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Derivative and Hedging Activities | 9 Months Ended
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Sep. 30, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative and Hedging Activities | 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 Statements 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, foreign currency swaps, futures, swaptions and forward commitments used to manage exposure to changes in interest rates and mortgage servicing right 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 loans held for sale is managed using corresponding forward sale commitments and U.S. 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 previously designated certain interest rate swaps as cash flow hedges on overnight Secured Overnight Financing Rates-based variable interest payments on federal home loan bank advances. Changes in the fair value of derivatives previously 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 hedged transaction is recognized in earnings. At September 30, 2024, the Company had $74 million (net-of-tax) of unrealized gains on derivatives classified as cash flow hedges recorded in accumulated other comprehensive loss. The Company had $10 million (net-of-tax) of unrealized gains on derivatives classified as cash flow hedges recorded in other comprehensive loss at December 31, 2023. There were no designated hedging relationships as of September 30, 2024. 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. 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 previously used 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 involved 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 previously designated and that qualified 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 were recognized in interest income. The fair value basis adjustments remaining from discontinued hedges are recognized in interest income over the remaining life of the hedged items. For the nine months ended September 30, 2024, interest income from loans and leases in the accompanying Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income increased by $7 million due to the floating rate payments received on the swaps being greater than the fixed rate payments, as well as the accretion of the fair value basis adjustment subsequent to discontinuance of the hedges. The fair value basis adjustment on our previously hedged real estate loans is included in loans and leases held for investment on our Consolidated Statements of Condition. The carrying amount of our hedged loans was $5.9 billion at September 30, 2024, of which unrealized loss of $24 million was due to the discontinued fair value hedge relationship. The following tables set forth information regarding the Company’s derivative financial instruments:
| September 30, 2024 |  |
|  |  | Fair Value |  |
(in millions) | Notional Amount |  | Other Assets |  | Other Liabilities |  | Expiration Dates
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Futures | $ | 870 |  |  | $ | — |  |  | $ | — |  |  | 2024
Mortgage-backed securities forwards | 1,469 |  |  | 6 |  |  | — |  |  | 2024
Rate lock commitments | 1,996 |  |  | 11 |  |  | — |  |  | 2024
Interest rate swaps and swaptions | 1,505 |  |  | 23 |  |  | — |  |  | 2024-2041
Liabilities |  |  |  |  |  |  |
Mortgage-backed securities forwards | $ | 742 |  |  | $ | — |  |  | $ | 12 |  |  | 2024
Rate lock commitments | 464 |  | — |  | 3 |  |  | 2024
Interest rate swaps and swaptions | 2,646 |  | — |  | 31 |  |  | 2024-2054
| December 31, 2023 |  |
|  |  | Fair Value |  |
(in millions) | Notional Amount |  | Other Assets |  | Other Liabilities |  | Expiration Date
Derivatives designated as cash flow hedging instruments: |  |  |  |  |  |  |
Interest rate swaps on FHLB advances | $ | 5,500 |  |  | $ | — |  |  | $ | 2 |  |  | 2025-2028
Derivatives designated as fair value hedging instruments: |  |  |  |  |  |  |
Interest rate swaps on multi-family loans held for investment | $ | 2,000 |  |  | — |  |  | 1 |  |  | 2025-2027
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Futures | $ | — |  |  | $ | — |  |  | $ | — |  |  |
Mortgage-backed securities forwards | 1,012 |  | 11 |  | — |  | 2024
Rate lock commitments | 1,490 |  | 12 |  | — |  | 2024
Interest rate swaps and swaptions | 5,431 |  | 115 |  | — |  | 2024-2041
Liabilities |  |  |  |  |  |  |
Futures | 2,235 |  |  | — |  |  | 1 |  |  | 2024
Mortgage-backed securities forwards | 1,048 |  |  | — |  |  | 32 |  |  | 2024
Rate lock commitments | 77 |  | — |  | 3 |  | 2024
Interest rate swaps and swaptions | 2,720 |  | — |  | 59 |  | 2024-2054
The table below presents the gross derivative assets and liabilities and the related cash pledged as collateral at September 30, 2024. No amounts were netted in the Statement of Condition.
