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Derivative Instruments and Other Financial Instruments Used For Hedging
 6 Months Ended
Jun. 30, 2014
Derivative Instruments and Other Financial Instruments Used For Hedging  
Derivative Instruments and Other Financial Instruments Used For Hedging

Note 10—Derivative Instruments and Other Financial Instruments Used For Hedging

        The Company enters into certain derivative and other financial instruments primarily to assist customers with their risk management objectives and to manage the Company's exposure to interest rate risk. When entering into derivatives on behalf of customers the Company generally acts as a financial intermediary by offsetting a significant portion of the market risk for these derivatives with third parties. The Company may also enter into derivatives for other risk management purposes and, subject to certain limits, may take market risk when buying and selling derivatives for its own account. All derivative instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value.

        Counterparty credit risk is inherent in derivative instruments. In order to reduce its exposure to counterparty credit risk, the Company utilizes credit approvals, limits, monitoring procedures and master netting and collateral support annex (CSA) agreements. Additionally, the Company considers the potential loss in the event of counterparty default in estimating the fair value amount of the derivative instrument.

        The table below presents the notional amounts and fair value amounts of the Company's derivative instruments reported on the consolidated balance sheets, segregated between derivative instruments designated and qualifying as hedging instruments and derivative instruments not designated and qualifying as hedging instruments as of June 30, 2014 and December 31, 2013, respectively. Asset and liability values are presented gross, excluding the impact of legally enforceable master netting and CSA agreements. The fair value of asset and liability derivatives designated and qualifying as hedging instruments and derivatives designated as other risk management are included in other assets and other liabilities, respectively. The fair value of asset and liability trading derivatives are included in trading account assets and trading account liabilities, respectively.

 
   June 30, 2014   December 31, 2013  
 
    
   Fair Value    
   Fair Value  
(Dollars in millions)   Notional
Amount		   Asset
Derivatives		   Liability
Derivatives		   Notional
Amount		   Asset
Derivatives		   Liability
Derivatives		  

Designated and qualifying as hedging instruments:

                                      

Cash flow hedges

    
 		    
 		    
 		    
 		    
 		    
 		  

Interest rate contracts

   $ 8,200   $ 37   $ 2   $ 4,300   $ 8   $ 13  

Fair value hedges

    
 		    
 		    
 		    
 		    
 		    
 		  

Interest rate contracts

     500     3     —     —     —     —  

Not designated and qualifying as hedging instruments:

    
 		    
 		    
 		    
 		    
 		    
 		  

Trading

    
 		    
 		    
 		    
 		    
 		    
 		  

Interest rate contracts

     47,006     797     671     44,427     713     609  

Commodity contracts

     5,776     117     107     5,714     76     61  

Foreign exchange contracts

     5,329     25     55     5,645     33     29  

Equity contracts

     4,034     286     287     4,027     253     254  

Other contracts

     —     —     —     140     —     —  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total Trading

     62,145     1,225     1,120     59,953     1,075     953  

Other risk management

    
248		    
2		    
5		    
185		    
2		    
4		  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total derivative instruments

   $ 71,093   $ 1,267   $ 1,127   $ 64,438   $ 1,085   $ 970  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                           

        We recognized net losses of $1 million and $2 million on other risk management derivatives for the three and six months ended June 30, 2014, respectively, compared to net losses of $1 million and $5 million on other risk management derivatives for the three and six months ended June 30, 2013, respectively, which are included in other noninterest income.

  • Derivatives Designated and Qualifying as Hedging Instruments

        The Company uses interest rate derivatives to manage the financial impact on the Company from changes in market interest rates. These instruments are used to manage interest rate risk relating to specified groups of assets and liabilities, primarily LIBOR-based commercial loans, certificates of deposit (CDs), borrowings, and debt issuances. Derivatives that qualify for hedge accounting are designated as either fair value or cash flow hedges. For further information related to the Company's hedging strategy, see Note 13 to the Consolidated Financial Statements in Part II, Item 8. "Financial Statements and Supplementary Data" in our 2013 Form 10-K.

