Huntington National Bank 2006 Annual Report Download - page 121

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
During the first quarter of 2006, Huntington terminated asset and liability conversion interest rate swaps with a total notional
value of $2.5 billion. The terminations generated gross gains of $34.9 million and gross losses of $34.5 million, resulting in a net
deferred gain of $0.4 million. The net gain (loss) is being amortized into interest income over the remainder of the original terms
of the terminated swaps. In 2006, a total of ($1.9 million) was recognized in interest income while ($0.8 million) was recognized
in other non-interest income. The additional amounts will be recognized as follows: 2007: $2.9 million, 2008: ($1.4 million),
2009: $0.1 million, and 2010: $1.5 million.
A total of $0.9 million of the unrealized net gain on cash flow hedges is expected to be recognized in 2007.
D
ERIVATIVES
U
SED IN
M
ORTGAGE
B
ANKING
A
CTIVITIES
The following is a summary of the derivative assets and liabilities that Huntington used in its mortgage banking activities:
At December 31,
(in thousands of dollars) 2006 2005
Derivative assets:
Interest rate lock agreements $ 236 $ 669
Forward trades and options 1,176 172
Total derivative assets 1,412 841
Derivative liabilities:
Interest rate lock agreements (838) (328)
Forward trades and options (699) (1,947)
Total derivative liabilities (1,537) (2,275)
Net derivative liability $ (125) $(1,434)
D
ERIVATIVES
U
SED IN
T
RADING
A
CTIVITIES
Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for
their risk management purposes. Derivative financial instruments used in trading activities consisted predominantly of interest
rate swaps, but also included interest rate caps, floors, and futures, as well as foreign exchange options. Interest rate options grant
the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract
expires. Interest rate futures are commitments to either purchase or sell a financial 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. The interest rate risk of these customer derivatives is mitigated
by entering into similar derivatives having offsetting terms with other counterparties.
Supplying these derivatives to customers results in non-interest 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
$10.8 million in 2006, $8.3 million in 2005, and $8.8 million in 2004. The total notional value of derivative financial instruments
used by Huntington on behalf of customers, including offsetting derivatives was $4.6 billion at the end of 2006 and $4.2 billion at
the end of the prior year. Huntington’s credit risk from interest rate swaps used for trading purposes was $40.0 million and
$44.3 million at the same dates.
Huntington also uses certain derivative financial instruments to offset changes in value of its residential mortgage servicing assets.
These derivatives consist primarily of forward interest rate agreements, and forward mortgage securities. The derivative
instruments used are not designated as hedges under Statement No. 133. Accordingly, such derivatives are recorded at fair value
with changes in fair value reflected in mortgage banking income. The total notional value of these derivative financial instruments
at December 31, 2006, was $2.6 billion. The total notional amount corresponds to trading assets with a fair value of $40.0 million
and trading liabilities with a fair value of $17.5 million. Total gains and losses for the three years ended December 31, 2006, 2005
and 2004 were $1.6 million, ($2.5 million), and ($0.2 million), respectively and were also included in other non-interest income.
In connection with securitization activities, Huntington purchased interest rate caps with a notional value totaling $1.6 billion.
These purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also
sold totaling $1.6 billion outside the securitization structure. Both the purchased and sold caps are marked to market through
income.
119