Huntington National Bank 2005 Annual Report Download - page 131

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
The following table represents the gross notional value of derivatives used to manage interest rate risk at December 31, 2005,
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 $ — $ 25,000 $ 25,000
Loans — 325,000 325,000
Deposits 790,250 — 790,250
Federal Home Loan Bank advances — 726,000 726,000
Subordinated notes 500,000 — 500,000
Other long-term debt 950,000 775,000 1,725,000
Total notional value at December 31, 2005 $2,240,250 $1,851,000 $4,091,250
A total of $8.4 million of the unrealized net gain on cash flow hedges is expected to be recognized in 2006.
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, 2005 and 2004, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the
counterparty, was $26.2 million and $12.3 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 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 $23.6 million, $24.0 million, and $51.6 million in 2005, 2004, and 2003, respectively.
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 and the related interest
rate lock commitments 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) 2005 2004
Derivative assets:
Interest rate lock agreements $ 669 $ 479
Forward trades 172 853
Total derivative assets 841 1,332
Derivative liabilities:
Interest rate lock agreements (328) (993)
Forward trades (1,947) (334)
Total derivative liabilities (2,275) (1,327)
Net derivative (liability) asset $ (1,434) $5
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 2005 and 2004
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
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