Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS

v3.19.2
DERIVATIVE FINANCIAL INSTRUMENTS
6 Months Ended
Jun. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are recorded in the Unaudited Condensed Consolidated Balance Sheets as either an asset or a liability (in other assets or other liabilities, respectively) and measured at fair value.
Derivative financial instruments can be designated as accounting hedges under GAAP. Designating a derivative as an accounting hedge allows Huntington to recognize gains and losses on the hedging instruments in same income statement line item where the gains and losses on the hedged item are recognized. Gains and losses on derivatives that are not designated to an effective hedge relationship under GAAP immediately impact earnings within the period they occur.
The following table presents the fair values of all derivative instruments included in the Unaudited Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018. Amounts in the table below are presented gross without the impact of any net collateral arrangements.
 
June 30, 2019
December 31, 2018
(dollar amounts in millions)
Asset
 
Liability
 
Asset
 
Liability
Derivatives designated as Hedging Instruments
 
 
 
 
 
 
 
Interest rate contracts
$
233

 
$
9

 
$
44

 
$
42

Derivatives not designated as Hedging Instruments
 
 
 
 
 
 
 
Interest rate contracts
425

 
311

 
261

 
165

Foreign exchange contracts
18

 
16

 
23

 
19

Commodities contracts
154

 
150

 
172

 
168

Equity contracts
1

 
3

 

 
10

Total Contracts
$
831

 
$
489

 
$
500

 
$
404


The following table presents the amount of gain or loss recognized in income for derivatives not designated as hedging instruments under ASC Subtopic 815-10 in the Unaudited Condensed Consolidated Income Statement for the three-month and six-month periods ended June 30, 2019 and 2018, respectively.
 
 
Location of Gain or (Loss) Recognized in Income on Derivative
 
Amount of Gain or (Loss) Recognized in Income on Derivative
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in millions)
 
 
 
2019
 
2018
 
2019
 
2018
Interest rate contracts:
 

 
 
 
 
 
 
 
 
Customer
 
Capital markets fees
 
$
12

 
$
12

 
$
22

 
$
19

Mortgage Banking
 
Mortgage banking income
 
22

 

 
34

 
8

Interest Rate Floors
 
Other noninterest income
 
5

 

 
5

 

Foreign exchange contracts
 
Capital markets fees
 
7

 
7

 
15

 
12

Commodities contracts
 
Capital markets fees
 
2

 

 
(4
)
 
2

Equity contracts
 
Other noninterest expense
 

 
(3
)
 
(1
)
 
(3
)
Total
 
 
 
$
48

 
$
16

 
$
71

 
$
38


Derivatives used in asset and liability management activities
Huntington engages in balance sheet hedging activity, principally for asset liability management purposes. Balance sheet hedging activity is generally arranged to receive hedge accounting treatment that can be classified as either fair value or cash flow hedges. Fair value hedges are executed to hedge changes in fair value of outstanding fixed-rate debt caused by fluctuations in market interest rates. Cash flow hedges are executed to modify interest rate characteristics of designated commercial loans in order to reduce the impact of changes in future cash flows due to market interest rate changes.
The following table presents the gross notional values of derivatives used in Huntington’s asset and liability management activities at June 30, 2019 and December 31, 2018, identified by the underlying interest rate-sensitive instruments.
 
June 30, 2019
(dollar amounts in millions)
Fair Value
Hedges
 
Cash Flow Hedges
 
Economic Hedges
 
Total
Instruments associated with:
 
 
 
 
 
 
 
Loans
$

 
$
11,925

 
$

 
$
11,925

Investment securities

 
12

 

 
12

Long-term debt
6,740

 

 

 
6,740

Unassigned (1)

 

 
2,200

 
2,200

Total notional value at June 30, 2019
$
6,740

 
$
11,937

 
$
2,200

 
$
20,877

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
(dollar amounts in millions)
 
 
Fair Value Hedges
 
Cash Flow Hedges
 
Total
Instruments associated with:
 
 
 
 
 
 
 
Investment securities
 
 
$

 
$
12

 
$
12

Long-term debt
 
 
4,865

 

 
4,865

Total notional value at December 31, 2018
 
 
$
4,865

 
$
12

 
$
4,877


(1)
Huntington held $2.2 billion as of June 30, 2019 of interest rate floors to economically hedge the impact of potential interest rate decreases.
The following table presents additional information about the interest rate swaps and floors used in Huntington’s asset and liability management activities at June 30, 2019 and December 31, 2018.
 
