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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2015
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 minimize 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 and liabilities so the net interest margin is not, on a material basis, adversely affected by movements in interest rates. We do not use derivative instruments to hedge credit risk. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. Income or loss on the derivative instruments linked to the hedged assets and liabilities will generally offset the effect of this unrealized appreciation or depreciation for the period the item is being hedged. We view this strategy as a prudent management of interest rate sensitivity. Please refer to “Note 11 - Derivative Financial Instruments” in our 2014 Form 10-K for a full discussion of our risk management strategy.
Although we use derivatives to offset (or minimize) 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, foreign exchange rates, and market liquidity. Credit risk is the risk 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 the counterparty owes us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, 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 highly rated counterparties that are reviewed regularly by our Credit Department.
Related to derivative transactions, protection against counterparty risk is generally provided by International Swaps and Derivatives Association, Inc. (“ISDA”) Credit Support Annexes (“CSAs”), or clearinghouses for Over the Counter (“OTC”) derivatives. CSAs require a counterparty to post collateral if a potential default would expose the other party to a loss. All derivative contracts entered into by the Bank are covered under such agreements and require collateral to be exchanged based on the net fair value of derivatives with each counterparty. Our exposure is limited to the value of the derivative contracts in a gain position less any collateral held or plus any collateral posted.
Title VII of 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. As of September 30, 2015, $4.0 billion notional of our derivative contracts were cleared on the Chicago Mercantile Exchange and the London Clearing House. All derivative contracts cleared through an exchange require collateral to be exchanged based on the fair value of the derivative. Our exposure is limited to the value of the derivative contracts in a gain position less any collateral held or plus any collateral posted. When there is a net negative exposure, we consider our exposure to the counterparty to be zero. At September 30, 2015 and December 31, 2014, we had a net positive exposure (derivative gain positions to us less collateral which has been posted by counterparties to us) related to derivatives of $48.9 million and $60.8 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, 2015 and December 31, 2014, and their impact on earnings and other comprehensive income for the three and nine months ended September 30, 2015 and 2014.

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,
 
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Fair Values(1)
Hedged Risk Exposure
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Interest rate
 
$
—

 
$
—

 
$
36,919

 
$
5,012

 
$
1,827

 
$
226

 
$
38,746

 
$
5,238

Derivative Liabilities:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Interest rate
 
(40,855
)
 
(21,435
)
 
—

 
(5,883
)
 
—

 
(1,370
)
 
(40,855
)
 
(28,688
)
Total net derivatives
 
 
$
(40,855
)
 
$
(21,435
)
 
$
36,919

 
$
(871
)
 
$
1,827

 
$
(1,144
)
 
$
(2,109
)
 
$
(23,450
)
     ___________
(1)
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.

(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,
 
 
2015
 
2014
 
2015
 
2014
Gross position
 
$
38,746

 
$
5,238

 
$
(40,855
)
 
$
(28,688
)
Impact of master netting agreement
 
(11,253
)
 
(4,045
)
 
11,253

 
4,045

Derivative values with impact of master netting agreements (as carried on balance sheet)
 
27,493

 
1,193

 
(29,602
)
 
(24,643
)
Cash collateral (held) pledged(1)
 
(14,617
)
 
(900
)
 
47,604

 
72,478

Net position
 
$
12,876

 
$
293

 
$
18,002

 
$
47,835



(1)
Cash collateral amount calculations include outstanding accrued interest payable/receivable.


 
 
 
Cash Flow
 
Fair Value
 
Trading
 
Total
 
 
 
September
30,
 
December
31,
 
September
30,
 
December
31,
 
September
30,
 
December
31,
 
September
30,
 
December
31,
 
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Notional Values
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
$
1,110,549

 
$
1,106,920

 
$
2,957,443

 
$
3,044,492

 
$
836,512

 
$
973,539

 
$
4,904,504

 
$
5,124,951




Impact of Derivatives on the Consolidated Statements of Income

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Fair Value Hedges
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
Hedge ineffectiveness gains (losses) recorded in earnings(1)
 
$
(1,843
)
 
$
1,238

 
$
(929
)
 
$
1,488

Realized gains recorded in interest expense
 
7,531

 
3,835

 
22,512

 
14,081

Total
 
$
5,688

 
$
5,073

 
$
21,583

 
$
15,569

 
 
 
 
 
 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
Hedge ineffectiveness gains (losses) recorded in earnings(1)
 
$
(273
)
 
$
(303
)
 
$
(542
)
 
$
(303
)
Realized losses recorded in interest expense
 
(5,411
)
 
(3,587
)
 
(16,157
)
 
(3,587
)
Total
 
$
(5,684
)
 
$
(3,890
)
 
$
(16,699
)
 
$
(3,890
)
 
 
 
 
 
 
 
 
 
Trading
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
Interest reclassification
 
$
853

 
$
(1,170
)
 
$
2,846

 
$
(3,137
)
Change in fair value of future interest payments recorded in earnings
 
716

 
5,636

 
2,972

 
(2,870
)
Total(1) 
 
1,569

 
4,466

 
5,818

 
(6,007
)
Total
 
$
1,573

 
$
5,649

 
$
10,702

 
$
5,672


________
(1)
Amounts included in “(losses) gains 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,
 
 
2015
 
2014
 
2015
 
2014
Amount of loss recognized in other comprehensive income
 
$
(27,162
)
 
$
(5,470
)
 
$
(35,441
)
 
$
(5,470
)
Less: amount of loss reclassified in interest expense(1)
 
5,411

 
3,587

 
16,157

 
3,587

Total change in other comprehensive income for unrealized losses on derivatives
 
$
(21,751
)
 
$
(1,883
)
 
$
(19,284
)
 
$
(1,883
)

___________
(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
Cash collateral held related to derivative exposure between us and our derivatives counterparties was $14.6 million and $0.9 million at September 30, 2015 and December 31, 2014, respectively. Collateral held is recorded in “Other Liabilities.” Cash collateral pledged related to derivative exposure between us and our derivatives counterparties was $47.6 million and $72.5 million at September 30, 2015 and December 31, 2014, respectively. Collateral pledged is recorded in “Other Assets.”