Huntington National Bank 2012 Annual Report Download - page 66

58
Interest Rate Risk
OVERVIEW
Huntington actively manages interest rate risk, as changes in market interest rates can have a significant impact on reported
earnings. The interest rate risk process is designed to compare income simulations in market scenarios designed to alter the direction,
magnitude, and speed of interest rate changes, as well as the slope of the yield curve. These scenarios are designed to illustrate the
embedded optionality in the balance sheet from, among other things, faster or slower mortgage prepayments and changes in deposit
mix.
INCOME SIMULATION AND ECONOMIC VALUE ANALYSIS
Interest rate risk measurement is calculated and reported to the ALCO and ROC monthly. The information reported includes the
identification of any policy limits exceeded, along with an assessment that describes the policy limit breach and outlines the action
plan and timeline for resolution, mitigation, or assumption of the risk.
Huntington uses two approaches to model interest rate risk: Interest Sensitive Earnings at Risk (ISE analysis) and Economic
Value of Equity (EVE analysis). Under ISE analysis, net interest income is modeled utilizing various assumptions for assets,
liabilities, and derivative positions under various interest rate scenarios. ISE analysis measures the sensitivity of interest sensitive
earnings over a one year time horizon. Market implied forward rates and various likely and extreme interest rate scenarios are used for
ISE analysis. These likely and extreme scenarios include rapid and gradual interest rate ramps, rate shocks and yield curve twists..
The ISE analysis used in the following table reflects the analysis used monthly by management. It models gradual -25, +100 and
+200 basis point parallel shifts in market interest rates over the next one-year period, beyond the interest rate change implied by the
forward yield curve. Due to the current low level of interest rates, the analysis reflects a declining interest rate scenario of 25 basis
points, the point at which many assets and liabilities reach zero percent.
Huntington is within Board policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis
point scenario. The table below shows the results of the scenario as of December 31, 2012:
Table 21 - Net Sensitive Earnings at Risk
Net Interest Income at Risk (%)
Basis point change scenario -25 +100 +200
Board policy limits --- -2.0 %-4.0 %
December 31, 2012 -0.6 1.7 3.2
The ISE at risk reported at December 31, 2012, shows that Huntington is asset sensitive, meaning that earnings increase
(decrease) when rates rise (fall). The primary reason for these results is that more assets (primarily LIBOR-indexed loans to
customers) than liabilities (primarily non-maturity deposits) will reprice over the modeled one-year period.
The following table shows the income sensitivity of selected assets and liabilities to changes in market interest rates. The table
compares the ISE analysis for selected Huntington portfolios to a portfolio that assumes 100% sensitivity to changes in interest rates.
We calculate the percent change in interest income/expense as the change in the base Huntington portfolio divided by the change in
the 100% sensitive portfolio.
The results for the +100 and +200 basis point ramps also confirm the asset sensitive nature of the portfolio. In both the +100 and
+200 basis point ramps, interest income for total loans (38.1% and 39.2%, respectively) increases faster than interest expense for
interest bearing deposits (35.5% and 37.0%, respectively). Additionally, total borrowings show changes in interest expense of 57.4%
and 60.2% for +100 and +200 basis point scenarios, respectively. While these results are high, since total borrowings represent a
small percentage of total interest-sensitive liabilities, the financial impact of their sensitivity to rising rates is minimal. The -25 basis
point parallel ramp confirms the asset sensitive position as the interest income for total loans (-9.7%), decreases faster than the interest
expense of deposits (-6.9%).