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DERIVATIVE FINANCIAL INSTRUMENTS AND BALANCE SHEET OFFSETTING | 9 Months Ended
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Sep. 30, 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 presents the total notional and fair values of the Company’s derivative instruments as of September 30, 2014 and December 31, 2013. The valuation methodology of derivative instruments is disclosed in Note 4 to the Company’s consolidated financial statements.
|  | Fair Values of Derivative Instruments |
|  | September 30, 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 |  | $ | — |  | $ | 12,824 |  | $ | 135,000 |  | $ | — |  | $ | 16,906 |
Total derivatives designated as hedging instruments |  | $ | 135,000 |  | $ | — |  | $ | 12,824 |  | $ | 135,000 |  | $ | — |  | $ | 16,906 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange options |  | $ | 85,614 |  | $ | 6,155 |  | $ | — |  | $ | 85,614 |  | $ | 6,290 |  | $ | — |
Embedded derivative liabilities |  | 47,968 |  | — |  | 3,426 |  | 51,505 |  | — |  | 3,655 |
Interest rate swaps and caps |  | 4,677,429 |  | 29,170 |  | 28,238 |  | 3,834,072 |  | 28,078 |  | 26,352 |
Foreign exchange contracts |  | 715,209 |  | 9,204 |  | 9,598 |  | 635,428 |  | 6,181 |  | 3,349 |
Total derivatives not designated as hedging instruments |  | $ | 5,526,220 |  | $ | 44,529 |  | $ | 41,262 |  | $ | 4,606,619 |  | $ | 40,549 |  | $ | 33,356 |
(1) Derivative assets are included in other assets. Derivative liabilities are included in other liabilities and deposits. 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, London Interbank Offering 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 deposit have the same maturity dates. As of September 30, 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 values of the interest rate swaps were $12.8 million and $16.9 million liability as of September 30, 2014 and December 31, 2013, respectively. During the three and nine months ended September 30, 2014, the Company recognized in interest expense, $226 thousand of expense and $133 thousand of income, respectively, related to hedge ineffectiveness. During the three and nine months ended September 30, 2013, the Company recognized a net reduction of $514 thousand and $817 thousand, respectively, in interest expense related to hedge ineffectiveness. In addition, the Company recognized a net reduction in interest expense of $1.7 million and $4.5 million, for the three and nine months ended September 30, 2014, related to the net settlements on the derivatives. The Company recognized a net reduction to interest expense of $894 thousand and $1.8 million, respectively, for the three and nine months ended September 30, 2013 related to the net settlement 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 RMB relative to the USD. 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 recorded at fair value. As of September 30, 2014 and December 31, 2013, the notional amount of the foreign exchange options was $85.6 million. As of September 30, 2014 and December 31, 2013, the notional amounts of the embedded derivative liabilities were $48.0 million and $51.5 million, respectively. The fair values of the foreign exchange options and the embedded derivative liabilities for these contracts amounted to a $6.2 million asset and a $3.4 million liability, respectively, as of September 30, 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, respectively, as of December 31, 2013. Interest Rate Swaps and Caps — The Company enters into interest rate derivatives including interest rate swaps and caps with its customers thus allowing them to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against interest rate risks in offering such products, the Company also enters into mirror interest rate contracts with institutional counterparties. Thus, the Company does not assume any interest rate risk since the contracts mirror each other. As of September 30, 2014, the total notional amounts of interest rate swaps and caps, including mirror transactions, with institutional counterparties and the Company’s customers totaled to a $2.34 billion asset and a $2.34 billion liability. In comparison, as of December 31, 2013, the total notional amounts of interest rate swaps and caps, including mirror transactions, with institutional counterparties and the Company’s customers totaled to a $1.91 billion asset and a $1.92 billion liability. The interest rate contracts are recorded at fair value. The fair values of interest rate swap and cap contracts with institutional counterparties and the Company’s customers amounted to a $29.2 million asset and a $28.2 million liability, as of September 30, 2014. The fair values of interest rate swap and cap contracts with institutional counterparties and the Company’s 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 foreign exchange forward contracts on a regular basis to economically hedge against foreign exchange rate fluctuations. As of September 30, 2014 and December 31, 2013, the notional amounts of short-term foreign exchange contracts were $693.2 million and $607.9 million, respectively. The fair values of short-term foreign exchange contracts amounted to an $8.2 million asset and an $8.6 million liability as of September 30, 2014. The fair values of short-term foreign exchange contracts amounted to a $6.0 million asset and a $3.2 million liability as of December 31, 2013. The Company also enters into long-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future. As of September 30, 2014 and December 31, 2013, the notional amount of long-term foreign exchange contracts totaled $22.0 million and $27.5 million, respectively. The fair values of long-term foreign exchange contracts amounted to a $1.0 million asset and a $1.0 million liability, as of September 30, 2014. The fair values of long-term foreign exchange contracts amounted to a $200 thousand asset and a $183 thousand liability, as of December 31, 2013. The following table presents the effect of the Company’s derivative financial instruments on the consolidated statements of income for the three and nine months ended September 30, 2014 and 2013:
|  | Location in |  | Three Months Ended |  | Nine Months Ended |
|  | Consolidated |  | September 30, |  | September 30, |
|  | Statements of Income |  | 2014 |  | 2013 |  | 2014 |  | 2013 |
|  |  |  |  |  | (In thousands) |  |  |
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps on certificates of deposit—fair value |  | Interest expense |  | $ | (1,668 | ) | $ | (1,481 | ) | $ | 4,082 |  | $ | (6,196 | )
|  | Total net (loss) gain |  | $ | (1,668 | ) | $ | (1,481 | ) | $ | 4,082 |  | $ | (6,196 | )
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |
Foreign exchange options |  | Noninterest income |  | $ | 37 |  | $ | 234 |  | $ | 91 |  | $ | 472 |
Foreign exchange options |  | Noninterest expense |  | (5 | ) | 7 |  | (2 | ) | 13 |
Interest rate swaps and caps |  | Noninterest income |  | 272 |  | (968 | ) | (794 | ) | 1,112 |
Foreign exchange contracts |  | Noninterest income |  | (597 | ) | 2,568 |  | (3,226 | ) | 1,806 |
|  | Total net (loss) gain |  | $ | (293 | ) | $ | 1,841 |  | $ | (3,931 | ) | $ | 3,403 |
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 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 Derivatives — The Company has entered into agreements with all counterparty financial institutions, which include master netting agreements. However, the Company has elected to account for all derivatives with counterparty institutions on a gross basis. Securities purchased under resale agreements and securities sold under agreements to repurchase — The Company’s securities purchased under resale agreements (“resale agreements”), and securities sold under agreements to repurchase (“repurchase agreements”) are transacted under legally enforceable master repurchase agreements that give the Company, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets repurchase and resale transactions with the same counterparty on the consolidated balance sheet where it has a legally enforceable master netting agreement and when the transactions are eligible for netting under ASC 210-20-45. Collateral pledged consists of securities which are not netted on the consolidated balance sheet against the related collateralized liability. Collateral accepted includes securities that are not recognized on the consolidated balance sheets. 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 following tables present the gross derivatives, resale agreements and repurchase agreements in the consolidated balance sheets and for each, the respective collateral received or pledged in the form of other financial instruments, which are generally marketable securities and/or cash. 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.
