Derivative financial instruments

3 Months Ended

Mar. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

10. 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 material as of March 31, 2024.

The net effect of interest rate swap agreements was to decrease net interest income by $100 million and $69 million during the three-month periods ended March 31, 2024 and 2023, 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:


			Average		Weighted-						Estimated
	Notional		Maturity		Average Rate						Fair Value
(Dollars in millions)	Amount		(In years)		Fixed			Variable			Gain (Loss) (a)
March 31, 2024
Fair value hedges:
Fixed rate long-term borrowings (b) (c)	$	3,850		5.9		3.48	%		5.51	%	$	—
Cash flow hedges:
Interest payments on variable rate commercial real estate loans (b) (d)		23,427		1.7	3.38			5.33				2
Total	$	27,277		2.3							$	2
December 31, 2023
Fair value hedges:
Fixed rate long-term borrowings (b) (e)	$	3,000		5.8		3.45	%		5.62	%	$	(1	)
Cash flow hedges:
Interest payments on variable rate commercial real estate loans (b) (f)		23,977		1.7	3.45			5.36				11
Total	$	26,977		2.2							$	10

(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 $104 million at March 31, 2024 and $43 million at December 31, 2023. The impact of such payments on interest rate swap agreements designated as cash flow hedges was a net settlement of losses of $361 million at March 31, 2024 and $214 million at December 31, 2023.

(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 $1.8 billion of forward-starting interest rate swap agreements that become effective in 2025.

(d)

Includes notional amount and terms of $6.0 billion of forward-starting interest rate swap agreements that become effective in 2024 and 2025.

(e)

Includes notional amount and terms of $1.0 billion of forward-starting interest rate swap agreements that become effective in 2025.

(f)

Includes notional amount and terms of $9.0 billion of forward-starting interest rate swap agreements that become effective in 2024.

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 the fair value of certain commitments to originate real estate loans for sale.

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 $43.4 billion and $44.4 billion at March 31, 2024 and December 31, 2023, respectively. The notional amounts of foreign exchange and other option and futures contracts not designated as hedging instruments aggregated $1.7 billion and $1.5 billion at March 31, 2024 and December 31, 2023, respectively.

10. Derivative financial instruments, continued

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
	March 31,		December 31,		March 31,		December 31,
(Dollars in millions)	2024		2023		2024		2023
Derivatives designated and qualifying as hedging instruments (a)
Interest rate swap agreements	$	3	$	12	$	1	$	2
Commitments to sell real estate loans		11		6		1		8
		14		18		2		10
Derivatives not designated and qualifying as hedging instruments (a)
Mortgage banking:
Commitments to originate real estate loans for sale		6		15		36		32
Commitments to sell real estate loans		40		35		2		3
		46		50		38		35
Other:
Interest rate contracts (b)		243		237		1,019		879
Foreign exchange and other option and futures contracts		15		19		13		19
		258		256		1,032		898
Total derivatives	$	318	$	324	$	1,072	$	943

(a)

Asset derivatives are reported in "accrued interest and other assets" and liability derivatives are reported in "accrued interest and other liabilities" in the Consolidated Balance Sheet.

(b)

The impact of variation margin payments at March 31, 2024 and December 31, 2023 was a reduction of the estimated fair value of interest rate contracts not designated as hedging instruments in an asset position of $893 million and $783 million, respectively, as of each period end, and in a liability position of $16 million and $32 million, respectively.


	Amount of Gain (Loss) Recognized
	Three Months Ended March 31,
	2024					2023
(Dollars in millions)	Derivative			Hedged Item		Derivative		Hedged Item
Derivatives in fair value hedging relationships
Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(60	)	$	60	$	12	$	(12	)
Derivatives not designated as hedging instruments
Interest rate contracts (b)	$	3				$	8
Foreign exchange and other option and futures contracts (b)		4					4
Total	$	7				$	12

(a)

Reported as an adjustment to "interest expense" in the Consolidated Statement of Income.

(b)

Reported as "trading account and other non-hedging derivative gains" in the Consolidated Statement of Income.


	Carrying Amount of the Hedged Item				Cumulative Amount of Fair Value Hedging Adjustment Increasing (Decreasing) the Carrying Amount of the Hedged Item
(Dollars in millions)	March 31, 2024		December 31, 2023		March 31, 2024			December 31, 2023
Location in the Consolidated Balance Sheet of the Hedged Items in Fair Value Hedges
Long-term borrowings	$	3,742	$	2,954	$	(104	)	$	(44	)

The amount of interest income recognized in the Consolidated Statement of Income associated with derivatives designated as cash flow hedges was a decrease of $87 million and $59 million for the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, the unrealized net loss recognized in other comprehensive income related to cash flow hedges was $359 million, of which losses of $1 million, $227 million, $129 million and $2 million relate to interest rate swap agreements maturing in 2024, 2025, 2026 and 2027, respectively.

10. Derivative financial instruments, continued

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 and the related collateral posted, was not material at each of March 31, 2024 and December 31, 2023. 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 March 31, 2024 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 $232 million at March 31, 2024 and $179 million at December 31, 2023. Counterparties posted collateral relating to those positions of $231 million at March 31, 2024 and $179 million at December 31, 2023, 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 $146 million and $129 million at March 31, 2024 and December 31, 2023, 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.