Huntington National Bank 2004 Annual Report Download - page 128

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
D
ERIVATIVES
U
SED IN
M
ORTGAGE
B
ANKING
A
CTIVITIES
Huntington also uses derivatives, principally loan sale commitments, in the hedging of its mortgage loan commitments and its
mortgage loans held for sale. For derivatives that are used in hedging mortgage loans held for sale, ineffective hedge gains and losses
are reflected in mortgage banking revenue in the income statement. Mortgage loan commitments are derivatives that are not included
in FAS 133 relationships. These derivative financial instruments are carried at fair value on the consolidated balance sheet with
changes in fair value reflected in mortgage banking revenue. The following is a summary of the derivative assets and liabilities that
Huntington used in its mortgage banking activities:
At December 31,
(in thousands of dollars) 2004 2003
Derivative assets:
Interest rate lock agreements $ 479 $ 658
Forward trades 853 24
Total derivative assets 1,332 682
Derivative liabilities:
Interest rate lock agreements (993) (270)
Forward trades (334) (2,021)
Total derivative liabilities (1,327) (2,291)
Net derivative liability $5 $(1,609)
D
ERIVATIVES
U
SED IN
T
RADING
A
CTIVITIES
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 held in Huntington’s trading portfolio during 2004 and 2003 consisted
predominantly of interest rate swaps, but also included interest rate caps, floors, and futures, as well as foreign exchange options.
Interest rate options grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price
before the contract expires. Interest rate futures are commitments to either purchase or sell a financial instrument at a future date for
a specified price or yield and may be settled in cash or through delivery of the underlying financial instrument. Interest rate caps and
floors are option-based contracts that entitle the buyer to receive cash payments based on the difference between a designated
reference rate and a strike price, applied to a notional amount. Written options, primarily caps, expose Huntington to market risk but
not credit risk. Purchased options contain both credit and market risk. They are used to manage fluctuating interest rates as exposure
to loss from interest rate contracts changes.
Supplying these derivatives to customers results in fee income. These instruments are carried at fair value in other assets with gains
and losses reflected in other non-interest income. Total trading revenue for customer accommodation was $8.8 million in 2004,
$10.3 million in 2003, and $6.4 million in 2002. The total notional value of derivative financial instruments used by Huntington on
behalf of customers (for which the related interest rate risk is offset by third parties) was $4.5 billion at the end of 2004 and
$5.0 billion at the end of the prior year. Huntington’s credit risk from interest rate swaps used for trading purposes was $53.8 million
and $82.2 million at the same dates.
In connection with its securitization activities, interest rate caps were purchased with a notional value totaling $1 billion. These
purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also sold totaling
$1 billion outside the securitization structure. Both the purchased and sold caps are marked to market through income in accordance
with accounting principles generally accepted in the United States.
126