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Derivative And Credit-Related Financial Instruments
 3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative And Credit-Related Financial Instruments DERIVATIVE AND CREDIT-RELATED FINANCIAL INSTRUMENTS
In the normal course of business, the Corporation enters into various transactions involving derivative and credit-related financial instruments to manage exposure to fluctuations in interest rate, foreign currency and other market risks and to meet the financing needs of customers (customer-initiated derivatives). These financial instruments involve, to varying degrees, elements of market and credit risk. Market and credit risk are included in the determination of fair value.
Market risk is the potential loss that may result from movements in interest rates, foreign currency exchange rates or energy commodity prices that cause an unfavorable change in the value of a financial instrument. The Corporation manages this risk by establishing monetary exposure limits and monitoring compliance with those limits. Market risk inherent in interest rate and energy contracts entered into on behalf of customers is mitigated by taking offsetting positions, except in those circumstances when the amount, tenor and/or contract rate level results in negligible economic risk, whereby the cost of purchasing an offsetting contract is not economically justifiable. The Corporation mitigates most of the inherent market risk in foreign exchange contracts entered into on behalf of customers by taking offsetting positions and manages the remainder through individual foreign currency position limits and aggregate value-at-risk limits. These limits are established annually and positions are monitored quarterly. Market risk inherent in derivative instruments held or issued for risk management purposes is typically offset by changes in the fair value of the assets or liabilities being hedged.
Credit risk is the possible loss that may occur in the event of nonperformance by the counterparty to a financial instrument. The Corporation attempts to minimize credit risk arising from customer-initiated derivatives by evaluating the creditworthiness of each customer, adhering to the same credit approval process used for traditional lending activities and obtaining collateral as deemed necessary. Derivatives with dealer counterparties are either cleared through a clearinghouse or settled directly with a single counterparty. For derivatives settled directly with dealer counterparties, the Corporation utilizes counterparty risk limits and monitoring procedures as well as master netting arrangements and bilateral collateral agreements to facilitate the management of credit risk. Master netting arrangements effectively reduce credit risk by permitting settlement of positive and negative positions and offset cash collateral held with the same counterparty on a net basis. Bilateral collateral agreements require daily exchange of cash or highly rated securities issued by the U.S. Treasury or other U.S. government entities to collateralize amounts due to either party. At March 31, 2020, counterparties with bilateral collateral agreements deposited $427 million of cash with the Corporation to secure the fair value of contracts in an unrealized gain position, and the Corporation had pledged $59 million of marketable investment securities and posted $26 million of cash as collateral for contracts in an unrealized loss position. For those counterparties not covered under bilateral collateral agreements, collateral is obtained, if deemed necessary, based on the results of management’s credit evaluation of the counterparty. Collateral varies, but may include cash, investment securities, accounts receivable, equipment or real estate. Included in the fair value of derivative instruments are credit valuation adjustments reflecting counterparty credit risk. These adjustments are determined by applying a credit spread for the counterparty or the Corporation, as appropriate, to the total expected exposure of the derivative. There were no derivative instruments with credit-risk-related contingent features that were in a liability position at March 31, 2020.
Derivative Instruments
Derivative instruments utilized by the Corporation are negotiated over-the-counter and primarily include swaps, caps and floors, forward contracts and options, each of which may relate to interest rates, energy commodity prices or foreign currency exchange rates. Swaps are agreements in which two parties periodically exchange cash payments based on specified indices applied to a specified notional amount until a stated maturity. Caps and floors are agreements which entitle the buyer to receive cash payments based on the difference between a specified reference rate or price and an agreed strike rate or price, applied to a specified notional amount until a stated maturity. Forward contracts are over-the-counter agreements to buy or sell an asset at a specified future date and price. Options are similar to forward contracts except the purchaser has the right, but not the obligation, to buy or sell the asset during a specified period or at a specified future date.
Over-the-counter contracts are tailored to meet the needs of the counterparties involved and, therefore, contain a greater degree of credit risk and liquidity risk than exchange-traded contracts, which have standardized terms and readily available price information. The Corporation reduces exposure to market and liquidity risks from over-the-counter derivative instruments entered into for risk management purposes, and transactions entered into to mitigate the market risk associated with customer-initiated transactions, by taking offsetting positions with investment grade domestic and foreign financial institutions and subjecting counterparties to credit approvals, limits and collateral monitoring procedures similar to those used in making other extensions of credit. In addition, certain derivative contracts executed bilaterally with a dealer counterparty in the over-the-counter market are cleared through a clearinghouse, whereby the clearinghouse becomes the counterparty to the transaction.



