Huntington National Bank 2011 Annual Report Download - page 82

impacted, and the impact of changes in intermediate-term and long-term rates takes a longer amount of time to be
reflected in financial results. The impact to EVE at Risk was meaningful because the impact of lower long-term
rates is reflected in higher mortgage asset prepayments. Higher mortgage asset prepayments has the effect of
lowering EVE at Risk because the duration of assets declines while the duration of liabilities is not impacted.
The baseline scenario for ISE analysis, with which all other scenarios are compared, is based on market
interest rates implied by the prevailing yield curve as of the period-end. Alternative interest rate scenarios are
then compared with the baseline scenario. These alternative interest rate scenarios include parallel rate shifts on
both a gradual and an immediate basis, movements in interest rates that alter the shape of the yield curve (e.g.,
flatter or steeper yield curve), and no changes in current interest rates for the entire measurement period.
Scenarios are also developed to measure short-term repricing risks, such as the impact of LIBOR-based interest
rates rising or falling faster than the prime rate.
The simulations for evaluating short-term interest rate risk exposure are scenarios that model gradual +/-100
and +/-200 basis points parallel shifts in market interest rates over the next one-year period beyond the interest
rate change implied by the current yield curve. We assumed market interest rates would not fall below 0% over
the next one-year period for the scenarios that used the -100 and -200 basis points parallel shift in market interest
rates. The table below shows the results of the scenarios as of December 31, 2011, and December 31, 2010. All
of the positions were within the board of directors’ policy limits as of December 31, 2011, except for the gradual
-100 basis point scenario. ISE at risk for the -100 basis point scenario was -2.3% compared to the policy limit of
-2.0%. The board of directors approved an exception to the policy limit given that the likelihood of rates
declining 100, or even 200, basis points has a low probability of occurrence as a mitigating factor for being
outside the policy limit.
Table 22 — Net Interest Income at Risk
Net Interest Income at Risk (%)
Basis point change scenario ................................ –200 –100 +100 +200
Board policy limits ....................................... –4.0% –2.0% –2.0% –4.0%
December 31, 2011 ...................................... –3.6 –2.3 1.8 3.4
December 31, 2010 ....................................... –3.2 –1.8 0.3 —
The ISE at risk reported as of December 31, 2011 for the +100 and +200 basis points scenario shows a
significant change to a near-term asset-sensitive interest rate risk position compared with December 31, 2010.
The ALCO’s strategy is to be near-term asset-sensitive to a rising rate scenario. The primary factors contributing
to this change are the 2011 first quarter termination of $4.5 billion of interest rate swaps maturing through June
2012, offset slightly by $1.8 billion of interest rate swaps executed in the 2011 second and third quarters, the
impact of lower interest rates on mortgage asset prepayments, and low-cost deposit growth.
The following table shows the income sensitivity of select portfolios to changes in market interest rates. A
portfolio with 100% sensitivity would indicate that interest income and expense will change with the same
magnitude and direction as interest rates. A portfolio with 0% sensitivity is insensitive to changes in interest
rates. For the +200 basis points scenario, total interest-sensitive income is 39.6% sensitive to changes in market
interest rates, while total interest-sensitive expense is 39.9% sensitive to changes in market interest rates. ISE at
risk for the +200 basis points scenario has a near-term asset-sensitive interest rate risk position because of the
larger base of total interest-sensitive income relative to total interest-sensitive expense.
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