Derivative Financial Instruments

12 Months Ended

Dec. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

7. Derivative Financial Instruments

Risk Management Strategy

We maintain an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize the economic effect of interest rate changes. Our goal is to manage interest rate sensitivity by modifying the repricing frequency and underlying index characteristics of certain balance sheet assets and liabilities so the net interest margin is not, on a material basis, adversely affected by movements in interest rates. We do not use derivative instruments to hedge credit risk. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. Income or loss on the derivative instruments that are linked to the hedged assets and liabilities will generally offset the effect of this unrealized appreciation or depreciation for the period the item is being hedged. We view this strategy as a prudent management of interest rate sensitivity. In addition, we utilize derivative contracts to minimize the economic impact of changes in foreign currency exchange rates on certain debt obligations that are denominated in foreign currencies. As foreign currency exchange rates fluctuate, these liabilities will appreciate and depreciate in value. These fluctuations, to the extent the hedge relationship is effective, are offset by changes in the value of the cross-currency interest rate swaps executed to hedge these instruments. Management believes certain derivative transactions entered into as hedges, primarily Floor Income Contracts, basis swaps and, at times, certain other interest rate swaps, are economically effective; however, those transactions do not qualify for hedge accounting under GAAP and thus may adversely impact earnings.

Although we use derivatives to minimize the risk of interest rate and foreign currency changes, the use of derivatives does expose us to both market and credit risk. Market risk is the chance of financial loss resulting from changes in interest rates, foreign exchange rates and market liquidity. Credit risk is the risk that a counterparty will not perform its obligations under a contract and it is limited to the loss of the fair value gain in a derivative that the counterparty owes us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, have no credit risk exposure to the counterparty; however, the counterparty has exposure to us. We minimize the credit risk in derivative instruments by entering into transactions with highly rated counterparties that are reviewed regularly by our Credit Department. We also maintain a policy of requiring that all derivative contracts be governed by an International Swaps and Derivative Association Master Agreement. Depending on the nature of the derivative transaction, bilateral collateral arrangements related to Navient Corporation contracts generally are required as well. When we have more than one outstanding derivative transaction with the counterparty, and there exists legally enforceable netting provisions with the counterparty (i.e. a legal right to offset receivable and payable derivative contracts), the "net" mark to market exposure, less collateral the counterparty has posted to us, represents exposure with the counterparty. When there is a net negative exposure, we consider our exposure to the counterparty to be zero. At December 31, 2023 and 2022, we have 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 $6 million and $11 million, respectively.

Our on-balance sheet securitization trusts have $1.6 billion of Euro denominated bonds outstanding as of December 31, 2023. To convert these non-US dollar denominated bonds into US dollar liabilities, the trusts have entered into foreign-currency swaps with highly-rated counterparties. In addition, the trusts have entered into $298 million notional of interest rate swaps which are primarily used to convert Prime received on securitized education loans to SOFR paid on the bonds. Our securitization trusts with swaps have ISDA documentation with protections against counterparty risk. The collateral calculations contemplated in the ISDA documentation of our securitization trusts require collateral based on the fair value of the derivative which may be adjusted for additional collateral based on rating agency criteria requirements considered within the collateral agreement. The trusts are not required to post collateral to the counterparties. At December 31, 2023 and 2022, the net positive exposure on swaps in securitization trusts was $0 and $0 million, respectively.

7. Derivative Financial Instruments (Continued)

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	Dec. 31, 2023		Dec. 31, 2022		Dec. 31, 2023			Dec. 31, 2022			Dec. 31, 2023			Dec. 31, 2022			Dec. 31, 2023			Dec. 31, 2022
Fair Values(1)
Derivative Assets:
Interest rate swaps	Interest rate	$	—	$	—	$	55		$	55		$	—		$	1		$	55		$	56
Cross-currency interest rate swaps	Foreign currency and interest rate		—		—		—			—			—			—			—			—
Total derivative assets(2)			—		—		55			55			—			1			55			56
Derivative Liabilities:
Interest rate swaps	Interest rate		—		—		—			(2	)		(1	)		(3	)		(1	)		(5	)
Floor Income Contracts	Interest rate		—		—		—			—			—			—			—			—
Cross-currency interest rate swaps	Foreign currency and interest rate		—		—		(189	)		(253	)		—			—			(189	)		(253	)
Total derivative liabilities(2)			—		—		(189	)		(255	)		(1	)		(3	)		(190	)		(258	)
Net total derivatives		$	—	$	—	$	(134	)	$	(200	)	$	(1	)	$	(2	)	$	(135	)	$	(202	)

