Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS

v3.7.0.1
DERIVATIVE FINANCIAL INSTRUMENTS
 6 Months Ended
Jun. 30, 2017
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 accrued income and other assets or accrued expenses and other liabilities, respectively) and measured at fair value.
The following table presents the fair values of all derivative instruments included in the Unaudited Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016. Amounts in the table below are presented gross without the impact of any net collateral arrangements:
 
June 30, 2017
December 31, 2016
(dollar amounts in thousands)
Asset
 
Liability
 
Asset
 
Liability
Derivatives designated as Hedging Instruments
 
 
 
 
 
 
 
Interest rate contracts
$
40,416

 
$
90,326

 
$
46,440

 
$
99,996

Derivatives not designated as Hedging Instruments
 
 
 
 
 
 
 
Interest rate contracts
192,000

 
114,889

 
213,587

 
143,976

Foreign exchange contracts
27,655

 
27,883

 
23,265

 
19,576

Commodities contracts
53,295

 
49,520

 
108,026

 
104,328

Equity contracts
10,728

 
5,694

 
9,775

 
—

Total Contracts
$
324,094

 
$
288,312

 
$
401,093

 
$
367,876


Derivatives used in Asset and Liability Management Activities
Huntington engages in balance sheet hedging activity, principally for asset and liability management purposes, to convert fixed rate assets or liabilities into floating rate or vice versa. Balance sheet hedging activity is arranged to receive hedge accounting treatment and is classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert deposits and subordinated and other long-term debt from fixed-rate obligations to floating rate. Cash flow hedges are also used to convert floating rate loans made to customers into fixed rate loans.
The following table presents the gross notional values of derivatives used in Huntington’s asset and liability management activities at June 30, 2017, identified by the underlying interest rate-sensitive instruments:
(dollar amounts in thousands)
Fair Value Hedges
 
Cash Flow Hedges
 
Total
Instruments associated with:
 
 
 
 
 
Loans
$
—

 
$
1,925,000

 
$
1,925,000

Deposits
—

 
—

 
—

Subordinated notes
950,000

 
—

 
950,000

Long-term debt
6,725,000

 
—

 
6,725,000

Total notional value at June 30, 2017
$
7,675,000

 
$
1,925,000

 
$
9,600,000


The following table presents additional information about the interest rate swaps used in Huntington’s asset and liability management activities at June 30, 2017:
 
 
 
 
 
 
 
Weighted-Average
Rate
(dollar amounts in thousands)
Notional Value
 
Average Maturity (years)
 
Fair Value
 
Receive
 
Pay
Asset conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
$
1,925,000

 
0.3
 
$
(3,420
)
 
1.07
%
 
1.44
%
Liability conversion swaps
 
 
 
 
 
 
 
 
 
Receive fixed—generic
7,675,000

 
2.8
 
(46,490
)
 
1.54

 
1.19

Total swap portfolio at June 30, 2017
$
9,600,000

 
2.3
 
$
(49,910
)
 
1.44
%
 
1.24
%

These derivative financial instruments were entered into for the purpose of managing the interest rate risk of assets and liabilities. Consequently, 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 to net interest income of $6 million and $19 million for the three-month periods ended June 30, 2017, and 2016, respectively. For the six-month periods ended June 30, 2017, and 2016, the net amounts resulted in an increase to net interest income of $16 million and $40 million, respectively.
Fair Value Hedges
The changes in fair value of the fair value hedges are, to the extent that the hedging relationship is effective, 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, 2017 and 2016:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
Change in fair value of interest rate swaps hedging deposits (1)
$
—

 
$
—

 
$
(76
)
 
$
(82
)
Change in fair value of hedged deposits (1)
—

 
—

 
—

 
72

Change in fair value of interest rate swaps hedging subordinated notes (2)
2,277

 
4

 
(2,431
)
 
6,809

Change in fair value of hedged subordinated notes (2)
(2,235
)
 
(4
)
 
3,168

 
(6,809
)
Change in fair value of interest rate swaps hedging other long-term debt (2)
15,832

