Derivative Instruments and Other Financial Instruments Used For Hedging

3 Months Ended

Mar. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Other Financial Instruments Used For Hedging

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. 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 credit support annex agreements. Additionally, the Company considers counterparty credit quality and the creditworthiness of the Company in estimating the fair value of derivative instruments.

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 as hedging instruments as of March 31, 2017 and December 31, 2016, respectively. Asset and liability values are presented gross, excluding the impact of legally enforceable master netting and credit support annex 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.

	March 31, 2017						December 31, 2016
			Fair Value						Fair Value
	Notional		Asset		Liability		Notional		Asset		Liability
(Dollars in millions)	Amount		Derivatives		Derivatives		Amount		Derivatives		Derivatives
Cash flow hedges
Interest rate contracts	$	13,244	$	6	$	230	$	15,459	$	19	$	199
Fair value hedges
Interest rate contracts	500		1		—		500		3		—
Not designated as hedging instruments:
Trading
Interest rate contracts	145,724		990		925		149,229		1,074		988
Commodity contracts	2,462		133		104		2,825		145		112
Foreign exchange contracts	5,756		187		101		5,981		217		131
Equity contracts	1,995		168		167		2,385		165		164
Other contracts	21		—		—		4		—		—
Total Trading	155,958		1,478		1,297		160,424		1,601		1,395
Other risk management	1,003		17		6		1,045		3		90
Total derivative instruments	$	170,705	$	1,502	$	1,533	$	177,428	$	1,626	$	1,684

We recognized net gains of $4 million and net losses of $2 million on other risk management derivatives for the three months ended March 31, 2017 and 2016, 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 and debt issuances. Derivatives that qualify for hedge accounting are designated as either fair value or cash flow hedges.

Cash Flow Hedges

The Company uses interest rate swaps to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed loans, and to a lesser extent, to hedge interest rate risk on rollover debt. 

The Company used interest rate swaps with a notional amount of $13.0 billion at March 31, 2017 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. The Company used interest rate swaps with a notional amount of $294 million at March 31, 2017 to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed short-term borrowings. At March 31, 2017, the weighted average remaining life of the active cash flow hedges was 3.84 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 noninterest expense in the period in which they arise. At March 31, 2017, the Company expects to reclassify approximately $47 million of income from AOCI to net interest income during the twelve months ending March 31, 2018. This amount could differ from amounts actually realized due to changes in interest rates, hedge terminations and the addition of other hedges subsequent to March 31, 2017.

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 months ended March 31, 2017 and 2016:

	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) Loss Recognized in Income on Derivative Instruments (Ineffective Portion)
	For the Three Months Ended March 31,						For the Three Months Ended March 31,					For the Three Months Ended March 31,
(Dollars in millions)	2017			2016		Location	2017		2016		Location	2017		2016
Derivatives in cash flow hedging relationships
						Interest income	$	29	$	42
Interest rate contracts	$	(19	)	$	261	Interest expense	—		—		Noninterest expense	$	2	$	1
Total	$	(19	)	$	261		$	29	$	42		$	2	$	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, any ineffectiveness is recognized in noninterest expense in the period in which it arises. The change in the fair value of the hedged item and the hedging instrument, to the extent completely effective, offsets with no impact on earnings.

The following table presents the gains (losses) on the Company's fair value hedges and hedged item for the three months ended March 31, 2017 and 2016, respectively:

	For the Three Months Ended March 31, 2017
(Dollars in millions)	Derivative			Hedged Item		Hedge Ineffectiveness
Interest rate risk on long-term debt	$	(2	)	$	1	$	(1	)
Total	$	(2	)	$	1	$	(1	)

	For the Three Months Ended March 31, 2016
(Dollars in millions)	Derivative		Hedged Item			Hedge Ineffectiveness
Interest rate risk on long-term debt	$	7	$	(7	)	$	—
Total	$	7	$	(7	)	$	—

Derivatives Not Designated as Hedging Instruments

Trading Derivatives

Derivative instruments classified as trading are primarily derivatives entered into as an accommodation for customers. 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 customer 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 statements of income under the heading trading account activities for the three months ended March 31, 2017 and 2016:

	Gain or (Loss) Recognized in Income on Derivative Instruments
	For the Three Months Ended
(Dollars in millions)	March 31, 2017			March 31, 2016
Trading derivatives:
Interest rate contracts	$	(22	)	$	(9	)
Foreign exchange contracts	10			9
Total	$	(12	)	$	—

Offsetting Assets and Liabilities

The Company primarily enters into derivative contracts and repurchase agreements with counterparties utilizing a standard International Swaps and Derivatives Association Master Agreements and Master Repurchase Agreements, respectively. These agreements 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. For additional information related to offsetting of financial assets and liabilities, refer to Note 5 to these consolidated financial statements.