(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)	December 31, 2023			December 31, 2022			December 31, 2023			December 31, 2022
Gross position	$	55		$	56		$	(190	)	$	(258	)
Impact of master netting agreements		—			—			—			—
Derivative values with impact of master netting agreements (as carried on balance sheet)		55			56			(190	)		(258	)
Cash collateral (held) pledged		(60	)		(80	)		46			62
Net position	$	(5	)	$	(24	)	$	(144	)	$	(196	)

(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 December 31, 2023					As of December 31, 2022
(Dollar in millions)	Carrying Value		Hedge Basis Adjustments			Carrying Value		Hedge Basis Adjustments
Short-term borrowings	$	490	$	(9	)	$	1,289	$	(10	)
Long-term borrowings	$	5,341	$	(281	)	$	6,188	$	(494	)

7. 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 December 31, 2023 and December 31, 2022 by $5 million and $6 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 position at December 31, 2023 and December 31, 2022 by $1 million and $1 million, respectively.


	Cash Flow				Fair Value				Trading				Total
(Dollars in billions)	Dec. 31, 2023		Dec. 31, 2022		Dec. 31, 2023		Dec. 31, 2022		Dec. 31, 2023		Dec. 31, 2022		Dec. 31, 2023		Dec. 31, 2022
Notional Values:
Interest rate swaps	$	2.2	$	8.3	$	4.6	$	6.2	$	1.9	$	17.4	$	8.7	$	31.9
Floor Income Contracts		—		—		—		—		—		6.0		—		6.0
Cross-currency interest rate swaps		—		—		1.6		1.8		—		—		1.6		1.8
Total derivatives	$	2.2	$	8.3	$	6.2	$	8.0	$	1.9	$	23.4	$	10.3	$	39.7

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


	Total Gains (Losses)
	Years Ended December 31,
(Dollars in millions)	2023			2022			2021
Fair Value Hedges:
Interest Rate Swaps
Gains (losses) recognized in net income on derivatives	$	104		$	(610	)	$	(310	)
Gains (losses) recognized in net income on hedged items		(128	)		660			349
Net fair value hedge ineffectiveness gains (losses)		(24	)		50			39
Cross currency interest rate swaps
Gains (losses) recognized in net income on derivatives		64			(63	)		104
Gains (losses) recognized in net income on hedged items		(86	)		96			(55	)
Net fair value hedge ineffectiveness gains (losses)		(22	)		33			49
Total fair value hedges(1)(2)		(46	)		83			88
Cash Flow Hedges:
Total cash flow hedges(2)		—			—			—
Trading:
Interest rate swaps		11			130			30
Floor income contracts		—			41			34
Total trading derivatives(3)		11			171			64
Mark-to-market gains (losses) recognized	$	(35	)	$	254		$	152

(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.

7. Derivative Financial Instruments (Continued)

Impact of Derivatives on Other Comprehensive Income (Equity)


	Years Ended December 31,
(Dollars in millions)	2023			2022		2021
Total gains (losses) on cash flow hedges	$	16		$	194	$	55
Reclassification adjustments for derivative (gains) losses included in net income (interest expense)(1)		(84	)		26		86
Net changes in cash flow hedges, net of tax	$	(68	)	$	220	$	141

(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)	December 31, 2023		December 31, 2022
Collateral held:
Cash (obligation to return cash collateral is recorded in short-term borrowings)	$	60	$	80
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)		—		—
Total collateral held	$	60	$	80
Derivative asset at fair value including accrued interest	$	62	$	85
Collateral pledged to others:
Cash (right to receive return of cash collateral is recorded in investments)	$	46	$	62
Total collateral pledged	$	46	$	62
Derivative liability at fair value including accrued interest and premium receivable	$	197	$	266

(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.