Huntington National Bank 2005 Annual Report Download - page 132

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NOTES TOCONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
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 $8.3 million in
2005, $8.8 million in 2004, and $10.3 million in 2003. 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 $4.2 billion at the end
of 2005 and $4.5 billion at the end of the prior year. Huntington’s credit risk from interest rate swaps used for trading purposes
was $44.3 million and $53.8 million at the same dates.
In connection with its securitization activities, interest rate caps were purchased with a notional value totaling $0.9 billion. These
purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also sold
totaling $0.9 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.
22. COMMITMENTS AND CONTINGENT LIABILITIES
C
OMMITMENTS TO
E
XTEND
C
REDIT
In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the financial
statements. The contract amount of these financial agreements, representing the credit risk, at December 31 were:
At December 31,
(in millions of dollars) 2005 2004
Commitments to extend credit
Commercial $ 3,316 $3,453
Consumer 3,046 2,779
Commercial real estate 1,567 854
Standby letters of credit 1,079 945
Commercial letters of credit 47 72
Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington
to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality.
These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market
conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to
expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest
rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate
nature.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. Most of these arrangements mature within two years. At December 31, 2005, approximately
48% of standby letters of credit are collateralized and most are expected to expire without being drawn upon. The carrying
amount of deferred revenue associated with these guarantees was $4.0 million and $4.1 million at December 31, 2005 and 2004,
respectively.
Commercial letters of credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and have
maturities of no longer than 90 days. The merchandise or cargo being traded normally secures these instruments.
C
OMMITMENTS TO
S
ELL
L
OANS
Huntington enters into forward contracts relating to its mortgage banking business. At December 31, 2005 and 2004, Huntington
had commitments to sell residential real estate loans of $348.3 million and $311.3 million, respectively. These contracts mature in
less than one year.
During the 2005 second quarter, Huntington entered into a two-year agreement to sell a minimum of 50% of monthly
automobile loan production at the cost of such loans, subject to certain limitations, provided the production meets certain
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