $ | 1,400,000 |  | $ | (495,000 | ) | $ | (905,000 | ) | $ | — |
|  | Gross Amounts of |  | Gross Amounts Offset in the Condensed |  | Net Amounts of Liabilities |  | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets |  |  |
Liabilities |  | Recognized Liabilities |  | Consolidated Balance Sheets |  | Presented in the Condensed Consolidated Balance Sheets |  | Financial Instruments |  | Collateral Posted |  | Net Amount |
Derivatives |  | $ | 33,849 |  | $ | — |  | $ | 33,849 |  | $ | (11,363 | ) | $ | (22,486 | ) | $ | — |
Repurchase Agreements |  | $ | 995,000 |  | $ | — |  | $ | 995,000 |  | $ | (495,000 | ) | $ | (500,000 | ) | $ | — |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80748-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708775-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5618551-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624258-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624163-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708773-113959 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80784-113994 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624177-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579245-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5580258-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579240-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41641-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 20: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624171-113959 + Details
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