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Derivative and Hedging Activities | 12 Months Ended
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Dec. 31, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative and Hedging Activities | NOTE 14. DERIVATIVE AND HEDGING ACTIVITIES The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposure to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate and liquidity risks, primarily by managing the amount, sources, and duration of its assets and liabilities and, the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments are recorded at fair value in other assets and other liabilities on the Consolidated Statements of Condition. The Company's policy is to present our derivative assets and derivative liabilities on the Consolidated Statement of Condition on a gross basis, even when provisions allowing for set-off are in place. However, for derivative contracts cleared through certain central clearing parties, variation margin payments are recognized as settlements. We are exposed to non-performance risk by the counterparties to our various derivative financial instruments. A majority of our derivatives are centrally cleared through a Central Counterparty Clearing House or consist of residential mortgage interest rate lock commitments further limiting our exposure to non-performance risk. We believe that the non-performance risk inherent in our remaining derivative contracts is minimal based on credit standards and the collateral provisions of the derivative agreements. Derivatives not designated as hedging instruments. The Company maintains a derivative portfolio of interest rate swaps, futures and forward commitments used to manage exposure to changes in interest rates and MSR asset values and to meet the needs of customers. The Company also enters into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Market risk on interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments and US Treasury futures. Changes in the fair value of derivatives not designated as hedging instruments are recognized on the Consolidated Statements of Income and Comprehensive Income. Derivatives designated as hedging instruments. The Company has designated certain interest rate swaps as cash flow hedges on LIBOR and overnight SOFR-based variable interest payments on federal home loan bank advances. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income on the Consolidated Statements of Condition and reclassified into interest expense in the same period in which the hedge transaction is recognized in earnings. At December 31, 2022, the Company had $52 million (net-of-tax) of unrealized gains on derivatives classified as cash flow hedges recorded in accumulated other comprehensive loss. The Company had $9 million (net-of-tax) of unrealized losses on derivatives classified as cash flow hedges at December 31, 2021. Derivatives that are designated in hedging relationships are assessed for effectiveness using regression analysis at inception and qualitatively thereafter, unless regression analysis is deemed necessary. All designated hedge relationships were, and are expected to be, highly effective as of December 31, 2022. Fair Value of Hedges of Interest Rate Risk The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. Such derivatives were used to hedge the changes in fair value of certain of its pools of prepayable fixed rate assets. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income. The Company had entered into an interest rate swap with a notional amount of $2.0 billion to hedge certain real estate loans. Interest income from loans and lease receivables decreased by $6 million and $49 million for the twelve months ended December 31, 2022 and 2021, respectively, related to a $2.0 billion of interest swaps designated in a fair value relationship related to certain real estate loans which matured in February 2022. As of December 31, 2022 and 2021, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges.
(in millions) |  |  | December 31, 2022 |  |  |  | December 31, 2021 |
Line Item in the Consolidated Statements of Condition in which the Hedge Item is Included |  |  | Carrying Amount of the Hedged Assets |  |  |  | Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of the Hedged Assets |  |  |  | Carrying Amount of the Hedged Assets |  |  |  | Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of the Hedged Assets |
Total loans and leases, net (1) |  | $ |  | - |  |  | $ |  | - |  |  | $ |  | 2,025 |  |  | $ |  | 25 |
(1) These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. Since the swap expired in February 2022, at December 31, 2022, the amortized cost basis of the closed portfolios used in these hedging relationships, the cumulative basis adjustments associated with these hedging relationships, and the amount of the designated hedged items, were zero. The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the periods indicated.
(in millions) | For the Twelve Months Ended December 31, 2022 |  |  | For the Twelve Months Ended December 31, 2021 |
Derivative – interest rate swap: |  |  |  |  |
Interest income | $ | 25 |  |  | $ | 48 |
Hedged item – loans: |  |  |  |  |
Interest income | $ | (25 | ) |  | $ | (48 | )
The following table sets forth information regarding the Company’s derivative financial instruments at December 31, 2022.
