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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Derivative Financial Instruments We maintain an overall interest rate risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate changes. Our goal is to manage interest rate sensitivity by modifying the repricing frequency and underlying index characteristics of certain balance sheet assets or liabilities so any adverse impacts related to movements in interest rates are managed within low to moderate limits. As a result of interest rate fluctuations, hedged balance sheet positions will appreciate or depreciate in market value or create variability in cash flows. Income or loss on the derivative instruments linked to the hedged item will generally offset the effect of this unrealized appreciation or depreciation or volatility in cash flows for the period the item is being hedged. We view this strategy as a prudent management of interest rate risk. Please refer to Note 11, “Derivative Financial Instruments” in our 2016 Form 10-K for a full discussion of our risk management strategy. Although we use derivatives to reduce the risk of interest rate changes, the use of derivatives does expose us to both market and credit risk. Market risk is the chance of financial loss resulting from changes in interest rates and market liquidity. Credit risk is the risk that a counterparty will not perform its obligations under a contract and it is limited to the loss of the fair value gain in a derivative that the counterparty owes us less collateral held and plus collateral posted. When the fair value of a derivative contract less collateral held and plus collateral posted is negative, we owe the counterparty and, therefore, we have no credit risk exposure to the counterparty; however, the counterparty has exposure to us. We minimize the credit risk in derivative instruments by entering into transactions with reputable counterparties that are reviewed regularly by our Credit Department. We also maintain a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association, Inc. Master Agreement. Depending on the nature of the derivative transaction, bilateral collateral arrangements are required as well. When we have more than one outstanding derivative transaction with the counterparty, and there exists legally enforceable netting provisions with the counterparty (i.e., a legal right to offset receivable and payable derivative contracts), the “net” mark-to-market exposure, less collateral held and plus collateral posted, represents exposure with the counterparty. We refer to this as the “net position.” When there is a net negative exposure, we consider our exposure to the counterparty and the net position to be zero. Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) requires all standardized derivatives, including most interest rate swaps, to be submitted for clearing to central counterparties to reduce counterparty risk. Two of the central counterparties we use are the CME and the LCH. The CME and the LCH made amendments to their respective rules that resulted in the prospective accounting treatment of certain daily variation margin payments being considered as the legal settlement of the outstanding exposure of the derivative instead of the posting of collateral. The CME rule changes, which became effective in January 2017, result in all variation margin payments on derivatives cleared through the CME being accounted for as legal settlement, while the LCH allows the clearing member institution the option to adopt the rule changes on an individual contract or portfolio basis. As of September 30, 2017, $5.1 billion notional of our derivative contracts were cleared on the CME and $0.7 billion were cleared on the LCH. The derivative contracts cleared through the CME and LCH represent 85.8 percent and 11.9 percent, respectively, of our total notional derivative contracts of $5.9 billion at September 30, 2017. Under this new rule, for derivatives cleared through the CME, the net gain (loss) position includes the variation margin amounts as settlement of the derivative and not collateral against the fair value of the derivative. Interest income (expense) related to variation margin on derivatives that are not designated as hedging instruments or are designated as fair value relationships is recognized as a gain (loss) rather than as interest income (expense). Changes in fair value for derivatives not designated as hedging instruments will be presented as realized gains (losses). Our LCH clearing member institution has elected not to adopt the new rule change. Therefore, there has been no change to the accounting for the derivatives cleared through the LCH, and variation margin payments required to be exchanged based on the fair value of those derivatives remain accounted for as collateral. Our exposure is limited to the value of the derivative contracts in a gain position less any collateral held and plus any collateral posted. When there is a net negative exposure, we consider our exposure to the counterparty to be zero. At September 30, 2017 and December 31, 2016, we had a net positive exposure (derivative gain positions to us, less collateral held by us and plus collateral posted with counterparties) related to derivatives of $23.6 million and $44.6 million, respectively. Summary of Derivative Financial Statement Impact The following tables summarize the fair values and notional amounts of all derivative instruments at September 30, 2017 and December 31, 2016, and their impact on earnings and other comprehensive income for the nine months ended September 30, 2017 and 2016. Please refer to Note 11, “Derivative Financial Instruments” in our 2016 Form 10-K for a full discussion of cash flow hedges, fair value hedges, and trading activities. The net fair value of derivative instruments as of September 30, 2017 was a liability of $8.0 million, compared to the net fair value as of December 31, 2016 liability of $18.1 million. The change in the net fair value reflects a $2.0 million decrease in fair value offset by variation margin amounts of $12.1 million. The net position as of September 30, 2017 was $23.0 million, compared to $30.0 million as of December 31, 2016. The change in the net position reflects a $2.0 million decrease in fair value, $22.6 million decrease in collateral held and pledged (for contracts other than those cleared through the CME), offset by variation margin impacts of $17.6 million. Impact of Derivatives on the Consolidated Balance Sheet
|  |  | Cash Flow Hedges |  | Fair Value Hedges |  | Trading |  | Total
|  |  | September 30, |  | December 31, |  | September 30, |  | December 31, |  | September 30, |  | December 31, |  | September 30, |  | December 31,
|  |  | 2017 |  | 2016 |  | 2017 |  | 2016 |  | 2017 |  | 2016 |  | 2017 |  | 2016
Fair Values(1) | Hedged Risk Exposure |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative Assets:(2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps | Interest rate |  | $ | 636 |  |  | $ | — |  |  | $ | — |  |  | $ | 7,808 |  |  | $ | — |  |  | $ | — |  |  | $ | 636 |  |  | $ | 7,808 |
Derivative Liabilities:(2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps | Interest rate |  | (7,247 | ) |  | (14,463 | ) |  | (1,168 | ) |  | (10,398 | ) |  | (221 | ) |  | (1,076 | ) |  | (8,636 | ) |  | (25,937 | )
Total net derivatives |  |  | $ | (6,611 | ) |  | $ | (14,463 | ) |  | $ | (1,168 | ) |  | $ | (2,590 | ) |  | $ | (221 | ) |  | $ | (1,076 | ) |  | $ | (8,000 | ) |  | $ | (18,129 | )
___________
(1) | Except for instruments cleared through the CME, fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position. The net position includes the variation margin as legal settlement of the derivative contract for instruments cleared through the CME.
