Huntington National Bank 2010 Annual Report Download - page 205

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. The credit risk to these customers is evaluated
and included in the calculation of fair value.
The net fair values of these derivative financial instruments, for which the gross amounts are included in
accrued income and other assets or accrued expenses and other liabilities at December 31, 2010 and 2009,
were $46.3 million and $45.1 million, respectively. The total notional values of derivative financial instruments
used by Huntington on behalf of customers, including offsetting derivatives, were $9.8 billion and $9.6 billion
at December 31, 2010 and 2009, respectively. Huntington’s credit risks from interest rate swaps used for
trading purposes were $263.0 million and $255.7 million at the same dates, respectively.
Derivatives used in mortgage banking activities
Huntington also uses certain derivative financial instruments to offset changes in value of its residential
MSRs. These derivatives consist primarily of forward interest rate agreements and forward mortgage securities.
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. The following table summarizes
the derivative assets and liabilities used in mortgage banking activities:
(Dollar amounts in thousands) 2010 2009
At December 31,
Derivative assets:
Interest rate lock agreements .................................... $ 2,817 $ 995
Forward trades and options ..................................... 20,669 7,711
Total derivative assets .......................................... 23,486 8,706
Derivative liabilities:
Interest rate lock agreements .................................... (1,445) (1,338)
Forward trades and options ..................................... (883) (119)
Total derivative liabilities ....................................... (2,328) (1,457)
Net derivative asset (liability) .................................... $21,158 $ 7,249
The total notional value of these derivative financial instruments at December 31, 2010 and 2009, was
$2.6 billion and $3.7 billion, respectively. The total notional amount at December 31, 2010 corresponds to
trading assets with a fair value of $2.7 million and trading liabilities with a fair value of $16.0 million. Total
MSR hedging gains and (losses) for the years ended December 31, 2010, 2009, and 2008, were $55.0 million,
($37.8) million, and $22.4 million, respectively. Included in total MSR hedging gains and losses for the years
ended December 31, 2010, 2009, and 2008 were gains and (losses) related to derivatives instruments of
$64.6 million, ($41.2) million, and ($19.0) million, respectively. These amounts are included in mortgage
banking income in the Consolidated Statements of Income.
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