The following table presents the composition of the Corporation’s derivative instruments held or issued for risk management purposes or in connection with customer-initiated and other activities at March 31, 2020 and December 31, 2019. The table excludes commitments and warrants accounted for as derivatives.
 
March 31, 2020
 
December 31, 2019
 
 
 
Fair Value
 
 
 
Fair Value
(in millions)
Notional/
Contract
Amount (a)
 
Gross Derivative Assets
 
Gross Derivative Liabilities
 
Notional/
Contract
Amount (a)
 
Gross Derivative Assets
 
Gross Derivative Liabilities
Risk management purposes
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Swaps - fair value - receive fixed/pay floating
$
3,325

 
$
—

 
$
—

 
$
3,325

 
$
—

 
$
—

Swaps - cash flow - receive fixed/pay floating
5,550

 
—

 
—

 
4,550

 
—

 
—

Derivatives used as economic hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
Spot, forwards and swaps
366

 
3

 
2

 
330

 
—

 
2

Total risk management purposes
9,241

 
3

 
2

 
8,205

 
—

 
2

Customer-initiated and other activities
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Caps and floors written
681

 
—

 
—

 
671

 
—

 
—

Caps and floors purchased
681

 
—

 
—

 
671

 
—

 
—

Swaps
19,754

 
605

 
70

 
16,485

 
211

 
39

Total interest rate contracts
21,116

 
605

 
70

 
17,827

 
211

 
39

Energy contracts:
 
 
 
 
 
 
 
 
 
 
 
Caps and floors written
439

 
1

 
76

 
477

 
—

 
23

Caps and floors purchased
439

 
76

 
1

 
477

 
23

 
—

Swaps
1,966

 
382

 
377

 
2,135

 
73

 
69

Total energy contracts
2,844

 
459

 
454

 
3,089

 
96

 
92

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
Spot, forwards, options and swaps
1,531

 
31

 
25

 
1,013

 
10

 
8

Total customer-initiated and other activities
25,491

 
1,095

 
549

 
21,929

 
317

 
139

Total gross derivatives
$
34,732

 
$
1,098

 
$
551

 
$
30,134

 
$
317

 
$
141

Amounts offset in the Consolidated Balance Sheets:
 
 
 
 
 
 
 
 
 
 
 
Netting adjustment - Offsetting derivative assets/liabilities
 
 
(55
)
 
(55
)
 
 
 
(63
)
 
(63
)
Netting adjustment - Cash collateral received/posted
 
 
(424
)
 
(23
)
 
 
 
(11
)
 
(12
)
Net derivatives included in the Consolidated Balance Sheets (b)

 
619

 
473

 



243

 
66

Amounts not offset in the Consolidated Balance Sheets:
 
 
 
 
 
 
 
 
 
 
 
Marketable securities pledged under bilateral collateral agreements
 
 
—

 
(54
)
 
 
 
—

 
(21
)
Net derivatives after deducting amounts not offset in the Consolidated Balance Sheets


 
$
619

 
$
419

 


 
$
243

 
$
45

(a)
Notional or contractual amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the Consolidated Balance Sheets.
(b)
Net derivative assets are included in accrued income and other assets and net derivative liabilities are included in accrued expenses and other liabilities on the Consolidated Balance Sheets. Included in the fair value of net derivative assets and net derivative liabilities are credit valuation adjustments reflecting counterparty credit risk and credit risk of the Corporation. The fair value of net derivative assets included credit valuation adjustments for counterparty credit risk of $22 million and $9 million at March 31, 2020 and December 31, 2019, respectively.
Risk Management
The Corporation's derivative instruments used for managing interest rate risk currently comprise swaps converting fixed-rate long-term debt to variable rates and variable-rate loans to fixed rates.
The following table details the effects of fair value hedging on the Consolidated Statements of Comprehensive Income.
 
