Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company uses derivative financial instruments to manage interest rate risk. Derivative instruments used as part of the Company's risk management strategy are further described in note 5 of the notes to consolidated financial statements included in the 2018 Annual Report. A tabular presentation of such derivatives outstanding as of September 30, 2019 and December 31, 2018 is presented below.

Basis Swaps

The following table summarizes the Company’s outstanding basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps").


	Notional amount
	As of September 30,		As of December 31,
Maturity	2019		2018
2019	$	—	3,500,000
2020	1,000,000		1,000,000
2021	250,000		250,000
2022 (a)	2,000,000		2,000,000
2023	750,000		750,000
2024	1,750,000		250,000
2026	1,150,000		1,150,000
2027 (b)	250,000		375,000
2028 (b)	—		325,000
2029 (b)	—		100,000
2031 (b)	—		300,000

	$	7,150,000	10,000,000

(a) $750 million of the notional amount of these derivatives have forward effective start dates in May 2020.

(b) During the third quarter of 2019, the Company terminated $125 million (notional amount), $325 million (notional amount), $100 million (notional amount), and $300 million (notional amount) of 1:3 Basis Swaps that had a maturity date in 2027, 2028, 2029, and 2031, respectively, and received $0.5 million in net proceeds.

The weighted average rate paid by the Company on the 1:3 Basis Swaps as of September 30, 2019 and December 31, 2018 was one-month LIBOR plus 9.7 basis points and 9.4 basis points, respectively.

Interest Rate Swaps – Floor Income Hedges

The following table summarizes the outstanding derivative instruments used by the Company to economically hedge loans earning fixed rate floor income.


	As of September 30, 2019						As of December 31, 2018
Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)		Notional amount		Weighted average fixed rate paid by the Company (a)

2019	$	500,000	1.12	%	$	3,250,000	0.97	%
2020	1,500,000		1.01		1,500,000		1.01
2021	600,000		2.15		100,000		2.95
2022 (b)	250,000		1.65		—		—
2023	150,000		2.25		400,000		2.24
2024	—		—		300,000		2.28
2027	—		—		25,000		2.35


	$	3,000,000	1.37	%	$	5,575,000	1.18	%

(a) For all interest rate derivatives, the Company receives discrete three-month LIBOR.

(b) These derivatives have forward effective start dates in June 2021.

During the first and third quarters of 2019, the Company received $2.1 million and paid $16.5 million, respectively, to terminate $100.0 million (notional amount) and $700.0 million (notional amount), respectively, of floor income interest rate swaps prior to their final maturity.

Interest Rate Swap Options – Floor Income Hedges

During 2014 and 2018, the Company paid $9.1 million and $4.6 million, respectively, for interest rate swap options to economically hedge loans earning fixed rate floor income. The interest rate swap options gave the Company the right, but not the obligation, to enter into interest rate swaps during the third quarter of 2019 in which the Company would pay a weighted average fixed amount of 3.21 percent and receive discrete one-month or three-month LIBOR. The Company did not exercise its rights on these options, and such swap options expired.

Interest Rate Caps

In June 2015 and June 2019, the Company paid $2.9 million and $0.3 million, respectively, for interest rate cap contracts to mitigate a rise in interest rates and its impact on earnings related to its student loan portfolio earning a fixed rate. In the event that the one-month LIBOR or three-month LIBOR rate rises above the applicable strike rate, the Company would receive monthly payments related to the spread difference. The following table summarizes these derivative instruments as of September 30, 2019.

Notional Amount

Strike rate

Maturity date

125,000

2.50% (1-month LIBOR)

July 15, 2020

150,000

4.99 (1-month LIBOR)

July 15, 2020

500,000

2.25 (3-month LIBOR)

September 25, 2020

Consolidated Financial Statement Impact Related to Derivatives

Balance Sheet

The following table summarizes the fair value of the Company’s derivatives as reflected in the consolidated balance sheets. There is no difference between the gross amounts of recognized assets presented in the consolidated balance sheets related to the Company's derivative portfolio and the net amount when excluding derivatives subject to enforceable master netting arrangements and cash collateral received.


	Fair value of asset derivatives				Fair value of liability derivatives
	As of September 30, 2019		As of December 31, 2018	As of September 30, 2019	As of December 31, 2018
Interest rate swap options - floor income hedges	$	—	1,465	—	—
Interest rate caps	57		353	—	—
Total	$	57	1,818	—	—

Income Statement Impact

The following table summarizes the components of "derivative market value adjustments and derivative settlements, net" included in the consolidated statements of income.


	Three months ended September 30,				Nine months ended September 30,
	2019		2018	2019	2018
Settlements:
1:3 basis swaps	$	234	3,361	3,375	4,676
Interest rate swaps - floor income hedges	7,064		19,087	35,931	46,752
Interest rate swaps - hybrid debt hedges	—		(124)	—	(410)
Total settlements - income	7,298		22,324	39,306	51,018
Change in fair value:
1:3 basis swaps	6,636		1,283	4,427	12,058
Interest rate swaps - floor income hedges	(12,094)		(7,427)	(75,657)	34,008
Interest rate swap options - floor income hedges	(1)		(31)	(1,465)	437
Interest rate caps	(171)		119	(570)	567
Interest rate swaps - hybrid debt hedges	—		830	—	2,839
Total change in fair value - (expense) income	(5,630)		(5,226)	(73,265)	49,909
Derivative market value adjustments and derivative settlements, net - income (expense)	$	1,668	17,098	(33,959)	100,927