Huntington National Bank 2012 Annual Report Download - page 188

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For cash flow hedges, interest rate swap contracts were entered into that pay fixed-rate interest in exchange for the receipt of
variable-rate interest without the exchange of the contract’s underlying notional amount, which effectively converts a portion of its
floating-rate debt to a fixed-rate debt. This reduces the potentially adverse impact of increases in interest rates on future interest
expense. Other LIBOR-based commercial and industrial loans were effectively converted to fixed-rate by entering into contracts that
swap certain variable-rate interest payments for fixed-rate interest payments at designated times.
To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair
value will not be included in current earnings but are reported as a component of OCI in the Consolidated Statements of Shareholders’
Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the
hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in
noninterest income.
The following table presents the gains and (losses) recognized in OCI and the location in the Consolidated Statements of Income
of gains and (losses) reclassified from OCI into earnings for derivatives designated as effective cash flow hedges:
Derivatives in cash
flow hedging
relationships
Amount of gain or (loss)
recognized in OCI on
derivatives (effective portion)
Location of gain or (loss)
reclassified from accumulated
OCI into earnings (effective
portion)
Amount of gain or (loss)
reclassified from accumulated
OCI into earnings (effective
portion)
(dollar amounts in thousands) 2012 2011 2010 2012 2011 2010
Interest rate contracts
Loans $ (2,866) $ 2,469 $ 51,943
Interest and fee income - loans and
leases $14,849 $ 3,080 $ (116,881)
Investment securities (703) 703 ---
Interest and fee income -
investment securities --- --- ---
FHLB Advances --- --- --- Interest expense - FHLB Advances --- --- 2,580
Subordinated notes --- --- ---
Interest expense - subordinated
notes and other long-term debt 143 27 (1,391)
Total $(3,569) $ 3,172 $ 51,943 $ 14,992 $ 3,107 $ (115,692)
Reclassified gains and losses on swaps related to loans and investment securities and swaps related to subordinated debt are
recorded within interest income and interest expense, respectively. During the next twelve months, Huntington expects to reclassify to
earnings $39.6 million after-tax, of unrealized gains on cash flow hedging derivatives currently in OCI.
The following table presents the gains and (losses) recognized in noninterest income for the ineffective portion of interest rate
contracts for derivatives designated as cash flow hedges for the years ending December 31, 2012, 2011, and 2010:
December 31,
(dollar amounts in thousands) 2012 2011 2010
Derivatives in cash flow hedging relationships
Interest rate contracts
Loans $ (179) $ 98 $ 947
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.