Huntington National Bank 2012 Annual Report Download - page 123

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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.
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 contracts. 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.
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. On the date a derivative
contract is entered into, we designate it as either:
• a qualifying hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value
hedge);
• a qualifying hedge of the variability of cash flows to be received or paid related to a recognized asset liability or forecasted
transaction (cash flow hedge); or
• a trading instrument or a non-qualifying (economic) hedge.
Changes in the fair value of a derivative that has been designated and qualifies as a fair value hedge, along with the changes in the
fair value of the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the
fair value of a derivative that has been designated and qualifies as a cash flow hedge, to the extent effective as a hedge, are recorded in
accumulated other comprehensive income, net of income taxes, and reclassified into earnings in the period during which the hedged
item affects earnings. Ineffectiveness in the hedging relationship is reflected in current period earnings. Changes in the fair value of
derivatives held for trading purposes or which do not qualify for hedge accounting are reported in current period earnings.
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.
Hedge accounting is discontinued prospectively when:
• the derivative is no longer effective or expected to be effective in offsetting changes in the fair value or cash flows of a
hedged item (including firm commitments or forecasted transactions);
• the derivative expires or is sold, terminated, or exercised;
• it is unlikely that a forecasted transaction will occur;
• the hedged firm commitment no longer meets the definition of a firm commitment; or
• the designation of the derivative as a hedging instrument is removed.
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value
or cash flow hedge, the derivative will continue to be carried on the balance sheet at fair value.