Huntington National Bank 2007 Annual Report Download - page 110

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DERIVATIVES USED IN MORTGAGE BANKING ACTIVITIES
The following is a summary of the derivative assets and liabilities that Huntington used in its mortgage banking activities:
(in thousands) 2007 2006
At December 31,
Derivative assets:
Interest rate lock agreements $ 753 $ 236
Forward trades and options 260 1,176
Total derivative assets 1,013 1,412
Derivative liabilities:
Interest rate lock agreements (800) (838)
Forward trades and options (4,262) (699)
Total derivative liabilities (5,062) (1,537)
Net derivative liability $(4,049) $ (125)
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, 2007, was $1.0 billion. The total notional amount corresponds to trading assets with a fair value of $7.0 million and
trading liabilities with a fair value of $4.3 million. Total gains and losses for the three years ended December 31, 2007, 2006 and
2005 were ($1.7 million), $1.6 million, and ($2.5 million), respectively and were also included in mortgage banking income.
DERIVATIVES USED IN TRADING ACTIVITIES
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 $17.8 million
in 2007, $10.8 million in 2006, and $8.3 million in 2005. The total notional value of derivative financial instruments used by
Huntington on behalf of customers, including offsetting derivatives was $6.4 billion at the end of 2007 and $4.6 billion at the end
of the prior year. Huntington’s credit risk from interest rate swaps used for trading purposes was $116.0 million and $40.0 million
at the same dates.
In connection with securitization activities, Huntington purchased interest rate caps with a notional value totaling $1.4 billion.
These purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also
sold totaling $1.4 billion outside the securitization structure. Both the purchased and sold caps are marked to market through
income.
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED