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 material as of September 30, 2023.

The net effect of interest rate swap agreements was to decrease net interest income by $79 million and $211 million during the three-month and nine-month periods ended September 30, 2023, respectively, and to decrease net interest income by $22 million and to increase net interest income by $50 million during the three-month and nine-month periods ended September 30, 2022, respectively.

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-						Estimated
	Notional		Average		Average Rate						Fair Value
	Amount		Maturity		Fixed			Variable			Gain (Loss) (a)
	(In thousands)		(In years)								(In thousands)
September 30, 2023
Fair value hedges:
Fixed rate long-term borrowings (b)	$	2,000,000		6.6		3.11	%		5.74	%	$	3,108
Cash flow hedges:
Interest payments on variable rate commercial real estate loans (b) (c)		23,977,000		2.0		3.45	%		5.32	%		9,077
Total	$	25,977,000		2.4							$	12,185
December 31, 2022
Fair value hedges:
Fixed rate long-term borrowings (b)	$	1,500,000		3.3		2.98	%		4.52	%	$	(833	)
Cash flow hedges:
Interest payments on variable rate commercial real estate loans (b) (d)		15,900,000		1.4		1.91	%		4.38	%		(7,059	)
Total	$	17,400,000		1.6							$	(7,892	)

(a)

Certain clearinghouse exchanges consider payments by counterparties for variation margin on derivative instruments to be settlements of those positions. The impact of such payments for interest rate swap agreements designated as fair value hedges was a net settlement of losses of $163.9 million at September 30, 2023 and $65.0 million at December 31, 2022. The impact of such payments on interest rate swap agreements designated as cash flow hedges was a net settlement of losses of $538.5 million at September 30, 2023 and $329.7 million at December 31, 2022.

(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 $9.4 billion of forward-starting interest rate swap agreements that become effective in 2023 and 2024.

(d)

Includes notional amount and terms of $4.7 billion of forward-starting interest rate swap agreements that become effective in 2023.

10. Derivative financial instruments, continued

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. 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.

Other derivative financial instruments not designated as hedging instruments included interest rate contracts, foreign exchange and other option and futures contracts. Interest rate contracts not designated as hedging instruments had notional values of $44.2 billion and $45.1 billion at September 30, 2023 and December 31, 2022, respectively. The notional amounts of foreign exchange and other option and futures contracts not designated as hedging instruments aggregated $1.5 billion and $1.7 billion at September 30, 2023 and December 31, 2022, 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
	September 30,		December 31,		September 30,		December 31,
	2023		2022		2023		2022
	(In thousands)
Derivatives designated and qualifying as hedging instruments (a)
Interest rate swap agreements	$	12,471	$	1,202	$	286	$	9,094
Commitments to sell real estate loans		5,998		3,037		614		9
		18,469		4,239		900		9,103
Derivatives not designated and qualifying as hedging instruments (a)
Mortgage banking:
Mortgage-related commitments to originate real estate loans for sale		2,380		452		53,783		46,025
Commitments to sell real estate loans		60,036		51,410		83		14
		62,416		51,862		53,866		46,039
Other:
Interest rate contracts (b)		323,865		355,806		1,420,668		1,278,180
Foreign exchange and other option and futures contracts		15,552		24,062		14,361		22,004
		339,417		379,868		1,435,029		1,300,184
Total derivatives	$	420,302	$	435,969	$	1,489,795	$	1,355,326

(a)

Asset derivatives are reported in other assets and liability derivatives are reported in other liabilities.

(b)

The impact of variation margin payments at September 30, 2023 and December 31, 2022 was a reduction of the estimated fair value of interest rate contracts not designated as hedging instruments in an asset position of $1.2 billion and $1.1 billion, respectively, as of each period end, and in a liability position of $15.7 million and $29.2 million, respectively.


	Amount of Gain (Loss) Recognized
	Three Months Ended September 30
	2023					2022
	Derivative			Hedged Item		Derivative			Hedged Item
	(In thousands)
Derivatives in fair value hedging relationships
Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(60,605	)		60,737	$	(50,976	)		50,821

Derivatives not designated as hedging instruments
Interest rate contracts (b)	$	6,311				$	6,946
Foreign exchange and other option and futures contracts (b)		4,232					4,462
Total	$	10,543				$	11,408

10. Derivative financial instruments, continued


	Amount of Gain (Loss) Recognized
	Nine Months Ended September 30
	2023					2022
	Derivative			Hedged Item		Derivative			Hedged Item
	(In thousands)
Derivatives in fair value hedging relationships
Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(94,997	)		95,920	$	(114,932	)		114,581

Derivatives not designated as hedging instruments
Interest rate contracts (b)	$	25,027				$	17,907
Foreign exchange and other option and futures contracts (b)		11,377					10,701
Total	$	36,404				$	28,608

(a)

Reported as an adjustment to interest expense.

(b)

Reported as trading account and other non-hedging derivative gains.


	Carrying Amount of the Hedged Item				Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of the Hedged Item
	September 30, 2023		December 31, 2022		September 30, 2023			December 31, 2022
	(In thousands)
Location in the Consolidated Balance Sheet of the Hedged Items in Fair Value Hedges

Long-term debt	$	1,834,030	$	1,433,731	$	(161,230	)	$	(65,310	)

The amount of interest income recognized in the Consolidated Statement of Income associated with derivatives designated as cash flow hedges was a decrease of $65 million and $22 million for the three months ended September 30, 2023 and 2022, respectively, and a decrease of $173 million and an increase of $36 million for the nine-month period ended September 30, 2023 and 2022, respectively. As of September 30, 2023 the unrealized net loss recognized in other comprehensive income related to cash flow hedges was $529 million, of which losses of $13 million, $357 million and $159 million related to interest rate swap agreements maturing in 2024, 2025 and 2026, respectively.

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 master netting arrangements and the related collateral posted, was not material at each of September 30, 2023 and December 31, 2022. 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 September 30, 2023 was not material.

The aggregate fair value of derivative financial instruments in an asset position with counterparties, which are subject to enforceable master netting arrangements, was $381 million at September 30, 2023 and $314 million at December 31, 2022. Counterparties posted collateral relating to those positions of $386 million at September 30, 2023 and $312 million at December 31, 2022, respectively. 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 $143 million and $205 million at September 30, 2023 and December 31, 2022, respectively. The fair value asset and liability amounts of derivative contracts have been reduced by variation margin payments treated as settlements as described herein. Variation margin on derivative contracts not treated as settlements continues to represent collateral posted or received by the Company.