Interest on Medium- and Long-Term Debt
 
Three Months Ended March 31,
(in millions)
2020
2019
Total interest on medium-and long-term debt (a)
$
40

$
51

 
 
 
Fair value hedging relationships:
 
 
Interest rate contracts:
 
 
Hedged items
30

26

Derivatives designated as hedging instruments
(6
)
1

(a) Includes the effects of hedging.
For information on accumulated net gains on cash flow hedges, refer to Note 8.
The following table summarizes the expected weighted average remaining maturity of the notional amount of risk management interest rate swaps, the carrying amount of the related hedged items and the weighted average interest rates associated with amounts expected to be received or paid on interest rate swap agreements as of March 31, 2020 and December 31, 2019.

Cash flow swaps - receive fixed/pay floating rate on variable-rate loans:
(dollar amounts in millions)
March 31, 2020
 
December 31, 2019
Derivative Notional Amount
$
5,550

 
$
4,550

Weighted Average:
 
 
 
   Remaining maturity (in years)
3.0

 
3.0

   Receive rate
1.87
%
 
1.94
%
   Pay rate (a)
1.58

 
1.71

(a)
Variable rates paid on receive fixed swaps designated as cash flow hedges are based on one-month LIBOR rates in effect at March 31, 2020 and December 31, 2019.

Fair value swaps - receive fixed/pay floating rate on medium- and long-term debt:
(dollar amounts in millions)
March 31, 2020
 
December 31, 2019
Derivative Notional Amount
$
3,325

 
$
3,325

Carrying value of hedged items (a)
3,634

 
3,469

Weighted Average:
 
 
 
   Remaining maturity (in years)
4.3

 
4.6

   Receive rate
3.44
%
 
3.44
%
   Pay rate (b)
2.32

 
2.80

(a)
Included $310 million and $146 million of cumulative hedging adjustments at March 31, 2020 and December 31, 2019, respectively, which included $6 million and $7 million, respectively, of hedging adjustment on a discontinued hedging relationship.
(b)
Variable rates paid on receive fixed swaps designated as fair value hedges are based on one- and six-month LIBOR rates in effect at March 31, 2020 and December 31, 2019.
Foreign exchange rate risk arises from changes in the value of certain assets and liabilities denominated in foreign currencies. The Corporation employs spot and forward contracts in addition to swap contracts to manage exposure to these and other risks. These instruments are used as economic hedges, and net gains or losses are included in other noninterest income in the Consolidated Statements of Comprehensive Income.
Customer-Initiated and Other
The Corporation enters into derivative transactions at the request of customers and generally takes offsetting positions with dealer counterparties to mitigate the inherent market risk. Income primarily results from the spread between the customer derivative and the offsetting dealer position.
For customer-initiated foreign exchange contracts where offsetting positions have not been taken, the Corporation manages the remaining inherent market risk through individual foreign currency position limits and aggregate value-at-risk limits. These
limits are established annually and reviewed quarterly. For those customer-initiated derivative contracts which were not offset or where the Corporation holds a position within the limits described above, the Corporation recognized no net gains or losses in other noninterest income in the Consolidated Statements of Comprehensive Income for both the three-month periods ended March 31, 2020 and 2019.
Fair values of customer-initiated and other derivative instruments represent the net unrealized gains or losses on such contracts and are recorded in the Consolidated Balance Sheets. Changes in fair value are recognized in the Consolidated Statements of Comprehensive Income. The net gains recognized in income on customer-initiated derivative instruments, net of the impact of offsetting positions, were as follows.
 