June 30, 2019
 
 
 
 
 
 
 
Weighted-Average Rate
(dollar amounts in millions)
Notional Value
 
Average Maturity (years)
 
Fair Value
 
Receive
 
Pay
Asset conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
$
5,937

 
3.5

 
$
48

 
1.87
%
 
2.19
%
Liability conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
6,740

 
2.6

 
137

 
2.26

 
2.44

Total swap portfolio at June 30, 2019
$
12,677

 
3.0

 
$
185

 
2.08
%
 
2.32
%
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
 
 
 
 
 
 
 
(dollar amounts in millions)
Notional Value
 
Average Maturity (years)
 
Fair Value
Interest rate floors
 
 
 
 
 
 
 
 
 
Designated interest rate floors
$
6,000
 
 
1.9
 
 
$
39

Unassigned interest rate floors
2,200
 
 
1.4
 
 
10

Total floors portfolio at June 30, 2019
$
8,200
 
 
1.7
 
 
$
49

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Weighted-Average Rate
(dollar amounts in millions)
Notional Value
 
Average Maturity (years)
 
Fair Value
 
Receive
 
Pay
Asset conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
$
12

 
1.2

 
$

 
2.20
%
 
2.46
%
Liability conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
$
4,865

 
2.6

 
$
2

 
2.24
%
 
2.54
%
Total swap portfolio at December 31, 2018
$
4,877

 
2.6

 
$
2

 
2.24
%
 
2.54
%

These derivative financial instruments were entered into for the purpose of managing the interest rate risk of assets and liabilities. With the exception of $2.2 billion of interest rate floors that are economically hedging interest rate decreases, net amounts receivable or payable on contracts hedging either interest earning assets or interest bearing liabilities were accrued as an adjustment to either interest income or interest expense. The net amounts resulted in an increase (decrease) to net interest income of $(15) million and $(15) million for the three-month periods ended June 30, 2019, and 2018, respectively, and $(29) million and $(14) million for the six-month periods ended June 30, 2019, and 2018, respectively.
Fair Value Hedges
The changes in fair value of the fair value hedges are recorded through earnings and offset against changes in the fair value of the hedged item.
The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item for the three-month and six-month periods ended June 30, 2019 and 2018.
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
(dollar amounts in millions)
2019
 
2018
 
2019
 
2018
Interest rate contracts
 
 
 
 
 
 
 
Change in fair value of interest rate swaps hedging long-term debt (1)
$
88

 
$
134

 
$
129

 
$
66

Change in fair value of hedged long term debt (1)
(88
)
 
(132
)
 
(129
)
 
(61
)
(1)
Recognized in Interest expense—long-term debt in the Unaudited Condensed Consolidated Statements of Income.
As of June 30, 2019 and December 31, 2018, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges.
 
Carrying Amount of the Hedged Liabilities
 
Cumulative Amount of Fair Value Hedging Adjustment To Hedged Liabilities
(dollar amounts in millions)
June 30, 2019
 
December 31, 2018
 
June 30, 2019
 
December 31, 2018
Long-term debt
$
6,769

 
$
4,845

 
$
117

 
$
(12
)
The cumulative amount of fair value hedging adjustments remaining for any hedged assets and liabilities for which hedge accounting has been discontinued was $(110) million and $(127) million at June 30, 2019 and December 31, 2018, respectively.
Cash Flow Hedges
During the first six months of 2019, Huntington entered into $11.9 billion of interest rate floors and swaps. These are designated as cash flow hedges for variable rate commercial loans indexed to LIBOR. The initial premium paid for the interest rate floor contracts represents the time value of the contracts and is not included in the measurement of hedge effectiveness. Any change in fair value related to time value is recognized in OCI. The initial premium paid is amortized on a straight line basis as a reduction to interest income over the contractual life of these contracts.
Also during the first six months of 2019, Huntington purchased $2.2 billion of interest rate floors to economically hedge the impact of potential interest rate decreases. These contracts are measured at fair value with changes in fair value recognized in earnings.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives used in mortgage banking activities
Mortgage loan origination hedging activity
Huntington’s mortgage origination hedging activity is related to economically hedging Huntington's mortgage pricing commitments to customers and the secondary sale to third parties. The value of a newly originated mortgage is not firm until the interest rate is committed or locked. The net asset (liability) position of these derivatives at June 30, 2019 and December 31, 2018 are $2 million and $(4) million, respectively. At June 30, 2019 and December 31, 2018, Huntington had commitments to sell residential real estate loans of $1.4 billion and $0.8 billion, respectively. These contracts mature in less than 1 year.
MSR hedging activity
Huntington’s MSR economic hedging activity uses securities and derivatives to manage the value of the MSR asset and to mitigate the various types of risk inherent in the MSR asset, including risks related to duration, basis, convexity, volatility, and yield curve. The hedging instruments include forward commitments, interest rate swaps, and options on interest rate swaps.
The notional value of the derivative financial instruments, corresponding trading assets and liabilities, and net trading gains (losses) related to MSR hedging activity is summarized in the following table:
(dollar amounts in millions)
June 30, 2019
December 31, 2018
Notional value
$
535
 
 
$
 
Trading assets
19
 
 
 