 
22,017

 
5,551

 
83,049

Change in fair value of hedged other long-term debt (2)
(16,913
)
 
(21,047
)
 
(8,378
)
 
(80,834
)
(1)
Effective portion of the hedging relationship is recognized in Interest expense—deposits in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
(2)
Effective portion of the hedging relationship is recognized in Interest expense—subordinated notes and other long-term debt in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
Cash Flow Hedges
To the extent these derivatives designated as cash flow hedges are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of OCI in the Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in noninterest income.
The following table presents the gains and (losses) recognized in OCI and the location in the Unaudited Condensed Consolidated Statements of Income of gains and (losses) reclassified from OCI into earnings for derivatives designated as effective cash flow hedges for the three-month and six-month periods ended June 30, 2017 and 2016:
 
 
 
 
 
 
 
 
 
 
Derivatives in cash flow hedging relationships
Amount of gain or
(loss) recognized in
OCI on derivatives
(effective portion)
(after-tax)
 
Location of gain or (loss) reclassified from
accumulated OCI into earnings (effective portion)
 
Amount of (gain) or loss
reclassified from
accumulated OCI
into earnings
(effective portion)
 
Three Months Ended June 30,
 
 
 
Three Months Ended June 30,
(dollar amounts in thousands)
2017
 
2016
 
 
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
 
 
Loans
$
793

 
$
1,293

 
Interest and fee income - loans and leases
 
$
427

 
$
(248
)
Investment Securities
—

 
—

 
Noninterest income - other income
 
—

 
—

Total
$
793

 
$
1,293

 
 
 
$
427

 
$
(248
)
Derivatives in cash flow hedging relationships
Amount of gain or
(loss) recognized in
OCI on derivatives
(effective portion)
(after-tax)
 
Location of gain or (loss) reclassified from
accumulated OCI into earnings (effective portion)
 
Amount of (gain) or loss
reclassified from
accumulated OCI
into earnings
(effective portion)
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
(dollar amounts in thousands)
2017
 
2016
 
 
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
 
 
Loans
$
(397
)
 
$
10,542

 
Interest and fee income - loans and leases
 
$
987

 
$
(893
)
Investment Securities
—

 
—

 
Noninterest income - other income
 
—

 
1


$
(397
)
 
$
10,542

 
 
 
$
987

 
$
(892
)

Gains and losses on swaps related to loans and investment securities and swaps related to subordinated debt are recorded within interest income and interest expense, respectively. During the next twelve months, Huntington expects to reclassify to earnings approximately $(2) million after-tax of unrealized gains (losses) on cash flow hedging derivatives currently in OCI.
The following table presents the gains and (losses) recognized in noninterest income for the ineffective portion of interest rate contracts for derivatives designated as cash flow hedges for the three and six-month periods ended June 30, 2017 and 2016:
Derivatives in cash flow hedging relationships
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollar amounts in thousands)
2017
 
2016
 
2017
 
2016
Interest rate contracts
 
 
 
 
 
 
 
Loans
$
(31
)
 
$
421

 
$
(134
)
 
$
377


Derivatives used in mortgage banking activities
Mortgage loan origination hedging activity
Huntington’s mortgage origination hedging activity is related to the hedging of the 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 interest rate lock commitments are derivative positions offset by forward commitments to sell loans.
Huntington uses two types of mortgage-backed securities in its forward commitments to sell loans. The first type of forward commitment is a “To Be Announced” (or TBA), the second is a “Specified Pool” mortgage-backed security. Huntington uses these derivatives to hedge the value of mortgage-backed securities until they are sold.
The following table summarizes the derivative assets and liabilities used in mortgage banking activities:
Derivatives used in mortgage banking activities
June 30, 2017
December 31, 2016
(dollar amounts in thousands)
Asset
 