 
 
Three Months Ended March 31,
(in millions)
 
Location of Gain
2020
 
2019
Interest rate contracts
 
Other noninterest income
$
8

 
$
6

Energy contracts
 
Other noninterest income
1

 
1

Foreign exchange contracts
 
Foreign exchange income
11

 
11

Total
 
 
$
20

 
$
18

Credit-Related Financial Instruments
The Corporation issues off-balance sheet financial instruments in connection with commercial and consumer lending activities. The Corporation’s credit risk associated with these instruments is represented by the contractual amounts indicated in the following table.
(in millions)
March 31, 2020
 
December 31, 2019
Unused commitments to extend credit:
 
 
 
Commercial and other
$
21,456

 
$
23,681

Bankcard, revolving check credit and home equity loan commitments
3,170

 
3,180

Total unused commitments to extend credit
$
24,626

 
$
26,861

Standby letters of credit
$
3,208

 
$
3,320

Commercial letters of credit
35

 
18


The Corporation maintains an allowance to cover current expected credit losses on lending-related commitments, including unused commitments to extend credit, letters of credit and financial guarantees. The allowance for credit losses on lending-related commitments, included in accrued expenses and other liabilities on the Consolidated Balance Sheets, was $62 million and $31 million at March 31, 2020 and December 31, 2019, respectively.
Unused Commitments to Extend Credit
Commitments to extend credit are legally binding agreements to lend to a customer, provided there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of the Corporation. Commercial and other unused commitments are primarily variable rate commitments. The allowance for credit losses on lending-related commitments included $51 million at March 31, 2020 and $25 million at December 31, 2019 for current expected credit losses on the Corporation’s unused commitments to extend credit.
Standby and Commercial Letters of Credit
Standby letters of credit represent conditional obligations of the Corporation which guarantee the performance of a customer to a third party. Standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Commercial letters of credit are issued to finance foreign or domestic trade transactions. These contracts expire in decreasing amounts through the year 2028. The Corporation may enter into participation arrangements with third parties that effectively reduce the maximum amount of future payments which may be required under standby and commercial letters of credit. These risk participations covered $160 million and $161 million, respectively, of the $3.2 billion and $3.3 billion standby and commercial letters of credit outstanding at March 31, 2020 and December 31, 2019, respectively.
The carrying value of the Corporation’s standby and commercial letters of credit, included in accrued expenses and other liabilities on the Consolidated Balance Sheets, totaled $33 million at March 31, 2020, including $23 million in deferred fees and $10 million in the allowance for credit losses on lending-related commitments. At December 31, 2019, the comparable amounts were $32 million, $26 million and $6 million, respectively.
The following table presents a summary of criticized standby and commercial letters of credit at March 31, 2020 and December 31, 2019. The Corporation's criticized list is generally consistent with the Special Mention, Substandard and Doubtful categories defined by regulatory authorities. The Corporation manages credit risk through underwriting, periodically reviewing and approving its credit exposures using Board committee approved credit policies and guidelines.
(dollar amounts in millions)
March 31, 2020
 
December 31, 2019
Total criticized standby and commercial letters of credit
$
50

 
$
44

As a percentage of total outstanding standby and commercial letters of credit
1.5
%
 
1.3
%
Other Credit-Related Financial Instruments
The Corporation enters into credit risk participation agreements, under which the Corporation assumes credit exposure associated with a borrower’s performance related to certain interest rate derivative contracts. The Corporation is not a party to the interest rate derivative contracts and only enters into these credit risk participation agreements in instances in which the Corporation is also a party to the related loan participation agreements for such borrowers. The Corporation manages credit risk on credit risk participation agreements by monitoring the creditworthiness of the borrowers, based on the normal credit review process as if the Corporation had entered into the derivative instruments directly with the borrowers. The notional amount of such credit risk participation agreements reflects the pro-rata share of the derivative instrument, consistent with the Corporation's share of the related participated loan. As of March 31, 2020 and December 31, 2019, the total notional amount of the credit risk participation agreements was approximately $807 million and $786 million, respectively, and the fair value was insignificant for both periods. The maximum estimated exposure to these agreements, as measured by projecting a maximum value of the guaranteed derivative instruments, assuming 100 percent default by all obligors on the maximum values, was $50 million and $20 million at March 31, 2020 and December 31, 2019, respectively. In the event of default, the lead bank has the ability to liquidate the assets of the borrower, in which case the lead bank would be required to return a percentage of the recouped assets to the participating banks. As of March 31, 2020, the weighted average remaining maturity of outstanding credit risk participation agreements was 3.4 years.