|  | As of September 30, 2014 |
|  | (In thousands) |
|  |  |  |  |  | Net Amounts of |  |  |  |  |  |  |
|  |  |  | Gross Amounts |  | Assets Presented |  | Gross Amounts Not Offset on the |  |  |
|  | Gross Amounts |  | Offset on the |  | on the |  | Consolidated Balance Sheets |  |  |
Assets |  | of Recognized Assets |  | Consolidated Balance Sheets |  | Consolidated Balance Sheets |  | Financial Instruments |  | Collateral Received |  | Net Amount |
Derivatives |  | $ | 17,556 |  | $ | — |  | $ | 17,556 |  | $ | (12,812 | )(1) | $ | (933 | )(3) | $ | 3,811 |
Resale Agreements |  | $ | 1,675,000 |  | $ | (200,000 | ) | $ | 1,475,000 |  | $ | (350,000 | )(2) | $ | (1,092,575 | )(4) | $ | 32,425 |
|  |  |  |  |  | Net Amounts of |  |  |  |  |  |  |
|  |  |  | Gross Amounts |  | Liabilities |  | Gross Amounts Not Offset on the |  |  |
|  | Gross Amounts |  | Offset on the |  | Presented on the |  | Consolidated Balance Sheets |  |  |
Liabilities |  | of Recognized Liabilities |  | Consolidated Balance Sheets |  | Consolidated Balance Sheets |  | Financial Instruments |  | Collateral Posted |  | Net Amount |
Derivatives |  | $ | 42,432 |  | $ | — |  | $ | 42,432 |  | $ | (12,812 | )(1) | $ | (29,607 | )(5) | $ | 13 |
Repurchase Agreements |  | $ | 1,005,106 |  | $ | (200,000 | ) | $ | 805,106 |  | $ | (350,000 | )(2) | $ | (455,106 | )(6) | $ | — |
|  | As of December 31, 2013 |
|  | (In thousands) |
|  |  |  |  |  | Net Amounts of |  |  |  |  |  |  |
|  |  |  | Gross Amounts |  | Assets Presented |  | Gross Amounts Not Offset on the |  |  |
|  | Gross Amounts |  | Offset on the |  | on the |  | Consolidated Balance Sheets |  |  |
Assets |  | of Recognized Assets |  | Consolidated Balance Sheets |  | Consolidated Balance Sheets |  | Financial Instruments |  | Collateral Received |  | Net Amount |
Derivatives |  | $ | 16,043 |  | $ | — |  | $ | 16,043 |  | $ | (11,363 | )(1) | $ | (4,680 | )(3) | $ | — |
Resale Agreements |  | $ | 1,400,000 |  | $ | — |  | $ | 1,400,000 |  | $ | (495,000 | )(2) | $ | (905,000 | )(4) | $ | — |
|  |  |  |  |  | Net Amounts of |  |  |  |  |
|  |  |  | Gross Amounts |  | Liabilities |  | Gross Amounts Not Offset on the |  |  |
|  | Gross Amounts |  | Offset on the |  | Presented on the |  | Consolidated Balance Sheets |  |  |
Liabilities |  | of Recognized Liabilities |  | Consolidated Balance Sheets |  | Consolidated Balance Sheets |  | Financial Instruments |  | Collateral Posted |  | Net Amount |
Derivatives |  | $ | 33,849 |  | $ | — |  | $ | 33,849 |  | $ | (11,363 | )(1) | $ | (22,486 | )(5) | $ | — |
Repurchase Agreements |  | $ | 995,000 |  | $ | — |  | $ | 995,000 |  | $ | (495,000 | )(2) | $ | (500,000 | )(6) | $ | — |
(1) Represents the netting of derivative receivable and payable balance for the same counterparty under enforceable master netting arrangements if the Company has elected to net. (2) Includes financial instruments subject to enforceable master netting arrangements that are not permitted to be offset under ASC 210-20-45 but would be eligible for offsetting to the extent an event of default has occurred. (3) Represents cash and securities received against derivative assets with the same counterparty that are subject to enforceable master netting arrangements. Includes approximately $933 thousand of cash collateral received as of September 30, 2014. (4) Represents the fair value of securities the Company has received under resale agreements, limited for table presentation purposes to the amount of the recognized asset due from each counterparty. (5) Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements. Includes approximately $6.5 million and $187 thousand of cash collateral posted as of September 30, 2014 and December 31, 2013, respectively. (6) Represents the fair value of securities the Company has pledged under repurchase agreements, limited for table presentation purposes to the amount of the recognized liability owed to each counterparty.

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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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