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DERIVATIVES | 3 Months Ended
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Mar. 31, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVES | NOTE 8 - DERIVATIVES In the normal course of business, Citizens enters into a variety of derivative transactions to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. These transactions include interest rate swap contracts, interest rate options, foreign exchange contracts, residential loan commitment rate locks, interest rate future contracts, swaptions, certain commodities, forward commitments to sell TBAs, forward sale contracts and purchase options. The Company does not use derivatives for speculative purposes. The Company’s derivative instruments are recognized on the Consolidated Balance Sheets in derivative assets and derivative liabilities at fair value. Certain derivatives are cleared through a central clearing house. Cleared derivatives represent contracts executed bilaterally with counterparties in the OTC market that are novated to a central clearing house who then becomes our counterparty. OTC-cleared derivative instruments are typically settled in cash each day based on the prior day value. Information regarding the valuation methodology and inputs used to estimate the fair value of the Company’s derivative instruments is described in Note 19 in the Company’s 2020 Form 10-K. Derivative assets and derivative liabilities are netted by counterparty on the Consolidated Balance Sheets if a “right of setoff” has been established in a master netting agreement between the Company and the counterparty. This netted derivative asset or liability position is also netted against the fair value of any cash collateral that has been pledged or received in accordance with a master netting agreement. The following table presents derivative instruments included on the Consolidated Balance Sheets:
| March 31, 2021 |  | December 31, 2020
(in millions) | Notional Amount(1) | Derivative Assets | Derivative Liabilities |  | Notional Amount(1) | Derivative Assets | Derivative Liabilities
Derivatives designated as hedging instruments: |  |  |  |  |  |  |
Interest rate contracts | $26,550 |  | $3 |  | $2 |  |  | $22,300 |  | $1 |  | $3 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Interest rate contracts | 148,086 |  | 1,122 |  | 182 |  |  | 149,021 |  | 1,565 |  | 214 |
Foreign exchange contracts | 18,731 |  | 273 |  | 213 |  |  | 16,789 |  | 320 |  | 291 |
Commodities contracts | 294 |  | 135 |  | 138 |  |  | 246 |  | 62 |  | 61 |
TBA contracts | 12,842 |  | 156 |  | 16 |  |  | 11,149 |  | 8 |  | 65 |
Other contracts | 7,527 |  | 38 |  | — |  |  | 8,051 |  | 197 |  | — |
Total derivatives not designated as hedging instruments |  | 1,724 |  | 549 |  |  |  | 2,152 |  | 631 |
Gross derivative fair values |  | 1,727 |  | 551 |  |  |  | 2,153 |  | 634 |
Less: Gross amounts offset in the Consolidated Balance Sheets (2) |  | (190) |  | (190) |  |  |  | (182) |  | (182) |
Less: Cash collateral applied (2) |  | (239) |  | (250) |  |  |  | (56) |  | (324) |
Total net derivative fair values presented in the Consolidated Balance Sheets |  | $1,298 |  | $111 |  |  |  | $1,915 |  | $128 |
(1) The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate contracts, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk, as they do not measure the true economic risk of these contracts. (2) Amounts represent the impact of enforceable master netting agreements that allow the Company to net settle positive and negative positions as well as collateral paid and received. The Company’s derivative transactions are internally divided into three sub-groups: institutional, customer and residential loan. Certain derivative transactions within these sub-groups are designated as fair value or cash flow hedges, as described below: Derivatives Designated As Hedging Instruments The Company’s institutional derivatives qualify for hedge accounting treatment. The net interest accruals on interest rate swaps designated in a fair value or cash flow hedge relationship are treated as an adjustment to interest income or interest expense of the item being hedged. The Company formally documents at inception all hedging relationships, as well as risk management objectives and strategies for undertaking various accounting hedges. Additionally, the Company monitors the effectiveness of its hedge relationships during the duration of the hedge period. The methods utilized to assess hedge effectiveness vary based on hedge relationship and the Company monitors each relationship to ensure that management’s initial intent continues to be satisfied. The Company discontinues hedge accounting treatment when it is determined that a derivative is not expected to be, or has ceased to be, effective as a hedge and subsequently reflects changes in the fair value of the derivative in earnings after termination of the hedge relationship. Fair Value Hedges In a fair value hedge, changes in the fair value of both the derivative instrument and the hedged asset or liability attributable to the risk being hedged are recognized in the same income statement line item in the Consolidated Statements of Operations when the changes in fair value occur. Citizens has outstanding interest rate swap agreements utilized to manage the interest rate exposure on its long-term borrowings, certain fixed rate residential mortgages and AFS debt securities. Certain fair value hedges have been designated as a last-of-layer hedge, which affords the Company the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar prepayable assets whereby the last dollar amount estimated to remain in the portfolio of assets is identified as the hedged item. The following table presents the change in fair value of interest rate contracts designated as fair value hedges, as well as the change in fair value of the related hedged items attributable to the risk being hedged, included in the Consolidated Statements of Operations:
