18. Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting, collateral and/or settlement provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting, collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not significant as of December 31, 2017.

The net effect of interest rate swap agreements was to increase net interest income by $25 million in 2017, $37 million in 2016 and $44 million in 2015.

Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:

					Weighted- Average Rate
	Notional Amount		Average Maturity		Fixed			Variable			Estimated Fair Value Gain (a)
	(In thousands)		(In years)								(In thousands)
December 31, 2017
Fair value hedges:
Fixed rate long-term borrowings(b)	$	4,550,000		2.9		2.27	%		2.09	%	$	573
Cash flow hedges:
Variable rate commercial real estate loans(b)( c)		4,850,000		2.0		1.52	%		1.36	%		66
Total	$	9,400,000		2.5							$	639
December 31, 2016
Fair value hedges:
Fixed rate long-term borrowings(b)	$	900,000		1.1		3.75	%		2.08	%	$	11,892

(a)

Effective January 2017 certain clearinghouse exchanges revised their rules such that certain required payments by counterparties for variation margin on derivative instruments that had been treated as collateral are now treated as settlements of those positions. The impact of such rule changes at December 31, 2017 was a reduction of the estimated fair value losses on interest rate swap agreements designated as fair value hedges of $41.1 million and on interest rate swap agreements designated as cash flow hedges of $16.3 million.

(b)

Under the terms of these agreements, the Company receives settlement amounts at a fixed rate and pays at a variable rate.

(c)

Includes notional amount and terms of $2.0 billion of forward-starting interest rate swap agreements that will become effective upon maturity in 2019 of $2.0 billion of agreements currently in effect.

The notional amount of interest rate swap agreements entered into for risk management purposes that were outstanding at December 31, 2017 mature as follows:

	(In thousands)
Year ending December 31:
2018	$	500,000
2019		4,250,000
2020		3,500,000
2021		—
2022		650,000
2023 through 2027		500,000
	$	9,400,000

The Company utilizes commitments to sell residential and commercial real estate loans to hedge the exposure to changes in the fair value of real estate loans held for sale. Such commitments have generally been designated as fair value hedges. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in fair value of certain commitments to originate real estate loans for sale.

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $29.9 billion and $21.6 billion at December 31, 2017 and 2016, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $530 million and $471 million at December 31, 2017 and 2016, respectively.

Information about the fair values of derivative instruments in the Company’s consolidated balance sheet and consolidated statement of income follows:

	Asset Derivatives				Liability Derivatives
	Fair Value				Fair Value
	December 31				December 31
	2017		2016		2017		2016
	(In thousands)
Derivatives designated and qualifying as hedging instruments
Interest rate swap agreements (a)	$	639	$	11,892	$	—	$	—
Commitments to sell real estate loans (a)		734		33,189		283		1,347
		1,373		45,081		283		1,347
Derivatives not designated and qualifying as hedging instruments
Mortgage-related commitments to originate real estate loans for sale (a)		8,797		8,060		494		735
Commitments to sell real estate loans (a)		2,526		5,210		1,019		399
Trading:
Interest rate contracts (b)		74,164		228,810		132,104		167,737
Foreign exchange and other option and futures contracts (b)		5,657		7,908		5,286		6,639
		91,144		249,988		138,903		175,510
Total derivatives	$	92,517	$	295,069	$	139,186	$	176,857

(a)	Asset derivatives are reported in other assets and liability derivatives are reported in other liabilities.

(b)

Asset derivatives are reported in trading account assets and liability derivatives are reported in other liabilities. The impact of the variation margin rule change at December 31, 2017 was a reduction of the estimated fair value of interest rate contracts in the trading account in an asset position of $136.2 million and in a liability position of $12.2 million.

	Amount of Gain (Loss) Recognized
	Year Ended December 31, 2017					Year Ended December 31, 2016					Year Ended December 31, 2015
	Derivative			Hedged Item		Derivative			Hedged Item		Derivative			Hedged Item
	(In thousands)
Derivatives in fair value hedging relationships
Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(52,392	)		51,628	$	(32,000	)		30,906	$	(29,359	)		28,719
Derivatives not designated as hedging instruments
Trading:
Interest rate contracts (b)	$	5,398				$	14,042				$	10,755
Foreign exchange and other option and futures contracts (b)		6,821					7,665					9,337
Total	$	12,219				$	21,707				$	20,092

(a)	Reported as other revenues from operations.

(b)	Reported as trading account and foreign exchange gains.

The amount of gain (loss) recognized in the consolidated statement of income associated with derivatives designated as cash flow hedges was not material.

The Company also has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately $16 million and $28 million at December 31, 2017 and 2016, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

The Company does not offset derivative asset and liability positions in its consolidated financial statements. The Company’s exposure to credit risk by entering into derivative contracts is mitigated through master netting agreements and collateral posting or settlement requirements. Master netting agreements covering interest rate and foreign exchange contracts with the same party include a right to set-off that becomes enforceable in the event of default, early termination or under other specific conditions.

The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $13 million and $34 million at December 31, 2017 and 2016, respectively. After consideration of such netting arrangements, for purposes of posting collateral, the net liability positions with counterparties aggregated $13 million and $30 million at December 31, 2017 and 2016, respectively. The Company was required to post collateral relating to those positions of $12 million and $27 million at December 31, 2017 and 2016, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt ratings were to fall below specified ratings, the counterparties of the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit risk-related contingent features in a net liability position on December 31, 2017 was less than $1 million, for which the Company was not required to post collateral in the normal course of business. If the credit risk-related contingent features had been triggered on December 31, 2017, the Company would not have been required to post any additional collateral with counterparties.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $13 million and $15 million at December 31, 2017 and 2016, respectively. After consideration of such netting arrangements, for purposes of posting collateral, the net asset positions with counterparties aggregated $13 million and $11 million at December 31, 2017 and 2016, respectively. Counterparties posted collateral relating to those positions of $12 million and $9 million at December 31, 2017 and 2016, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit risk standards and often contain collateral provisions.

In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse, rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and variation margin payments depending on the contracts being in a net asset or liability position. The amount of initial margin collateral posted by the Company was $52 million and $111 million at December 31, 2017 and 2016, respectively. The fair value asset and liability amounts of derivative contracts at December 31, 2017 have been reduced by variation margin payments treated as settlements of $136 million and $70 million, respectively. Variation margin on derivative contracts not treated as settlements continues to represent collateral posted or received by the Company. For those contracts, the net fair value of derivative financial instruments cleared through clearinghouses for which variation margin is required was a net asset position of $2 million and $63 million at December 31, 2017 and December 31, 2016, respectively. Collateral posted by the clearinghouses associated with that net asset position was $2 million and $81 million at December 31, 2017 and 2016, respectively.