  • Cash Flow Hedges

        The Company used interest rate swaps with a notional amount of $8.2 billion at June 30, 2014 to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed loans. To the extent effective, payments received (or paid) under the swap contract offset fluctuations in interest income on loans caused by changes in the relevant LIBOR index. At June 30, 2014, the weighted average remaining life of the active cash flow hedges was approximately 3.85 years.

        For cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness are recognized in earnings in the period in which they arise. At June 30, 2014, the Company expects to reclassify approximately $95 million of income from accumulated other comprehensive income to net interest income during the twelve months ending June 30, 2015. This amount could differ from amounts actually realized due to changes in interest rates, hedge terminations and the addition of other hedges subsequent to June 30, 2014.

        The following tables present the amount and location of the net gains and losses recorded in the Company's consolidated statements of income and changes in stockholder's equity for derivatives designated as cash flow hedges for the three and six months ended June 30, 2014 and 2013:

 
   Amount of Gain or
(Loss) Recognized in
OCI on Derivative
Instruments
(Effective Portion)		   Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)		   Gain or (Loss) Recognized in
Income on Derivative
Instruments (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)		  
 
   For the Three Months
Ended June 30,		    
   For the Three Months
Ended June 30,		    
   For the Three Months
Ended June 30,		  
(Dollars in millions)   2014   2013   Location   2014   2013   Location   2014   2013  

Derivatives in cash flow hedging relationships

                                              

 

               Interest income   $ 27   $ 8                  

Interest rate contracts

   $ 70   $ 3   Interest expense     2     (1 ) Noninterest expense   $ (1 ) $ —  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 70   $ 3       $ 29   $ 7       $ (1 ) $ —  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                                   


 

 
   Amount of Gain or
(Loss) Recognized in
OCI on Derivative
Instruments
(Effective Portion)		   Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)		   Gain or (Loss) Recognized in
Income on Derivative
Instruments (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)		  
 
   For the Six Months
Ended June 30,		    
   For the Six Months
Ended June 30,		    
   For the Six Months
Ended June 30,		  
(Dollars in millions)   2014   2013   Location   2014   2013   Location   2014   2013  

Derivatives in cash flow hedging relationships

                                              

 

               Interest income   $ 49   $ 15                  

Interest rate contracts

   $ 78   $ 9   Interest expense     3     (1 ) Noninterest expense   $ (1 ) $ —  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 78   $ 9       $ 52   $ 14       $ (1 ) $ —  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                                   

  • Fair Value Hedges

        The Company engages in an interest rate hedging strategy in which one or more interest rate swaps are associated with a specified interest bearing liability, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, U.S. dollar LIBOR.

        For fair value hedges, the effective portion of the gain or loss on the hedging instruments is reported in interest expense and the ineffective portion is recorded in noninterest expense.

        The following table presents the gains (losses) on the Company's fair value hedges for the three and six months ended June 30, 2014:

 
   For the Three Months Ended
June 30, 2014		   For the Six Months Ended
June 30, 2014		  
(Dollars in millions)   Derivative   Hedged
Item		   Hedge
Ineffectiveness		   Derivative   Hedged
Item		   Hedge
Ineffectiveness		  

Interest rate risk on long-term debt

   $ 3   $ (3 ) $ —   $ 3   $ (3 ) $ —  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 3   $ (3 ) $ —   $ 3   $ (3 ) $ —  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                           

  • Derivatives Not Designated and Qualifying as Hedging Instruments

    Trading Derivatives

        Derivative instruments classified as trading include both derivatives entered into as an accommodation for customers and, subject to certain limits, for the Company's own account. Trading derivatives are included in trading assets or trading liabilities with changes in fair value reflected in income from trading account activities. The majority of the Company's derivative transactions for customers were essentially offset by contracts with third parties that reduce or eliminate market risk exposures.