Liability
 
Asset
 
Liability
Interest rate lock agreements
$
9,227

 
$
355

 
$
5,747

 
$
1,598

Forward trades and options
1,642

 
2,178

 
13,319

 
1,173

Total derivatives used in mortgage banking activities
$
10,869

 
$
2,533

 
$
19,066

 
$
2,771


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 total notional value of these derivative financial instruments at June 30, 2017 and December 31, 2016, was $228 million and $300 million, respectively. The total notional amount at June 30, 2017, corresponds to trading assets with a fair value of $1 million and trading liabilities with a fair value of $2 million. Net trading gains and (losses) related to MSR hedging for the three-month periods ended June 30, 2017 and 2016, were $2 million and $6 million and $1 million and $18 million for the six-month periods ended June 30, 2017 and 2016, respectively. These amounts are included in mortgage banking income in the Unaudited Condensed Consolidated Statements 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 consisted of commodity, interest rate, and foreign exchange contracts. Huntington may enter 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 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 accrued income and other assets or accrued expenses and other liabilities at both June 30, 2017 and December 31, 2016, were $80 million and $80 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $20.6 billion and $20.6 billion at both June 30, 2017 and December 31, 2016, respectively. Huntington’s credit risk from interest rate swaps used for trading purposes was $156 million and $196 million at the same dates, respectively.
Share Swap Economic Hedge
Huntington acquires and holds shares of Huntington common stock in a Rabbi Trust for the Executive Deferred Compensation Plan. Huntington common stock held in the Rabbi Trust is recorded at cost and the corresponding deferred compensation liability is recorded at fair value using Huntington's share price as a significant input.
During the second quarter of 2016, Huntington entered into an economic hedge with a $20 million notional amount to hedge deferred compensation expense related to the Executive Deferred Compensation Plan. During the second quarter of 2017, Huntington entered into another economic hedge with a notional value of $8 million for a total notional amount of $28 million to hedge deferred compensation expense related to the Executive Deferred Compensation Plan. The economic hedge is recorded at fair value within other assets or liabilities. Changes in the fair value are recorded directly through other noninterest expense in the Unaudited Condensed Consolidated Statements of Income. At June 30, 2017, the fair value of the share swap was $11 million.
Visa Related Swap
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 the Visa® litigation. In connection with the FirstMerit acquisition, Huntington acquired an additional Visa® related swap agreement. At June 30, 2017, the combined fair value of the swap liabilities of $6 million is an estimate of the exposure liability based upon Huntington’s assessment of the potential Visa® litigation losses and timing of 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.
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 bilateral 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 generally enters into master netting agreements with customer counterparties, however collateral is generally not exchanged.
At June 30, 2017 and December 31, 2016, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $44 million and $26 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, 2017, Huntington pledged $120 million of investment securities and cash collateral to counterparties, while other counterparties pledged $53 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, 2017 and December 31, 2016:
Offsetting of Financial Liabilities and Derivative Assets
 
 
 
 
Gross amounts
offset in the
condensed
consolidated
balance sheets
 
Net amounts of
assets
presented in
the condensed
consolidated
balance sheets
 
Gross amounts not offset in
the condensed consolidated
balance sheets
 
 
(dollar amounts in thousands)
 
Gross amounts
of recognized
assets
 
 
 
Financial
instruments
 
Cash collateral
received
 
Net amount
June 30, 2017
Derivatives
$
334,963

 
$
(144,951
)
 
$
190,012

 
$
(5,009
)
 
$
(18,448
)
 
$
166,555

December 31, 2016
Derivatives
420,159

 
(181,940
)
 
238,219

 
(34,328
)
 
(5,428
)
 
198,463


Offsetting of Financial Liabilities and Derivative Liabilities
 
 
 
 
Gross amounts
offset in the
condensed
consolidated
balance sheets
 
Net amounts of
liabilities
presented in
the condensed
consolidated
balance sheets
 
Gross amounts not offset in
the condensed consolidated
balance sheets
 
 
(dollar amounts in thousands)
 
Gross amounts
of recognized
liabilities
 
 
 
Financial
instruments
 
Cash collateral
delivered
 
Net amount
June 30, 2017
Derivatives
$
290,845

 
$
(212,487
)
 
$
78,358

 
$
—

 
$
(24,348
)
 
$
54,010

December 31, 2016
Derivatives
370,647

 
(272,361
)
 
98,286

 
(7,550
)
 
(23,943
)
 
66,793