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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2022
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments

 

 

4.   Derivative Financial Instruments

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts of all derivative instruments and their impact on net income and other comprehensive income.

Impact of Derivatives on Balance Sheet

 

 

 

 

 

Cash Flow

 

 

Fair Value(3)

 

 

Trading

 

 

Total

 

(Dollars in millions)

 

Hedged Risk

Exposure

 

Sep 30, 2022

 

 

Dec 31, 2021

 

 

Sep 30, 2022

 

 

Dec 31, 2021

 

 

Sep 30, 2022

 

 

Dec 31, 2021

 

 

Sep 30, 2022

 

 

Dec 31, 2021

 

Fair Values(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Interest rate

 

$

—

 

 

$

—

 

 

$

56

 

 

$

222

 

 

$

—

 

 

$

2

 

 

$

56

 

 

$

224

 

Cross-currency interest rate

   swaps

 

Foreign currency and

interest rate

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total derivative assets(2)

 

 

 

 

—

 

 

 

—

 

 

 

56

 

 

 

222

 

 

 

—

 

 

 

2

 

 

 

56

 

 

 

224

 

Derivative Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Interest rate

 

 

—

 

 

 

—

 

 

 

(7

)

 

 

—

 

 

 

(2

)

 

 

(5

)

 

 

(9

)

 

 

(5

)

Floor Income Contracts

 

Interest rate

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(65

)

 

 

—

 

 

 

(65

)

Cross-currency interest rate

   swaps

 

Foreign currency and

interest rate

 

 

—

 

 

 

—

 

 

 

(407

)

 

 

(190

)

 

 

—

 

 

 

—

 

 

 

(407

)

 

 

(190

)

Total derivative liabilities(2)

 

 

 

 

—

 

 

 

—

 

 

 

(414

)

 

 

(190

)

 

 

(2

)

 

 

(70

)

 

 

(416

)

 

 

(260

)

Net total derivatives

 

 

 

$

—

 

 

$

—

 

 

$

(358

)

 

$

32

 

 

$

(2

)

 

$

(68

)

 

$

(360

)

 

$

(36

)

 

(1)

Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements and classified in other assets or other liabilities depending on whether in a net positive or negative position.  

(2)

The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:

 

 

 

Other Assets

 

 

Other Liabilities

 

(Dollar in millions)

 

September 30, 2022

 

 

December 31, 2021

 

 

September 30, 2022

 

 

December 31, 2021

 

Gross position

 

$

56

 

 

$

224

 

 

$

(416

)

 

$

(260

)

Impact of master netting agreements

 

 

—

 

 

 

(6

)

 

 

—

 

 

 

6

 

Derivative values with impact of master netting

   agreements (as carried on balance sheet)

 

 

56

 

 

 

218

 

 

 

(416

)

 

 

(254

)

Cash collateral (held) pledged

 

 

(62

)

 

 

(244

)

 

 

69

 

 

 

147

 

Net position

 

$

(6

)

 

$

(26

)

 

$

(347

)

 

$

(107

)

 

(3)

The following table shows the carrying value of liabilities in fair value hedges and the related fair value hedging adjustments to these liabilities:

 

 

 

As of September 30, 2022

 

 

As of December 31, 2021

 

(Dollar in millions)

 

Carrying

Value

 

 

Hedge Basis Adjustments

 

 

Carrying

Value

 

 

Hedge Basis Adjustments

 

Short-term borrowings

 

$

1,283

 

 

$

(15

)

 

$

—

 

 

$

—

 

Long-term borrowings

 

$

6,102

 

 

$

(664

)

 

$

8,503

 

 

$

252

 

 

              

 

4.   Derivative Financial Instruments (Continued)

The above fair values include adjustments when necessary for counterparty credit risk for both when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the asset position at September 30, 2022 and December 31, 2021 by $8 million and $8 million, respectively. In addition, the above fair values reflect adjustments for illiquid derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset positions at September 30, 2022 and December 31, 2021 by $1 million and $2 million, respectively.

 

 

 

Cash Flow

 

 

Fair Value

 

 

Trading

 

 

Total

 

(Dollars in billions)

 

Sep 30, 2022

 

 

Dec 31, 2021

 

 

Sep 30, 2022

 

 

Dec 31, 2021

 

 

Sep 30, 2022

 

 

Dec 31, 2021

 

 

Sep 30, 2022

 

 

Dec 31, 2021

 

Notional Values:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

9.9

 

 

$

12.1

 

 

$

6.2

 

 

$

6.2

 

 

$

25.5

 

 

$

28.4

 

 

$

41.6

 

 

$

46.7

 

Floor Income Contracts

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

6.0

 

 

 

12.5

 

 

 

6.0

 

 

 

12.5

 

Cross-currency interest rate swaps

 

 

—

 

 

 

—

 

 

 

1.9

 

 

 

2.1

 

 

 

—

 

 

 

—

 

 

 

1.9

 

