Huntington National Bank 2003 Annual Report Download - page 136

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rates applied to a notional amount. The changes in fair value of the hedged item and the hedging instrument are reflected in current
earnings. An insignificant loss was recognized in 2002 and no gain or loss in 2001 in connection with the ineffective portion of
Huntington’s fair value hedging instruments. Furthermore, there were no gains or losses on derivatives designated as fair value hedges
that were excluded from the assessment of effectiveness during 2002 and 2001.
For cash flow hedges, interest rate swap contracts were entered into that pay fixed-rate interest in exchange for the receipt of variable-
rate interest without the exchange of the contract’s underlying notional amount, which effectively converts a portion of its floating-rate
debt to fixed-rate. This reduces the potentially adverse impact of increases in interest rates on future interest expense. In like fashion,
certain LIBOR-based commercial and industrial loans were effectively converted to fixed-rate by entering into contracts that swap
variable-rate interest for fixed-rate interest over the life of the contracts.
Interest rate swaps are used to manage the interest rate risk associated with its retained interest in a securitization trust. This retained
interest provides the right to receive any future cash flows arising after the investors in the securitization trust have received their
contractual return. As the trust holds fixed-rate automobile loans and is funded with floating rate notes, the future cash flows
associated with the retained interest will vary with interest rates. The interest rate swaps used convert the variable portion of these
future cash flows to a fixed-rate cash flow.
To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value
will not be included in current earnings but are reported as a component of accumulated other comprehensive income in shareholders’
equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the
hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in earnings.
During 2002, a net loss was recognized in connection with the ineffective portion of its cash flow hedging instruments and a net gain
was recognized in 2001. The amounts were classified in other non-interest income and were insignificant in both years. No amounts
were excluded from the assessment of effectiveness during 2002 and 2001 for derivatives designated as cash flow hedges.
Derivatives used to manage Huntington’s interest rate risk at December 31, 2003, are shown in the table below:
Average Maturity Weighted-Average Rate
(in thousands of dollars) Notional Value (years) Fair Value Receive Pay
Asset conversion swaps
Receive fixed—generic $ 630,000 3.7 $ 21,978 4.23% 1.22%
Pay fixed—generic 250,000 0.1 (906) 1.15 3.38
Total Asset Conversion Swaps 880,000 2.7 21,072 3.36 1.83
Liability conversion swaps
Receive fixed—generic 850,000 7.5 15,445 4.03 1.53
Receive fixed—callable 754,000 9.5 (13,365) 4.76 1.08
Pay fixed—generic 3,472,188 3.1 (14,530) 1.16 2.67
Pay fixed—forwards 350,000 N/A (19,920) N/A N/A
Total Liability Conversion Swaps 5,426,188 4.8 (32,370) 2.18 2.24
Total Swap Portfolio $6,306,188 4.5 $(11,298) 2.35% 2.18%
At December 31, 2002, the fair value of the swap portfolio used for asset and liability management was $13.1 million. These values
must be viewed in the context of the overall financial structure of Huntington, including the aggregate net position of all on- and off-
balance sheet financial instruments.
As is the case with cash securities, the market value of interest rate swaps is largely a function of the financial market’s expectations
regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of
the swaps on net interest income. This will depend, in large part, on the shape of the yield curve as well as interest rate levels.
Management made no assumptions regarding future changes in interest rates with respect to the variable-rate information presented in
the table above.
134 HUNTINGTON BANCSHARES INCORPORATED