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Derivative And Credit-Related Financial Instruments | 9 Months Ended
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Sep. 30, 2023
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. 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. Master netting arrangements effectively reduce credit valuation adjustments 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 September 30, 2023, counterparties with bilateral collateral agreements deposited $159 million of cash with the Corporation to secure the fair value of contracts in an unrealized gain position, and the Corporation had pledged $207 million of marketable investment securities and posted $12 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. 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 September 30, 2023 and December 31, 2022. The table excludes a derivative related to the Corporation's 2008 sale of its remaining ownership of Visa shares and includes accrued interest receivable and payable.
| September 30, 2023 |  | December 31, 2022
|  |  | 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: |  |  |  |  |  |  |  |  |  |  |
Fair value swaps - receive fixed/pay floating | $ | 6,300 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,150 |  |  | $ | — |  |  | $ | — |
Cash flow swaps - receive fixed/pay floating (b) | 25,100 |  |  | — |  |  | 2 |  |  | 26,600 |  |  | — |  |  | 50 |
Derivatives used as economic hedges |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts: |  |  |  |  |  |  |  |  |  |  |
Spot, forwards and swaps | 562 |  |  | 2 |  |  | 1 |  |  | 392 |  |  | 1 |  |  | 3 |
Total risk management purposes | 31,962 |  |  | 2 |  |  | 3 |  |  | 30,142 |  |  | 1 |  |  | 53 |
Customer-initiated and other activities |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts: |  |  |  |  |  |  |  |  |  |  |
Caps and floors written | 1,459 |  |  | — |  |  | 24 |  |  | 924 |  |  | — |  |  | 25 |
Caps and floors purchased | 1,459 |  |  | 24 |  |  | — |  |  | 924 |  |  | 25 |  |  | — |
Swaps | 19,347 |  |  | 279 |  |  | 634 |  |  | 18,450 |  |  | 181 |  |  | 569 |
Total interest rate contracts | 22,265 |  |  | 303 |  |  | 658 |  |  | 20,298 |  |  | 206 |  |  | 594 |
Energy contracts: |  |  |  |  |  |  |  |  |  |  |
Caps and floors written | 4,034 |  |  | 1 |  |  | 319 |  |  | 4,051 |  |  | — |  |  | 430 |
Caps and floors purchased | 4,034 |  |  | 320 |  |  | 1 |  |  | 4,051 |  |  | 431 |  |  | — |
Swaps | 6,805 |  |  | 504 |  |  | 485 |  |  | 6,419 |  |  | 589 |  |  | 576 |
Total energy contracts | 14,873 |  |  | 825 |  |  | 805 |  |  | 14,521 |  |  | 1,020 |  |  | 1,006 |
Foreign exchange contracts: |  |  |  |  |  |  |  |  |  |  |
Spot, forwards, options and swaps | 2,581 |  |  | 48 |  |  | 42 |  |  | 2,704 |  |  | 52 |  |  | 42 |
Total customer-initiated and other activities | 39,719 |  |  | 1,176 |  |  | 1,505 |  |  | 37,523 |  |  | 1,278 |  |  | 1,642 |
Total gross derivatives | $ | 71,681 |  |  | 1,178 |  |  | 1,508 |  |  | $ | 67,665 |  |  | 1,279 |  |  | 1,695 |
Amounts offset in the Consolidated Balance Sheets: |  |  |  |  |  |  |  |  |  |  |
Netting adjustment - Offsetting derivative assets/liabilities |  |  | (446) |  |  | (446) |  |  |  |  | (644) |  |  | (644) |
Netting adjustment - Cash collateral received/posted |  |  | (155) |  |  | (12) |  |  |  |  | (180) |  |  | (4) |
Net derivatives included in the Consolidated Balance Sheets (c) |  |  | 577 |  |  | 1,050 |  |  |  |  | 455 |  |  | 1,047 |
Amounts not offset in the Consolidated Balance Sheets: |  |  |  |  |  |  |  |  |  |  |
Marketable securities pledged under bilateral collateral agreements |  |  | (295) |  |  | (207) |  |  |  |  | (70) |  |  | (202) |
Net derivatives after deducting amounts not offset in the Consolidated Balance Sheets |  |  | $ | 282 |  |  | $ | 843 |  |  |  |  | $ | 385 |  |  | $ | 845 |
(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)September 30, 2023 included $3.3 billion of forward starting swaps that will become effective on their contractual start dates in 2023 and 2024. (c)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 $2 million at both September 30, 2023 and December 31, 2022. Risk Management The Corporation's derivative instruments used for managing interest rate risk include cash flow hedging strategies that convert variable-rate loans to fixed rates and fair value hedging strategies that convert fixed-rate medium- and long-term debt to variable rates. Interest and fees on loans included $163 million and $2 million of cash flow hedge losses for the three-month periods ended September 30, 2023 and 2022, respectively, and $(432) million and $45 million of cash flow hedge (loss) income for the nine-month periods ended September 30, 2023 and 2022, respectively. 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 September 30, |  | Nine Months Ended September 30,
