Huntington National Bank 2004 Annual Report Download - page 127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
Derivatives used to manage Huntington’s interest rate risk at December 31, 2004, are shown in the table below:
Average Weighted-Average Rate
Notional Maturity Fair
(in thousands of dollars) Value (years) Value Receive Pay
Asset conversion swaps
Receive fixed — generic $ 350,000 3.3 $ (1,692) 3.41% 2.25%
Pay fixed — forwards 50,000 N/A (316) N/A N/A
Total asset conversion swaps $ 400,000 3.3 (2,008) 3.41% 2.25%
Liability conversion swaps
Receive fixed — generic 1,450,000 6.8 19,318 4.23% 2.54%
Receive fixed — callable 637,000 8.6 (5,461) 4.50 2.13
Pay fixed — generic 2,266,000 2.0 7,863 2.23 2.96
Pay fixed — forwards 410,000 N/A (1,829) N/A N/A
Total liability conversion swaps 4,763,000 4.6 19,891 3.23% 2.70%
Total Swap Portfolio $ 5,163,000 4.5 $ 17,883 3.24% 2.67%
N/A, not applicable
At December 31, 2003, the fair value of the swap portfolio used for asset and liability management was a liability of $11.3 million.
These values must be viewed in the context of the overall financial structure of Huntington, including the aggregate net position of all
on- and off-balance sheet financial instruments.
As is the case with cash securities, the fair value of interest rate swaps is largely a function of the financial market’s expectations
regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact
of the swaps on net interest income. This will depend, in large part, on the shape of the yield curve as well as interest rate levels.
Management made no assumptions regarding future changes in interest rates with respect to the variable-rate information presented
in the table above.
The next table represents the gross notional value of derivatives used to manage interest rate risk at December 31, 2004, identified by
the underlying interest rate-sensitive instruments. The notional amounts shown in the tables above and below should be viewed in the
context of overall interest rate risk management activities to assess the impact on the net interest margin.
Fair Value Cash Flow
(in thousands of dollars) Hedges Hedges Total
Instruments associated with:
Investment securities $ 50,000 $ 25,000 $ 75,000
Loans — 325,000 325,000
Deposits 647,000 70,000 717,000
Federal Home Loan Bank advances — 901,000 901,000
Subordinated notes 500,000 300,000 800,000
Other long term debt 950,000 1,395,000 2,345,000
Total Notional Value at December 31, 2004 $ 2,147,000 $ 3,016,000 $ 5,163,000
The estimated amount of the existing unrealized gains and losses to be reclassified to pre-tax earnings from accumulated other
comprehensive income within the next 12 months is expected to be a net loss of $2.9 million.
Collateral agreements are regularly entered into as part of the underlying derivative agreements with its counterparties to mitigate the
credit risk associated with both the derivatives used for asset and liability management and used in trading activities. At December 31,
2004 and 2003, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was
$12.3 million and $17.2 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master
netting agreements.
These derivative financial instruments were entered into for the purpose of altering the interest rate risk embedded in its 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 amount resulted in an increase to net
interest income of $24.0 million, $51.6 million, and $48.4 million in 2004, 2003, and 2002, respectively.
125