Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS

v3.20.2
DERIVATIVE FINANCIAL INSTRUMENTS
9 Months Ended
Sep. 30, 2020
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 the income statement line item where the gains and losses on the hedged item are recognized. Gains and losses on derivatives that are not designated in an effective hedge relationship under GAAP immediately impact earnings within the period they occur.
The following table presents the fair values and notional values of all derivative instruments included in the Unaudited Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019. Amounts in the table below are presented gross without the impact of any net collateral arrangements.
September 30, 2020 December 31, 2019
(dollar amounts in millions) Notional Value Asset Liability Notional Value Asset Liability
Derivatives designated as Hedging Instruments
Interest rate contracts $ 27,671  $ 858  $ 59  $ 25,927  $ 256  $ 36 
Derivatives not designated as Hedging Instruments
Interest rate contracts 33,837  1,109  919  27,614  420  314 
Foreign exchange contracts 2,691  23  24  2,173  19  18 
Commodities contracts 1,899  153  149  3,020  155  152 
Equity contracts 477  —  21  427 
Total Contracts $ 66,575  $ 2,143  $ 1,172  $ 59,161  $ 856  $ 521 
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 nine-month periods ended September 30, 2020 and 2019, respectively.
Location of Gain or (Loss) Recognized in Income
on Derivative
Amount of Gain or (Loss) Recognized in Income on Derivative
Three Months Ended
September 30,
Nine Months Ended
September 30,
(dollar amounts in millions) 2020 2019 2020 2019
Interest rate contracts:
Customer Capital markets fees $ 10  $ 15  $ 39  $ 38 
Mortgage Banking Mortgage banking income 47  28  109  52 
Interest Rate Floors Interest and fee income on loans and leases —  (1) — 
Foreign exchange contracts Capital markets fees 18  22 
Commodities contracts Capital markets fees —  (3)
Equity contracts Other noninterest expense (1) (2) (3) (3)
Total $ 63  $ 48  $ 165  $ 110 
Derivatives used in asset and liability management activities
Huntington engages in balance sheet hedging activity, principally for asset and 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 and investment securities 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 September 30, 2020 and December 31, 2019, identified by the underlying interest rate-sensitive instruments.
September 30, 2020
(dollar amounts in millions) Fair Value Hedges Cash Flow Hedges Economic Hedges Total
Instruments associated with:
Loans $ —  $ 17,375  $ 1,000  $ 18,375 
Investment securities 3,309  —  —  3,309 
Long-term debt 6,987  —  —  6,987 
Total notional value at September 30, 2020 $ 10,296  $ 17,375  $ 1,000  $ 28,671 
December 31, 2019
(dollar amounts in millions) Fair Value Hedges Cash Flow Hedges Economic Hedges Total
Instruments associated with:
Loans $ —  $ 18,375  $ —  $ 18,375 
Investment securities —  12  —  12 
Long-term debt 7,540  —  —  7,540 
Total notional value at December 31, 2019 $ 7,540  $ 18,387  $ —  $ 25,927 
These derivative financial instruments were entered into for the purpose of managing the interest rate risk of assets and liabilities. 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 $82 million and $(16) million for the three-month periods ended September 30, 2020, and 2019, respectively. For the nine-month periods ended September 30, 2020, and 2019, the net amounts resulted in an increase (decrease) to net interest income of $151 million and $(44) million, 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.
Huntington has designated $3.1 billion of interest rate swaps as fair value hedges of fixed-rate investment securities using the last-of-layer method. This approach allows the Company to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and other factors affecting the timing and amount of cash flows. The fair value basis adjustment on our hedged mortgage-backed securities is included in available-for-sale securities on our Unaudited Condensed Consolidated Statements of Financial Condition.
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 nine-month periods ended September 30, 2020 and 2019.
Three Months Ended
September 30,
Nine Months Ended
September 30,
(dollar amounts in millions) 2020 2019 2020 2019
Interest rate contracts
Change in fair value of interest rate swaps hedging investment securities (1) $ —  $ —  $ (1) $ — 
Change in fair value of hedged investment securities (1) —  —  — 
Change in fair value of interest rate swaps hedging long-term debt (2) (36) 36  159  165 
Change in fair value of hedged long term debt (2) 35  (32) (160) (162)
(1)Recognized in Interest income—available-for-sale securities—taxable in the Unaudited Condensed Consolidated Statements of Income
(2)Recognized in Interest expense—long-term debt in the Unaudited Condensed Consolidated Statements of Income.
As of September 30, 2020, and December 31, 2019, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges.
Amortized Cost Cumulative Amount of Fair Value Hedging Adjustment To Hedged Items
(dollar amounts in millions) September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019
Investment securities (1) $ 7,389  $ —  $ $ — 
Long-term debt 7,210  7,578  274  114 
Total $ 14,599  $ 7,578  $ 275  $ 114 
(1)Amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. As of September 30, 2020, the amortized cost basis of the closed portfolios used in these hedging relationships was $7.2 billion, the cumulative basis adjustments associated with these hedging relationships was $1 million, and the amounts of the designated hedged items were $3.1 billion.
The cumulative amount of fair value hedging adjustments remaining for any hedged assets and liabilities for which hedge accounting has been discontinued was $(69) million and $(93) million at September 30, 2020 and December 31, 2019, respectively.
Cash Flow Hedges
At September 30, 2020, Huntington has $17.4 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.
Gains and losses on interest rate floors and swaps recognized in other comprehensive income were $(40) million and $28 million for the three-months periods ended September 30, 2020 and 2019, respectively. For the nine-month periods ended September 30, 2020 and 2019, gains and losses on interest rate floors and swaps recognized in other comprehensive income were $279 million and, $82 million respectively.
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. Forward commitments to sell economically hedge the possible loss on interest rate lock commitments due to interest rate change. The net asset (liability) position of these derivatives at September 30, 2020 and December 31, 2019 are $44 million and $6 million, respectively. At September 30, 2020 and December 31, 2019, Huntington had commitments to sell residential real estate loans of $2.7 billion and $1.4 billion, respectively. These contracts mature in less than one 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) September 30, 2020 December 31, 2019
Notional value $ 578  $ 778 
Trading assets 56  19 
Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2020
(dollar amounts in millions) 2020 2019 2020 2019
Trading gains $ (1) $ 20  $ 61  $ 44 
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 these 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 September 30, 2020 and December 31, 2019, were $75 million and $87 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $32 billion and $30 billion at September 30, 2020 and December 31, 2019, respectively. Huntington’s credit risk from customer derivatives was $988 million and $407 million at the same dates, respectively.
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 12 “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.
In addition to the customer derivative credit exposure, aggregate credit risk associated with broker-dealer and bank derivative transactions, net of collateral that has been pledged by the counterparty, was $94 million and $22 million at September 30, 2020 and December 31, 2019, respectively. The credit risk associated with derivatives is calculated after considering master netting agreements.
At September 30, 2020, Huntington pledged $285 million of investment securities and cash collateral to counterparties, while other counterparties pledged $345 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 September 30, 2020 and December 31, 2019.
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
September 30, 2020 $ 2,143  $ (1,055) $ 1,088  $ (130) $ (56) $ 902 
December 31, 2019 856  (404) 452  (65) (29) 358 
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
September 30, 2020 $ 1,172  $ (1,062) $ 110  $ (4) $ (63) $ 43 
December 31, 2019 521  (417) 104  —  (75) 29