 

 

2.1

 

Total derivatives

 

$

9.9

 

 

$

12.1

 

 

$

8.1

 

 

$

8.3

 

 

$

31.5

 

 

$

40.9

 

 

$

49.5

 

 

$

61.3

 

 

 

Mark-to-Market Impact of Derivatives on Statements of Income

 

 

 

Total Gains (Losses)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Fair Value Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) recognized in net income on derivatives

 

$

(193

)

 

$

(53

)

 

$

(629

)

 

$

(228

)

Gains (losses) recognized in net income on hedged items

 

 

210

 

 

 

60

 

 

 

680

 

 

 

251

 

Net fair value hedge ineffectiveness gains (losses)

 

 

17

 

 

 

7

 

 

 

51

 

 

 

23

 

Cross currency interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) recognized in net income on derivatives

 

 

(127

)

 

 

(48

)

 

 

(217

)

 

 

138

 

Gains (losses) recognized in net income on hedged items

 

 

104

 

 

 

51

 

 

 

251

 

 

 

(90

)

Net fair value hedge ineffectiveness gains (losses)

 

 

(23

)

 

 

3

 

 

 

34

 

 

 

48

 

Total fair value hedges(1)(2)

 

 

(6

)

 

 

10

 

 

 

85

 

 

 

71

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash flow hedges(2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Trading:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

40

 

 

 

(2

)

 

 

120

 

 

 

13

 

Floor income contracts

 

 

—

 

 

 

(3

)

 

 

41

 

 

 

8

 

Cross currency interest rate swaps

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total trading derivatives(3)

 

 

40

 

 

 

(5

)

 

 

161

 

 

 

21

 

Mark-to-market gains (losses) recognized

 

$

34

 

 

$

5

 

 

$

246

 

 

$

92

 

 

(1) 

Recorded in interest expense in the consolidated statements of income.

(2) 

The accrued interest income (expense) on fair value hedges and cash flow hedges is recorded in interest expense and is excluded from this table.

(3) 

Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

 


 

4.   Derivative Financial Instruments (Continued)

Impact of Derivatives on Other Comprehensive Income (Equity)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Total gains (losses) on cash flow hedges

 

$

52

 

 

$

(1

)

 

$

179

 

 

$

21

 

Reclassification adjustments for derivative (gains) losses

    included in net income (interest expense)(1)

 

 

2

 

 

 

21

 

 

 

38

 

 

 

64

 

Net changes in cash flow hedges, net of tax

 

$

54

 

 

$

20

 

 

$

217

 

 

$

85

 

 

 

(1)

Includes net settlement income/expense.  

Collateral

The following table details collateral held and pledged related to derivative exposure between us and our derivative counterparties:

(Dollars in millions)

 

September 30, 2022

 

 

December 31, 2021

 

Collateral held:

 

 

 

 

 

 

 

 

Cash (obligation to return cash collateral is recorded in short-term borrowings)

 

$

62

 

 

$

244

 

Securities at fair value — corporate derivatives (not recorded in financial

   statements)(1)

 

 

—

 

 

 

—

 

Securities at fair value — on-balance sheet securitization derivatives (not

   recorded in financial statements)(2)

 

 

—

 

 

 

1

 

Total collateral held

 

$

62

 

 

$

245

 

Derivative asset at fair value including accrued interest

 

$

60

 

 

$

242

 

Collateral pledged to others:

 

 

 

 

 

 

 

 

Cash (right to receive return of cash collateral is recorded in investments)

 

$

69

 

 

$

147

 

Total collateral pledged

 

$

69

 

 

$

147

 

Derivative liability at fair value including accrued interest and premium

   receivable

 

$

419

 

 

$

271

 

 

(1) 

The Company has the ability to sell or re-pledge securities it holds as collateral.

(2) 

The trusts do not have the ability to sell or re-pledge securities they hold as collateral.

 

 

 

4.   Derivative Financial Instruments (Continued)

Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $.5 million with our counterparties. Downgrades in our unsecured credit rating would not result in any additional collateral requirements. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings. At September 30, 2022 and December 31, 2021, we had a net positive exposure (derivative gain positions to us less collateral which has been posted by counterparties to us) related to Navient Corporation derivatives of $7 million and $9 million, respectively. The trusts are not required to post collateral to the counterparties. At September 30, 2022 and December 31, 2021, the net positive exposure on swaps in securitization trusts was $0 and $0, respectively.

The table below highlights credit exposure related to our derivative counterparties at September 30, 2022.

(Dollars in millions)

 

Corporate

Contracts

 

 

Securitization

Trust

Contracts

 

Exposure, net of collateral

 

$

7

 

 

$

—

 

Percent of exposure to counterparties with credit ratings

   below S&P AA- or Moody’s Aa3

 

 

100

%

 

 

—

%

Percent of exposure to counterparties with credit ratings

   below S&P A- or Moody’s A3

 

 

—

%

 

 

—

%