Trading liabilities
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six Months Ended June 30,
(dollar amounts in millions)
2019
2018
 
2019
2018
Trading gains (losses)
$
18


 
$
25

(8
)

MSR hedging trading assets and liabilities are included in other assets and other liabilities, respectively, in the Unaudited Condensed Balance Sheets. Trading gains (losses) are included in mortgage banking income in the Unaudited Condensed Consolidated Statement of Income.
Derivatives used in customer related activities
Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments used in trading activities consist of commodity, interest rate, and foreign exchange contracts. Huntington enters into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms and currencies in order to economically hedge significant exposure related to derivatives used in trading activities.
The interest rate or price risk of customer derivatives is mitigated by entering into similar derivatives having offsetting terms with other counterparties. The credit risk to these customers is evaluated and included in the calculation of fair value. Foreign currency derivatives help the customer hedge risk and reduce exposure to fluctuations in exchange rates. Transactions are primarily in liquid currencies with Canadian dollars and Euros comprising a majority of all transactions. Commodity derivatives help the customer hedge risk and reduce exposure to fluctuations in the price of various commodities. Hedging of energy-related products and base metals comprise the majority of all transactions.
The net fair values of these derivative financial instruments, for which the gross amounts are included in other assets or other liabilities at both June 30, 2019 and December 31, 2018, were $89 million and $92 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $27 billion and $26 billion at June 30, 2019 and December 31, 2018, respectively. Huntington’s credit risk from customer derivatives was $386 million and $132 million at the same dates, respectively.
Visa®-related Swaps
In connection with the sale of Huntington’s Class B Visa® shares, Huntington entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B shares resulting from changes in the Visa® litigation. At June 30, 2019, the fair value of the swap liabilities of $3 million is an estimate of the exposure liability based upon Huntington’s assessment of the potential Visa® litigation losses and timing of the litigation settlement.
Financial assets and liabilities that are offset in the Unaudited Condensed Consolidated Balance Sheets
Huntington records derivatives at fair value as further described in Note 11 "Fair Values of Assets and Liabilities".
Derivative balances are presented on a net basis taking into consideration the effects of legally enforceable master netting agreements. Additionally, collateral exchanged with counterparties is also netted against the applicable derivative fair values. Huntington enters into derivative transactions with two primary groups: broker-dealers and banks, and Huntington’s customers. Different methods are utilized for managing counterparty credit exposure and credit risk for each of these groups.
Huntington enters into transactions with broker-dealers and banks for various risk management purposes. These types of transactions generally are high dollar volume. Huntington enters into collateral and master netting agreements with these counterparties, and routinely exchanges cash and high quality securities collateral. Huntington enters into transactions with customers to meet their financing, investing, payment and risk management needs. These types of transactions generally are low dollar volume. Huntington enters into master netting agreements with customer counterparties; however, collateral is generally not exchanged with customer counterparties.
At June 30, 2019 and December 31, 2018, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $34 million and $37 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements with broker-dealers and banks.
At June 30, 2019, Huntington pledged $82 million of investment securities and cash collateral to counterparties, while other counterparties pledged $206 million of investment securities and cash collateral to Huntington to satisfy collateral netting agreements. In the event of credit downgrades, Huntington would not be required to provide additional collateral.
The following tables present the gross amounts of these assets and liabilities with any offsets to arrive at the net amounts recognized in the Unaudited Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018.
Offsetting of Financial Assets and Derivative Assets
 
 
 
 
Gross amounts
offset in the unaudited
condensed
consolidated
balance sheets
 
Net amounts of
assets
presented in
the unaudited condensed
consolidated
balance sheets
 
Gross amounts not offset in the
unaudited condensed consolidated
balance sheets
 
 
(dollar amounts in millions)
 
Gross amounts
of recognized
assets
 
 
 
Financial
instruments
 
Cash collateral
received
 
Net amount
June 30, 2019
Derivatives
$
831

 
$
(398
)
 
$
433

 
$
(12
)
 
$
(65
)
 
$
356

December 31, 2018
Derivatives
500

 
(291
)
 
209

 
(4
)
 
(53
)
 
152


Offsetting of Financial Liabilities and Derivative Liabilities
 
 
 
 
Gross amounts
offset in the unaudited
condensed
consolidated
balance sheets
 
Net amounts of
liabilities
presented in
the unaudited condensed
consolidated
balance sheets
 
Gross amounts not offset in the
unaudited condensed consolidated
balance sheets
 
 
(dollar amounts in millions)
 
Gross amounts
of recognized
liabilities
 
 
 
Financial
instruments
 
Cash collateral
delivered
 
Net amount
June 30, 2019
Derivatives
$
489

 
$
(372
)
 
$
117

 
$
(3
)
 
$
(5
)
 
$
109

December 31, 2018
Derivatives
404

 
(217
)
 
187

 

 
(12
)
 
175