Derivative Financial Instruments

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative financial instruments are recorded at fair value in other assets and other liabilities on the Consolidated Statements of Financial Condition. Our policy is to present its derivative assets and derivative liabilities on the Consolidated Statement of Financial 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: We maintain a derivative portfolio of interest rate swaps, futures and forward commitments used to manage exposure to changes in interest rates, MSR asset values and to meet the needs of customers. We also enter 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. Changes in fair value of derivatives not designated as hedging instruments are recognized in the Consolidated Statements of Income.

Derivatives designated as hedging instruments: We have designated certain interest rate swaps as fair value hedges of fixed-rate FHLB advances and investment securities available for sale using the last-of-layer method. 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, 2019. Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged item.

During the fourth quarter of 2018, we completed the Wells Fargo branch acquisition. This acquisition resulted in the addition of $1.8 billion of deposits and significantly changed the composition of our balance sheet. We settled all of our

variable LIBOR based long-term FHLB borrowings and determined that our forecasted interest payments were probable not to occur. As a result, we reclassified $29 million of hedging gains that had been deferred in OCI from de-designated hedging relationships immediately into income in 2018. We have no gains or losses estimated to be reclassified from other comprehensive income into earnings during the next 12 months.

The following tables present the notional amount, estimated fair value and maturity of our derivative financial instruments:



	December 31, 2019 (1)
	Notional Amount		Fair Value (2)		Expiration Dates
	(Dollars in millions)
Derivatives in fair value hedge relationships:
Assets
Interest rate swaps on FHLB advances	$	200	$	—	2020
Interest rate swaps on AFS securities	100		—		2022
Total derivative assets	$	300	$	—
Derivatives not designated as hedging instruments:
Assets
Futures	$	550	$	—	2020-2023
Mortgage-backed securities forwards	1,918		2		2020
Rate lock commitments	3,870		34		2020
Interest rate swaps	799		26		2020-2029
Total derivative assets	$	7,137	$	62
Liabilities
Mortgage-backed securities forwards	5,749		9		2020
Rate lock commitments	229		1		2020
Interest rate swaps and swaptions	1,662		8		2020-2050
Total derivative liabilities	$	7,640	$	18


(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.


(2)	Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.



	December 31, 2018 (1)
	Notional Amount		Fair Value (2)		Expiration Dates
	(Dollars in millions)
Derivatives in fair value hedge relationships:
Assets
Interest rate swaps on CDs	$	20	$	—	2019
Liabilities
Interest rate swaps on CDs	$	10	$	—	2019
Derivatives not designated as hedging instruments:
Assets
Futures	$	248	$	—	2019-2023
Mortgage-backed securities forwards	362		4		2019
Rate lock commitments	2,221		20		2019
Interest rate swaps and swaptions	1,662		23		2019-2049
Total derivative assets	$	4,493	$	47
Liabilities
Futures	$	1,513	$	1	2019-2023
Mortgage-backed securities forwards	4,625		31		2019
Rate lock commitments	45		—		2019
Interest rate swaps	755		7		2019-2028
Total derivative liabilities	$	6,938	$	39


(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.


(2)	Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.

The following tables present the derivatives subject to a master netting arrangement, including the cash pledged as collateral:



			Gross Amounts Netted in the Statement of Financial Position		Net Amount Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amount						Financial Instruments		Cash Collateral
	(Dollars in millions)
December 31, 2019
Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards	$	2	$	—	$	2	$	—	$	—
Interest rate swaps	26		—		26		—		—
Total derivative assets	$	28	$	—	$	28	$	—	$	—

Liabilities
Mortgage-backed securities forwards	9		—		9		—		24
Interest rate swaps and swaptions (1)	8		—		8		—		39
Total derivative liabilities	$	17	$	—	$	17	$	—	$	63

December 31, 2018
Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards	$	4	$	—	$	4	$	—	$	—
Interest rate swaps and swaptions (1)	23		—		23		—		14
Total derivative assets	$	27	$	—	$	27	$	—	$	14

Liabilities
Futures	$	1	$	—	$	1	$	—	$	1
Mortgage-backed securities forwards	31		—		31		—		29
Interest rate swaps (1)	7		—		7		—		23
Total derivative liabilities	$	39	$	—	$	39	$	—	$	53


(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 fair value basis adjustment on our hedged AFS securities is included in investment securities available for sale on our Consolidated Statements of Financial Condition. The carrying amount of our hedged securities was $287 million at December 31, 2019, of which $1 million was due to the fair value hedge relationship, and zero at December 31, 2018. The closed portfolio of AFS securities designated in this last layer method hedge was $291 million (amortized cost of $289 million) at December 31, 2019, of which we have designated $100 million. There were no designated AFS hedges at December 31, 2018.

The carrying amount of hedged FHLB advances was $200 million at December 31, 2019 and zero at December 31, 2018. The fair value hedge relationship had a de minimis impact at December 31, 2019 and zero at December 31, 2018.

At December 31, 2019, we pledged a total of $63 million related to derivative financial instruments, consisting of $34 million of cash collateral on derivative liabilities and $29 million of maintenance margin on centrally cleared derivatives and had a de minimis obligation to return cash on derivative assets. We pledged a total of $53 million related to derivative financial instruments, consisting of $30 million of cash collateral on derivative liabilities and $23 million of maintenance margin on centrally cleared derivatives and had an obligation to return cash of $14 million on derivative assets at December 31, 2018. Within the Consolidated Statements of Financial Condition, the collateral related to derivative activity is included in other assets and liabilities and the cash pledged as maintenance is restricted and included in other assets.

The following table presents the net gain recognized on designated instruments, net of the impact of offsetting positions:



	Amount Recorded in Net Interest Income (1)
	For the Years Ended December 31,
	2019		2018 (2)
	(Dollars in millions)
Gain on cash flow hedging relationships in interest contracts
Amount of gain reclassified from AOCI into income	$	—	$	30
Total gain on hedges	$	—	$	30


(1)	The income impact from fair value hedging relationships for the years ending December 31, 2019 was de minimis and zero at December 31, 2018.


(2)	Includes $29 million of hedging gains reclassified into net interest income in conjunction with the payoff of long-term FHLB advances.

The following table presents the net gain/(loss) recognized in income on derivative instruments, net of the impact of offsetting positions:



		For the Years Ended December 31,
		2019			2018			2017
		(Dollars in millions)
Derivatives not designated as hedging instruments:	Location of Gain (Loss)
Futures	Net loss on mortgage servicing rights	$	(2	)	$	(4	)	$	(1	)
Interest rate swaps and swaptions	Net gain (loss) on mortgage servicing rights	57			1			(11		)
Mortgage-backed securities forwards	Net gain (loss) on mortgage servicing rights	21			(2		)	4
Rate lock commitments and forward agency and loan sales	Net gain (loss) on loan sales	35			(31		)	(34		)
Forward commitments	Other noninterest income	2			—			—
Interest rate swaps (1)	Other noninterest income	5			3			2
Total derivative (loss) gain		$	118		$	(33	)	$	(40	)

(1)

Includes customer-initiated commercial interest rate swaps.