|  | September 30, 2024
|  | Gross Amounts Not Offset in the Statements of Condition
(in millions) |  | Financial Instruments |  | Cash Collateral Pledged (Received)
Derivatives not designated as hedging instruments: |  |  |  |
Assets |  |  |  |
Mortgage-backed securities forwards |  | $ | 6 |  |  | $ | — |
Interest rate swaptions |  | 23 |  |  | — |
Total derivative assets |  | $ | 29 |  |  | $ | — |
Liabilities |  |  |  |
Mortgage-backed securities forwards |  | 12 |  |  | 14 |
Interest rate swaps (1) |  | 31 |  |  | 110 |
Total derivative liabilities |  | $ | 43 |  |  | $ | 124 |
(1)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. The table below presents the gross derivative assets and liabilities and the related cash pledged as collateral at December 31, 2023. No amounts were netted in the Statement of Condition.
|  | December 31, 2023
|  | Gross Amounts Not Offset in the Statements of Condition
(in millions) |  | Financial Instruments |  | Cash Collateral Pledged (Received)
Derivatives designated hedging instruments: |  |  |  |
Interest rate swaps on FHLB advances |  | $ | 2 |  |  | $ | 75 |
Interest rate swaps on multi-family loans held for investment(1) |  | 1 |  |  | 27 |
Derivatives not designated as hedging instruments: |  |  |  |
Assets |  |  |  |
Mortgage-backed securities forwards |  | $ | 11 |  |  | $ | (1) |
Interest rate swaptions |  | 115 |  |  | (34) |
Total derivative assets |  | $ | 126 |  |  | $ | (35) |
Liabilities |  |  |  |
Futures |  | $ | 1 |  |  | $ | 3 |
Mortgage-backed securities forwards |  | 32 |  |  | 57 |
Interest rate swaps (1) |  | 59 |  |  | 42 |
Total derivative liabilities |  | $ | 92 |  |  | $ | 102 |
(1)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 earnings. Interest rate swaps with notional amounts totaling $5.5 billion as of December 31, 2023 were designated as cash flow hedges of certain FHLB borrowings. There were no designated hedging relationships as of September 30, 2024. The following table presents the effect of the Company’s cash flow derivative instruments on accumulated other comprehensive loss:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in millions) | 2024 |  | 2023 |  | 2024 |  | 2023
Amount of gain (loss) recognized in accumulated other comprehensive loss | $ | (1) |  |  | $ | 64 |  |  | $ | 142 |  |  | $ | 98 |
Amount of reclassified from accumulated other comprehensive loss to interest expense | $ | (18) |  |  | $ | (7) |  |  | $ | (57) |  |  | $ | (19) |
In the third quarter 2024, the Company repaid $2 billion of FHLB advances that were associated with previously de-designated cash flow hedging relationships. As no future cash flows will occur as a result of the repayments, the Company reclassified the gain of approximately $5 million out of accumulated other comprehensive loss into interest expense during the quarter. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate borrowings. We will recognize $80 million of lower interest expense over the next rolling twelve month period related to the reclassification. Derivatives not Designated as Hedging Instruments The following table presents the net gain (loss) recognized in income on derivatives not designated as hedging instruments, net of the impact of offsetting positions:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30, |
(dollars in millions) |  | 2024 |  | 2023 |  | 2024 |  | 2023 |
Derivatives not designated as hedging instruments | Location of Gain (Loss) |  |  |  |  |  |  |  |
Futures | Net return on mortgage servicing rights | $ | (1) |  |  | $ | — |  |  | $ | 2 |  |  | $ | 3 |  |
Interest rate swaps and swaptions | Net return on mortgage servicing rights | 45 |  |  | (61) |  |  | 8 |  |  | (83) |  |
Mortgage-backed securities forwards | Net return on mortgage servicing rights | 3 |  |  | (12) |  |  | (18) |  |  | (25) |  |
Rate lock commitments and US Treasury futures | Net gain on loan sales | (3) |  |  | 1 |  |  | 20 |  |  | 39 |  |
Interest rate swaps (1) | Other non-interest income | 1 |  |  | — |  |  | (4) |  |  | 1 |  |
Total derivative (loss) gain |  | $ | 45 |  |  | $ | (72) |  |  | $ | 8 |  |  | $ | (65) |  |
(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://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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