Huntington National Bank 2003 Annual Report Download - page 137

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The next table represents the gross notional value of derivatives used to manage interest rate risk at December 31, 2003, identified by
the underlying interest rate-sensitive instruments. The notional amounts shown in the preceding and following tables should be viewed
in the context of overall interest rate risk management activities to assess the impact on the net interest margin.
(in thousands of dollars)
Fair Value
Hedges
Cash Flow
Hedges Total
Instruments associated with:
Loans $ 922,188 $ 575,000 $1,497,188
Deposits 754,000 170,000 924,000
Federal Home Loan Bank advances — 985,000 985,000
Subordinated notes — 650,000 650,000
Other long-term debt 500,000 1,750,000 2,250,000
Total Notional Value at December 31, 2003 $2,176,188 $4,130,000 $6,306,188
The estimated amount of the existing unrealized gains and losses to be reclassified to pre-tax earnings from accumulated other
comprehensive income within the next twelve months is expected to be a net gain of $23.5 million.
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,
2003 and 2002, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was
$17.2 million and $15.9 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 its 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 interest income
exceeding interest expense by $51.6 million and $48.4 million in 2003 and 2002, respectively. Interest expense exceeded interest income
by $6.2 million in 2001.
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 are derivatives that are not included in
FAS 133 relationships. These derivative financial instruments 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:
(in thousands of dollars) 2003 2002
Derivative assets:
Interest rate lock agreements $ 658 $ 5,314
Forward trades 24 —
Total Derivative Assets 682 5,314
Derivative liabilities:
Interest rate lock agreements (270) (58)
Forward trades (2,021) (13,817)
Total Derivative Liabilities (2,291) (13,875)
Net Derivative Liability $(1,609) $ (8,561)
HUNTINGTON BANCSHARES INCORPORATED 135