|  |  | Three Months Ended March 31, |
(in millions) |  |  |  |  | 2021 |  | 2020 | Affected Line Item in the Consolidated Statements of Operations
Interest rate swaps hedging borrowed funds |  |  |  |  | ($28) |  |  | $93 |  | Interest expense - long-term borrowed funds
Hedged long-term debt attributable to the risk being hedged |  |  |  |  | 28 |  |  | (92) |  | Interest expense - long-term borrowed funds
Interest rate swaps hedging fixed rate loans |  |  |  |  | — |  |  | 17 |  | Interest and fees on loans and leases
Hedged fixed rate loans attributable to the risk being hedged |  |  |  |  | — |  |  | (17) |  | Interest and fees on loans and leases
Interest rate swaps hedging debt securities available for sale |  |  |  |  | 28 |  |  | (107) |  | Interest income - investment securities
Hedged debt securities available for sale attributable to risk being hedged |  |  |  |  | (28) |  |  | 107 |  | Interest income - investment securities
The following table reflects amounts recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:
| March 31, 2021 |  | December 31, 2020
(in millions) | Debt securities available for sale(1) | Long-term borrowed funds |  | Debt securities available for sale(1) | Long-term borrowed funds
Carrying amount of hedged assets | $9,549 |  | $— |  |  | $10,869 |  | $— |
Carrying amount of hedged liabilities | — |  | 3,280 |  |  | — |  | 3,307 |
Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items | 68 |  | 85 |  |  | 96 |  | 112 |
(1) The Company designated $2.0 billion as the hedged amount (from a closed portfolio of prepayable financial assets with an amortized cost basis of $9.5 billion and $10.9 billion as of March 31, 2021 and December 31, 2020, respectively) in a last-of-layer hedging relationship, which commenced in the third quarter of 2019. Cash Flow Hedges In a cash flow hedge, the entire change in the fair value of the interest rate swap included in the assessment of hedge effectiveness is initially recorded in OCI and is subsequently reclassified from OCI to current period earnings (interest income or interest expense) in the same period that the hedged item affects earnings. Citizens has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating-rate assets, and liabilities. All of these swaps have been deemed highly effective cash flow hedges. During the next 12 months, there are $94 million in pre-tax net gains on derivative instruments included in OCI expected to be reclassified to net interest income in the Consolidated Statements of Operations. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to March 31, 2021. The following table presents the pre-tax net gains (losses) recorded in the Consolidated Statements of Operations and in the Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges:
|  |  | Three Months Ended March 31,
(in millions) |  |  |  |  | 2021 |  | 2020
Amount of pre-tax net (losses) gains recognized in OCI |  |  |  |  | ($28) |  |  | $129 |
Amount of pre-tax net gains reclassified from OCI into interest income |  |  |  |  | 46 |  |  | 5 |
Amount of pre-tax net losses reclassified from OCI into interest expense |  |  |  |  | (12) |  |  | (1) |
Derivatives Not Designated As Hedging Instruments Economic Hedges The Company’s economic hedges include those related to offsetting customer derivatives, residential mortgage loan derivatives (including interest rate lock commitments and forward sales commitments) and derivatives to hedge its residential MSR portfolio. Customer derivatives include interest rate, foreign exchange and commodity derivative contracts designed to meet the hedging and financing needs of the Company’s customers, and are economically hedged by the Company to offset its market exposure. Interest rate lock commitments on residential mortgage loans that will be held for sale are considered derivative instruments, and are economically hedged by entering into forward sale commitments to manage changes in fair value due to interest rate risk. Residential MSR portfolio derivatives are entered to hedge the risk of changes in the fair value of the Company’s MSR asset. The following table presents the effect of economic hedges on noninterest income:
|  |  |  |  | Amounts Recognized in Noninterest Income for the |
|  |  | Three Months Ended March 31, | Affected Line Item in the Consolidated Statements of Operations
(in millions) |  |  |  |  | 2021 |  | 2020
Economic hedge type: |  |  |  |  |  |  |  |
Customer interest rate contracts |  |  |  |  | ($348) |  |  | $1,089 |  | Foreign exchange and interest rate products
Customer foreign exchange contracts |  |  |  |  | (116) |  |  | (30) |  | Foreign exchange and interest rate products
Customer commodity contracts |  |  |  |  | 94 |  |  | (63) |  | Foreign exchange and interest rate products
Derivative contracts to hedge interest rate risk |  |  |  |  | 356 |  |  | (1,084) |  | Foreign exchange and interest rate products
Derivative contracts to hedge foreign exchange risk |  |  |  |  | 150 |  |  | 99 |  | Foreign exchange and interest rate products
Derivative transactions to hedge commodity price risk |  |  |  |  | (92) |  |  | 63 |  | Foreign exchange and interest rate products
Residential loan commitments |  |  |  |  | (238) |  |  | 140 |  | Mortgage banking fees
Derivative contracts used to hedge residential loan commitments |  |  |  |  | 275 |  |  | (129) |  | Mortgage banking fees
Derivative contracts used to hedge residential MSRs |  |  |  |  | (182) |  |  | 271 |  | Mortgage banking fees
Total |  |  |  |  | ($101) |  |  | $356 |  |

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- References No definition available. + Details
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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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