Huntington National Bank 2011 Annual Report Download - page 143

Derivative Financial Instruments — A variety of derivative financial instruments, principally interest rate
swaps, caps, floors, and collars, are used in asset and liability management activities to protect against the risk of
adverse price or interest rate movements. These instruments provide flexibility in adjusting Huntington’s
sensitivity to changes in interest rates without exposure to loss of principal and higher funding requirements.
Derivative financial instruments are recorded in the Consolidated Balance Sheets as either an asset or a
liability (in accrued income and other assets or accrued expenses and other liabilities, respectively) and measured
at fair value, with changes to fair value recorded through earnings unless specific criteria are met to account for
the derivative using hedge accounting.
Huntington also uses derivatives, principally loan sale commitments, in hedging its mortgage loan interest
rate lock commitments and its mortgage loans held for sale. Mortgage loan sale commitments and the related
interest rate lock commitments are carried at fair value on the Consolidated Balance Sheets with changes in fair
value reflected in mortgage banking revenue. Huntington also uses certain derivative financial instruments to
offset changes in value of its MSRs. These derivatives consist primarily of forward interest rate agreements, and
forward mortgage securities. The derivative instruments used are not designated as hedges. Accordingly, such
derivatives are recorded at fair value with changes in fair value reflected in mortgage banking income.
For those derivatives to which hedge accounting is applied, Huntington formally documents the hedging
relationship and the risk management objective and strategy for undertaking the hedge. This documentation
identifies the hedging instrument, the hedged item or transaction, the nature of the risk being hedged, and, unless
the hedge meets all of the criteria to assume there is no ineffectiveness, the method that will be used to assess the
effectiveness of the hedging instrument and how ineffectiveness will be measured. The methods utilized to assess
retrospective hedge effectiveness, as well as the frequency of testing, vary based on the type of item being
hedged and the designated hedge period. For specifically designated fair value hedges of certain fixed-rate debt,
Huntington utilizes the short-cut method when certain criteria are met. For other fair value hedges of fixed-rate
debt, including certificates of deposit, Huntington utilizes the regression method to evaluate hedge effectiveness
on a quarterly basis. For fair value hedges of portfolio loans, the regression method is used to evaluate
effectiveness on a daily basis. For cash flow hedges, the regression method is applied on a quarterly basis. For
hedging relationships that are designated as fair value hedges, changes in the fair value of the derivative are, to
the extent that the hedging relationship is effective, recorded through earnings and offset against changes in the
fair value of the hedged item. For cash flow hedges, changes in the fair value of the derivative are, to the extent
that the hedging relationship is effective, recorded in OCI and subsequently recognized in earnings at the same
time that the hedged item is recognized in earnings. Any portion of a hedge that is ineffective is recognized
immediately in other noninterest income. When a cash flow hedge is discontinued because the originally
forecasted transaction is not probable of occurring, any net gain or loss in OCI is recognized immediately in
other noninterest income.
Like other financial instruments, derivatives contain an element of credit risk, which is the possibility that
Huntington will incur a loss because a counterparty fails to meet its contractual obligations. Notional values of
interest rate swaps and other off-balance sheet financial instruments significantly exceed the credit risk
associated with these instruments and represent contractual balances on which calculations of amounts to be
exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of positions that have
become favorable to Huntington, including any accrued interest receivable due from counterparties. Potential
credit losses are mitigated through careful evaluation of counterparty credit standing, selection of counterparties
from a limited group of high quality institutions, collateral agreements, and other contract provisions. Huntington
considers the value of collateral held and collateral provided in determining the net carrying value of derivatives.
Advertising Costs — Advertising costs are expensed as incurred and recorded as a marketing expense, a
component of noninterest expense.
Income Taxes — Income taxes are accounted for under the asset and liability method. Accordingly, deferred
tax assets and liabilities are recognized for the future book and tax consequences attributable to temporary
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