Derivative Financial Instruments

3 Months Ended

Mar. 31, 2014

Derivative Financial Instruments

7. Derivative Financial Instruments

Certain of the Company’s interest rate swap agreements are designated as cash flow hedges for accounting purposes. The Company’s remaining interest rate swap agreements, as well as its interest rate cap agreements, the corresponding options written in to offset the interest rate cap agreements, and a total return swap, are not designated as hedges for accounting purposes. The underlying notional amounts and aggregate fair values of these agreements at March 31, 2014 and December 31, 2013, were as follows:

	March 31, 2014					December 31, 2013
	Notional		Fair Value			Notional		Fair Value
Interest rate swap agreements designated as cash flow hedges	$	5,142,500	$	(2,230	)	$	3,873,000	$	(5,686	)
Interest rate swap agreements not designated as hedges		3,237,133		(26,205	)		3,444,459		(31,360	)
Interest rate cap agreements		4,929,458		43,599			4,616,960		28,274
Options for interest rate cap agreements		4,929,458		(43,680	)		4,616,960		(28,389	)
Total return swap		250,594		—			—		—

The aggregate fair value of the interest rate swap agreements was included on the Company’s consolidated balance sheets in other assets and other liabilities, as appropriate. The interest rate cap agreements were included in other assets and the related options in other liabilities on the Company’s consolidated balance sheets.

In March 2014, the Company entered into a financing arrangement with a third party where by the Company pledged certain bonds retained in its own securitizations in exchange for approximately $250,594 in cash.  In conjunction with the financing arrangement, the Company entered into a total return swap related to the bonds as an effective avenue to monetize the Company’s retained bonds as a source of financing.  The Company will receive the fixed return on the bonds in exchange for paying a variable rate of three-month LIBOR plus 75 basis points.  In addition, at maturity, the Company will receive a payment from, or make a payment to, the counterparty based on the change in fair value of the bonds during the one-year term of the facility. Throughout the term of the facility, the party in a net liability position must post collateral. The Company has the ability to substitute collateral and may do so if a bond is set to begin amortizing.  Alternatively, the amortization may be utilized to reduce the notional amount of the facility.

The Company enters into legally enforceable master netting agreements which reduce risk by permitting netting of transactions, such as derivatives and collateral posting, with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in ISDA master agreements.

Information on the offsetting of derivative assets and derivative liabilities due to the right of offset was as follows, as of March 31, 2014 and December 31, 2013:

	Offsetting of Financial Assets
							Gross Amounts Not Offset in the
							Consolidated Balance Sheet
	Gross		Gross Amounts		Net Amounts of Assets Presented
	Amounts of		Offset in the		in the				Cash
	Recognized		Consolidated		Consolidated		Financial		Collateral		Net
	Assets		Balance Sheet		Balance Sheet		Instruments		Received		Amount
March 31, 2014
Interest rate swaps - Santander & affiliates	$	3,067	$	—	$	3,067	$	—	$	—	$	3,067
Interest rate caps - Santander & affiliates		27,018		—		27,018		—		—		27,018
Interest rate caps - third party		16,581		—		16,581		—		—		16,581
Total derivatives subject to a master netting arrangement or similar arrangement		46,666		—		46,666		—		—		46,666
Total derivatives not subject to a master netting arrangement or similar arrangement		—		—		—		—		—		—
Total derivative assets	$	46,666	$	—	$	46,666	$	—	$	—	$	46,666
Total financial assets	$	46,666	$	—	$	46,666	$	—	$	—	$	46,666
December 31, 2013
Interest rate swaps - Santander & affiliates	$	1,601	$	—	$	1,601	$	—	$	—	$	1,601
Interest rate caps - Santander & affiliates		9,342		—		9,342		—		—		9,342
Interest rate caps - third party		18,932		—		18,932		—		—		18,932
Total derivatives subject to a master netting arrangement or similar arrangement		29,875		—		29,875		—		—		29,875
Total derivatives not subject to a master netting arrangement or similar arrangement		—		—		—		—		—		—
Total derivative assets	$	29,875	$	—	$	29,875	$	—	$	—	$	29,875
Total financial assets	$	29,875	$	—	$	29,875	$	—	$	—	$	29,875

	Offsetting of Financial Liabilities
										Gross Amounts Not Offset in the
										Consolidated Balance Sheet
	Gross		Gross Amounts			Net Amounts of Liabilities Presented
	Amounts of		Offset in the			in the				Cash
	Recognized		Consolidated			Consolidated		Financial		Collateral		Net
	Liabilities		Balance Sheet			Balance Sheet		Instruments		Pledged		Amount
March 31, 2014
Interest rate swaps - Santander & affiliates	$	31,502	$	(9,707	)	$	21,795	$	—	$	—	$	21,795
Back to back - Santander & affiliates		27,018		(21,817	)	$	5,201	$	—	$	—	$	5,201
Back to back - third party		16,662		(16,662	)		—		—		—		—
Total derivatives subject to a master netting arrangement or similar arrangement		75,182		(48,186	)		26,996		—		—		26,996
Total derivatives not subject to a master netting arrangement or similar arrangement		—		—			—		—		—		—
Total derivative liabilities	$	75,182	$	(48,186	)	$	26,996	$	—	$	—	$	26,996
Total financial liabilities	$	75,182	$	(48,186	)	$	26,996	$	—	$	—	$	26,996
December 31, 2013
Interest rate swaps - Santander & affiliates	$	38,647	$	(2,258	)	$	36,389	$	—	$	—	$	36,389
Back to back - Santander & affiliates		9,342		(9,342	)		—		—		—		—
Back to back - third party		19,047		(15,420	)		3,627		—		—		3,627
Total derivatives subject to a master netting arrangement or similar arrangement		67,036		(27,020	)		40,016		—		—		40,016
Total derivatives not subject to a master netting arrangement or similar arrangement		—		—			—		—		—		—
Total derivative liabilities	$	67,036	$	(27,020	)	$	40,016	$	—	$	—	$	40,016
Total financial liabilities	$	67,036	$	(27,020	)	$	40,016	$	—	$	—	$	40,016

The Company is the holder of a warrant that gives it the right, if certain vesting conditions are satisfied, to purchase additional shares in a company in which it has a cost method investment. This warrant was issued in 2012 and is carried at its estimated fair value of zero at March 31, 2014 and December 31, 2013.

The gross gains (losses) reclassified from accumulated other comprehensive income to net income, and gains (losses) recognized in net income, are included as components of interest expense. The Company’s interest rate swap agreements had effects on its consolidated statements of income and comprehensive income for the three months ended March 31, 2014 and 2013 as follows:

	March 31, 2014
			Gross Gains (Losses)		Gross Gains (Losses)
			Recognized in		Reclassified From
	Gains (Losses)		Accumulated Other		Accumulated Other
	Recognized in		Comprehensive		Comprehensive Income
	Interest Expense		Income		To Interest Expense
Interest rate swap agreements designated as cash flow hedges	$	138	$	654	$	(2,664	)
Derivative instruments not designated as hedges	$	5,189

	March 31, 2013
			Gross Gains (Losses)			Gross Gains (Losses)
			Recognized in			Reclassified From
	Gains (Losses)		Accumulated Other			Accumulated Other
	Recognized in		Comprehensive			Comprehensive Income
	Interest Expense		Income			to Interest Expense
Interest rate swap agreements designated as cash flow hedges	$	—	$	(505	)	$	(4,995	)
Derivative instruments not designated as hedges	$	6,657

The ineffectiveness related to the interest rate swap agreements designated as cash flow hedges was not material for the three months ended March 31, 2014 and 2013.