(in millions) | 2023 |  | 2022 |  | 2023 |  | 2022
Total interest on medium- and long-term debt (a) | $ | 106 |  |  | $ | 26 |  |  | $ | 273 |  |  | $ | 47 |
Fair value hedging relationships: |  |  |  |  |  |  |
Interest rate contracts: |  |  |  |  |  |  |
Hedged items | 74 |  |  | 28 |  |  | 194 |  |  | 79 |
Derivatives designated as hedging instruments | 32 |  |  | (2) |  |  | 79 |  |  | (32) |
(a) Includes the effects of hedging. Centrally-cleared derivative positions are settled daily based on derivative fair values and the party receiving net settlement amounts pays price alignment, based on an earning rate, to the party making settlement payments. Accordingly, the Corporation may recognize risk management hedging income consisting of price alignment income or expense depending on the fair value of its positions. Price alignment income was reported in other noninterest income on the Consolidated Statements of Comprehensive Income and totaled $17 million and $32 million for the three and nine months ended September 30, 2023, respectively, and was insignificant for the three and nine months ended September 30, 2022. For information on accumulated net losses on cash flow hedges, refer to Note 8. The following tables summarize the expected weighted average remaining maturity of the notional amount of risk management interest rate swaps, the weighted average interest rates associated with amounts expected to be received or paid on interest rate swap agreements, and for fair value swaps, the weighted average carrying amount of the related hedged items, as of September 30, 2023 and December 31, 2022. Cash flow swaps - receive fixed/pay floating rate on variable-rate loans
| September 30, 2023 |  | December 31, 2022
Weighted average: |  |  |
Time to maturity (in years) | 4.1 |  |  | 4.6 |
Receive rate (a) | 2.38 | % |  | 2.35 | %
Pay rate (a), (b) | 5.36 |  |  | 4.07 |
(a)Excludes forward starting swaps not effective as of the period shown. September 30, 2023 excluded $3.3 billion of forward starting swaps. December 31, 2022 excluded $4.6 billion of forward starting swaps. (b)Variable rates paid on receive fixed swaps designated as cash flow hedges are based on BSBY or Secured Overnight Financing Rate (SOFR) rates in effect at September 30, 2023 and BSBY, SOFR or LIBOR rates in effect at December 31, 2022. Fair value swaps - receive fixed/pay floating rate on medium- and long-term debt
(dollar amounts in millions) | September 30, 2023 |  | December 31, 2022
Carrying value of hedged items (a) | $ | 6,049 |  |  | $ | 3,024 |
Weighted average: |  |  |
Time to maturity (in years) | 3.5 |  |  | 3.9 |
Receive rate (b) | 3.67 | % |  | 3.52 | %
Pay rate (b) | 5.39 |  |  | 4.90 |
(a)Included $(250) million and $(124) million of cumulative hedging adjustments at September 30, 2023 and December 31, 2022, respectively, which included $3 million and $4 million, respectively, of hedging adjustment on a discontinued hedging relationship. (b)Floating rates paid on receive fixed swaps designated as fair value hedges are based on SOFR rates in effect at September 30, 2023 and SOFR and LIBOR rates in effect at December 31, 2022. 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 did not recognize any net gains or losses in other noninterest income on the Consolidated Statements of Comprehensive Income for the three months ended September 30, 2023, compared to a net gain of $1 million for the three months ended September 30, 2022. The Corporation recognized a net loss of $1 million for the nine months ended September 30, 2023, compared to no net gains or losses for the nine months ended September 30, 2022. Fair values of customer-initiated and other derivative instruments represent the net unrealized gains or losses on such contracts and are recorded on the Consolidated Balance Sheets. Changes in fair value are recognized on the Consolidated Statements of Comprehensive Income. The net gains recognized in income on customer-initiated derivative instruments, net of the impact of offsetting positions included in capital markets income, were as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in millions) | 2023 |  | 2022 |  | 2023 |  | 2022