(2) | The following table reconciles gross positions with the impact of master netting agreements to the balance sheet classification:
|  | Other Assets |  | Other Liabilities
|  | September 30, |  | December 31, |  | September 30, |  | December 31,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
Gross position(1) |  | $ | 636 |  |  | $ | 7,808 |  |  | $ | (8,636 | ) |  | $ | (25,937 | )
Impact of master netting agreement |  | (636 | ) |  | (7,808 | ) |  | 636 |  |  | 7,808 |
Derivative values with impact of master netting agreements (as carried on balance sheet) |  | — |  |  | — |  |  | (8,000 | ) |  | (18,129 | )
Cash collateral (held) pledged(2) |  | — |  |  | — |  |  | 31,003 |  |  | 48,134 |
Net position |  | $ | — |  |  | $ | — |  |  | $ | 23,003 |  |  | $ | 30,005 |
__________
(1) | Except for instruments cleared with the CME, gross position amounts are exclusive of accrued interest and collateral held and pledged.
(2) | Cash collateral (held) pledged excludes amounts that represent legal settlement of the derivative contracts.
|  | Cash Flow |  | Fair Value |  | Trading |  | Total
|  | September 30, |  | December 31, |  | September 30, |  | December 31, |  | September 30, |  | December 31, |  | September 30, |  | December 31,
|  | 2017 |  | 2016 |  | 2017 |  | 2016 |  | 2017 |  | 2016 |  | 2017 |  | 2016
Notional Values |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 1,440,220 |  |  | $ | 1,054,688 |  |  | $ | 3,480,365 |  |  | $ | 3,628,062 |  |  | $ | 966,542 |  |  | $ | 494,638 |  |  | $ | 5,887,127 |  |  | $ | 5,177,388 |
Impact of Derivatives on the Consolidated Statements of Income
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
Fair Value Hedges |  |  |  |  |  |  |  |
Interest rate swaps: |  |  |  |  |  |  |  |
Hedge ineffectiveness realized gains (losses) recorded in earnings(1) |  | $ | 2,748 |  |  | $ | 3,199 |  |  | $ | (5,130 | ) |  | $ | 2,000 |
Realized gains (losses) recorded in interest expense |  | 154 |  |  | 6,944 |  |  | 7,582 |  |  | 21,593 |
Total |  | $ | 2,902 |  |  | $ | 10,143 |  |  | $ | 2,452 |  |  | $ | 23,593 |
Cash Flow Hedges |  |  |  |  |  |  |  |
Interest rate swaps: |  |  |  |  |  |  |  |
Hedge ineffectiveness losses recorded in earnings(1) |  | $ | (1,025 | ) |  | $ | (843 | ) |  | $ | (1,172 | ) |  | $ | (1,524 | )
Realized losses recorded in interest expense |  | (2,689 | ) |  | (4,381 | ) |  | (8,697 | ) |  | (13,588 | )
Total |  | $ | (3,714 | ) |  | $ | (5,224 | ) |  | $ | (9,869 | ) |  | $ | (15,112 | )
Trading |  |  |  |  |  |  |  |
Interest rate swaps: |  |  |  |  |  |  |  |
Interest reclassification |  | $ | 185 |  |  | $ | 537 |  |  | $ | 165 |  |  | $ | 1,897 |
Realized gains (losses) recorded in earnings |  | (247 | ) |  | (1,525 | ) |  | (1,189 | ) |  | 783 |
Total(1) |  | (62 | ) |  | (988 | ) |  | (1,024 | ) |  | 2,680 |
Total |  | $ | (874 | ) |  | $ | 3,931 |  |  | $ | (8,441 | ) |  | $ | 11,161 |
________
(1) | Amounts included in “gains (losses) on derivatives and hedging activities, net” in the consolidated statements of income.
Impact of Derivatives on the Statements of Changes in Stockholders’ Equity
|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
Amount of gain (loss) recognized in other comprehensive income (loss) |  | $ | 2,125 |  |  | $ | 4,943 |  |  | $ | (1,133 | ) |  | $ | (37,370 | )
Less: amount of gain (loss) reclassified in interest expense(1) |  | (2,689 | ) |  | (4,381 | ) |  | (8,697 | ) |  | (13,588 | )
Total change in other comprehensive income (loss) for unrealized gains (losses) on derivatives, before income tax benefit (expense) |  | $ | 4,814 |  |  | $ | 9,324 |  |  | $ | 7,564 |  |  | $ | (23,782 | )
___________ (1) Amounts included in “realized gains (losses) recorded in interest expense” in the “Impact of Derivatives on the Consolidated Statements of Income” table. Cash Collateral As of September 30, 2017, cash collateral held and pledged excludes amounts that represent legal settlement of the derivative contracts held with CME. Cash collateral held related to derivative exposure between us and our derivatives counterparties was $0.3 million and $1.0 million at September 30, 2017 and December 31, 2016, respectively. Collateral held is recorded in “Other Liabilities” on the consolidated balance sheets. Cash collateral pledged related to derivative exposure between us and our derivatives counterparties was $31.3 million and $49.1 million at September 30, 2017 and December 31, 2016, respectively. Collateral pledged is recorded in “Other interest-earning assets” on the consolidated balance sheets.

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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 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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