        The Company offers market-linked CDs, which allow the client to earn the higher of either a minimum fixed rate of interest or a return tied to either equity, commodity or currency indices. The Company offsets its exposure to the embedded derivative contained in market-linked CDs with a matched over-the-counter option. Both the embedded derivative (when bifurcated) and hedge options are recorded at fair value with the realized and unrealized changes in fair value recorded in noninterest income within trading account activities.

        The following table presents the amount of the net gains and losses for derivative instruments classified as trading reported in the consolidated statement of income under the heading trading account activities for the three and six months ended June 30, 2014 and 2013:

 
   Gain or (Loss)
Recognized in Income on
Derivative Instruments		    
    
  
 
   Gain or (Loss)
Recognized in Income on
Derivative Instruments		  
 
   For the Three Months Ended  
 
   For the Six Months Ended  
(Dollars in millions)   June 30, 2014   June 30, 2013   June 30, 2014   June 30, 2013  

Trading derivatives:

                          

Interest rate contracts

   $ 9   $ 10   $ 19   $ 9  

Equity contracts

     —     —     1     —  

Foreign exchange contracts

     2     5     6     8  

Commodity contracts

     (1 )   1     1     —  

Other contracts

     2     —     1     1  
                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 12   $ 16   $ 28   $ 18  
                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                   

  • Offsetting Assets and Liabilities

        The Company primarily enters into derivative contracts and repurchase agreements with counterparties utilizing standard International Swaps and Derivatives Association master netting agreements (ISDA MNA) or master repurchase agreements, which generally establish the terms and conditions of the transactions, including a legal right to set-off amounts payable and receivable between the Company and a counterparty, regardless of whether or not such amounts have matured or have contingency features.

        The following tables present the offsetting of financial assets and liabilities as of June 30, 2014 and December 31, 2013:

 
   June 30, 2014  
 
    
    
    
   Gross Amounts Not Offset in
Balance Sheet		    
  
(Dollars in millions)   Gross Amounts
of Recognized
Assets/Liabilities		   Gross Amounts
Offset in
Balance Sheet		   Net Amounts
Presented in
Balance Sheet		   Financial
Instruments		   Cash Collateral
Received/Pledged		   Net Amount  

Financial Assets:

                                      

Derivative Assets

   $ 1,267   $ 454   $ 813   $ 50   $ —   $ 763  

Securities purchased under resale agreements

     45     —     45     44     —     1  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 1,312   $ 454   $ 858   $ 94   $ —   $ 764  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                           

Financial Liabilities:

                                      

Derivative Liabilities

   $ 1,127   $ 510   $ 617   $ 220   $ —   $ 397  

Securities sold under repurchase agreements

     25     —     25     25     —     —  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 1,152   $ 510   $ 642   $ 245   $ —   $ 397  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                           


 

 
   December 31, 2013  
 
    
    
    
   Gross Amounts Not Offset in
Balance Sheet		    
  
(Dollars in millions)   Gross Amounts
of Recognized
Assets/Liabilities		   Gross Amounts
Offset in
Balance Sheet		   Net Amounts
Presented in
Balance Sheet		   Financial
Instruments		   Cash Collateral
Received/Pledged		   Net Amount  

Financial Assets:

                                      

Derivative Assets

   $ 1,085   $ 493   $ 592   $ 79   $ —   $ 513  

Securities purchased under resale agreements

     10     —     10     10     —     —  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 1,095   $ 493   $ 602   $ 89   $ —   $ 513  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                           

Financial Liabilities:

                                      

Derivative Liabilities

   $ 970   $ 423   $ 547   $ 144   $ —   $ 403  

Securities sold under repurchase agreements

     8     —     8     8     —     —  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 978   $ 423   $ 555   $ 152   $ —   $ 403  
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​