Interest rate contracts | $ | 5 |  |  | $ | 9 |  |  | $ | 17 |  |  | $ | 28 |
Energy contracts | 4 |  |  | 14 |  |  | 17 |  |  | 22 |
Foreign exchange contracts | 12 |  |  | 12 |  |  | 40 |  |  | 36 |
Total | $ | 21 |  |  | $ | 35 |  |  | $ | 74 |  |  | $ | 86 |
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) | September 30, 2023 |  | December 31, 2022
Unused commitments to extend credit: |  |  |
Commercial and other | $ | 28,357 |  |  | $ | 30,800 |
Bankcard, revolving credit and home equity loan commitments | 4,169 |  |  | 4,017 |
Total unused commitments to extend credit | $ | 32,526 |  |  | $ | 34,817 |
Standby letters of credit | $ | 3,521 |  |  | $ | 3,712 |
Commercial letters of credit | 42 |  |  | 39 |
The Corporation maintains an allowance to cover current expected credit losses inherent in 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 $42 million and $51 million at September 30, 2023 and December 31, 2022, 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 $39 million at September 30, 2023 and $44 million at December 31, 2022 for expected credit losses inherent in 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 2033. 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 $89 million and $107 million at September 30, 2023 and December 31, 2022, respectively, of the $3.6 billion and $3.8 billion of standby and commercial letters of credit outstanding at September 30, 2023 and December 31, 2022, 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 $34 million at September 30, 2023, including $31 million in deferred fees and $3 million in the allowance for credit losses on lending-related commitments. At December 31, 2022, the comparable amounts were $35 million, $28 million and $7 million, respectively. The following table presents a summary of criticized standby and commercial letters of credit at September 30, 2023 and December 31, 2022. The Corporation's criticized list is 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) | September 30, 2023 |  | December 31, 2022
Total criticized standby and commercial letters of credit | $ | 52 |  |  | $ | 37 |
As a percentage of total outstanding standby and commercial letters of credit | 1.5 | % |  | 1.0 | %
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 its credit risk on the credit risk participation agreements by monitoring the creditworthiness of the borrowers, which is based on the normal credit review process as if the Corporation had entered into the derivative instruments directly with the borrower. The notional amount of such credit risk participation agreements reflects the pro-rata share of the derivative instrument, consistent with its share of the related participated loan. The total notional amount of the credit risk participation agreements was approximately $1 billion and $951 million at September 30, 2023 and December 31, 2022, respectively, and the fair value was insignificant at both September 30, 2023 and December 31, 2022. 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 insignificant at September 30, 2023 and December 31, 2022. 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 September 30, 2023, the weighted average remaining maturity of outstanding credit risk participation agreements was 4.3 years. In 2008, the Corporation sold its remaining ownership of Visa Class B shares and entered into a derivative contract. Under the terms of the derivative contract, the Corporation will compensate the counterparty primarily for dilutive adjustments made to the conversion factor of the Visa Class B shares to Class A shares based on the ultimate outcome of litigation involving Visa. Conversely, the Corporation will be compensated by the counterparty for any increase in the conversion factor from anti-dilutive adjustments. The notional amount of the derivative contract was equivalent to approximately 780,000 Visa Class B Shares. The fair value of the derivative liability, included in accrued expenses and other liabilities on the Consolidated Balance Sheets, was $13 million and $12 million at September 30, 2023 and December 31, 2022. respectively.

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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://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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