|  | December 31, 2022 |
|  |  |  |  | Fair Value |
(in millions) |  | Notional Amount |  |  | Other Assets |  |  | Other Liabilities |
Derivatives designated as cash flow hedging instruments: |  |  |  |  |  |  |  |  |
Interest rate swap |  | $ | 3,750 |  |  | $ | 5 |  |  | $ | — |
Total |  | $ | 3,750 |  |  | $ | 5 |  |  | $ | — |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |
Futures |  | $ | 1,205 |  |  | $ | 2 |  |  | $ | — |
Mortgage-backed securities forwards |  |  | 1,065 |  |  |  | 36 |  |  |  | — |
Rate lock commitments |  |  | 1,539 |  |  |  | 9 |  |  |  | — |
Interest rate swaps and swaptions |  |  | 7,594 |  |  |  | 182 |  |  |  | — |
Total |  | $ | 11,403 |  |  | $ | 229 |  |  | $ | — |
Liabilities |  |  |  |  |  |  |  |  |
Mortgage-backed securities forwards |  |  | 739 |  |  |  | — |  |  |  | 61 |
Rate lock commitments |  |  | 527 |  |  |  | — |  |  |  | 10 |
Interest rate swaps and swaptions |  |  | 2,445 |  |  |  | — |  |  |  | 65 |
Total derivatives not designated as hedging instruments |  | $ | 3,711 |  |  | $ | — |  |  | $ | 136 |
The following table presents the derivative subject to a master netting agreement, including the cash pledged as collateral:
|  | December 31, 2022 |
|  |  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset in the Statements of Condition |
(in millions) |  | Gross Amount |  |  | Gross Amounts Netted in the Statements of Condition |  |  | Net Amount Presented in the Statements of Condition |  |  | Financial Instruments |  |  | Cash Collateral Pledged (Received) |
Derivatives designated hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps on FHLB advances (1) |  | $ | 5 |  |  | $ | — |  |  | $ | 5 |  |  | $ | 4 |  |  | $ | 27 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities forwards |  | $ | 36 |  |  | $ | — |  |  | $ | 36 |  |  | $ | — |  |  | $ | (9 | )
Interest rate swaptions |  |  | 182 |  |  |  | — |  |  |  | 182 |  |  |  | — |  |  |  | (36 | )
Futures |  |  | 2 |  |  |  |  |  |  | 2 |  |  |  |  |  |  | 1 |
Total derivative assets |  | $ | 220 |  |  | $ | — |  |  | $ | 220 |  |  | $ | — |  |  | $ | (44 | )
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities forwards |  | $ | 61 |  |  | $ | — |  |  | $ | 61 |  |  | $ | — |  |  | $ | 54 |
Interest rate swaps (2) |  |  | 65 |  |  |  | — |  |  |  | 65 |  |  |  | — |  |  |  | 29 |
Total derivative liabilities |  | $ | 126 |  |  | $ | — |  |  | $ | 126 |  |  | $ | — |  |  | $ | 83 |
(1) Notional value of cash flow hedging instruments at December 31, 2021 $2.3 billion. Securities pledged at December 31, 2021 was $9 million. (2) Variation margin pledged to, or received from, a Central Counterparty Clearing House to cover the prior days fair value of open positions is considered settlement of the derivative position for accounting purposes. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of amounts subject to variability caused by changes in interest rates from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Changes in the fair value of derivatives designated and that qualify as cash flow hedges are initially recorded in other comprehensive income and are subsequently reclassified into earnings in the period that the hedged transaction affects income. Interest rate swaps with notional amounts totaling $3.8 billion and $2.3 billion as of December 31, 2022 and December 31, 2021, were designated as cash flow hedges of certain FHLB borrowings. The following table presents the effect of the Company’s cash flow derivative instruments on AOCL for the year ending December 31, 2022 and 2021:
(in millions) |  | For the Twelve Months Ended December 31, 2022 |  |  | For the Twelve Months Ended December 31, 2021 |
Amount of gain recognized in AOCL |  | $ | 88 |  |  | $ | 8 |
Amount of reclassified from AOCL to interest expense |  |  | (4 | ) |  |  | 25 |
Amounts reported in AOCL related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $51 million will be reclassified to interest expense. The following table presents the net gain (loss) recognized in income on derivative instruments, net of the impact of offsetting positions:
|  | For the Twelve Months Ended December 31, 2022 |  | For the Twelve Months Ended December 31, 2021 |
(dollars in millions) |  |  |  |  |
Derivatives not designated as hedging instruments | Location of Gain (Loss) |  |  |  |
Futures | Net return on mortgage servicing rights | $ | (1 | ) | $ | — |
Interest rate swaps and swaptions | Net return on mortgage servicing rights |  | (11 | ) |  | — |
Mortgage-backed securities forwards | Net return on mortgage servicing rights |  | (4 | ) |  | — |
Rate lock commitments and US Treasury futures | Net gain on loan sales |  | 28 |  |  | — |
Forward commitments | Other noninterest income |  | (1 | ) |  | — |
Interest rate swaps (1) | Other noninterest income |  | — |  |  | — |
Total derivative (loss) gain |  | $ | 11 |  | $ | — |
(1) Includes customer-initiated commercial interest rate swaps.

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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 https://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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