Huntington National Bank 2015 Annual Report Download - page 122

114
Changes in the fair value of a derivative that has been designated and qualifies as a fair value hedge, along with the changes in
the fair value of the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in
the fair value of a derivative that has been designated and qualifies as a cash flow hedge, to the extent effective as a hedge, are
recorded in accumulated other comprehensive income, net of income taxes, and reclassified into earnings in the period during which
the hedged item affects earnings. Ineffectiveness in the hedging relationship is reflected in current period earnings. Changes in the fair
value of derivatives held for trading purposes or which do not qualify for hedge accounting are reported in current period earnings.
For those derivatives to which hedge accounting is applied, Huntington formally documents the hedging relationship and the
risk management objective and strategy for undertaking the hedge. This documentation identifies the hedging instrument, the hedged
item or transaction, the nature of the risk being hedged, and, unless the hedge meets all of the criteria to assume there is no
ineffectiveness, the method that will be used to assess the effectiveness of the hedging instrument and how ineffectiveness will be
measured. The methods utilized to assess retrospective hedge effectiveness, as well as the frequency of testing, vary based on the type
of item being hedged and the designated hedge period. For specifically designated fair value hedges of certain fixed-rate debt,
Huntington utilizes the short-cut method when certain criteria are met. For other fair value hedges of fixed-rate debt, including
certificates of deposit, Huntington utilizes the regression method to evaluate hedge effectiveness on a quarterly basis. For fair value
hedges of portfolio loans, the regression method is used to evaluate effectiveness on a daily basis. For cash flow hedges, the regression
method is applied on a quarterly basis.
Hedge accounting is discontinued prospectively when:
• the derivative is no longer effective or expected to be effective in offsetting changes in the fair value or cash flows of a
hedged item (including firm commitments or forecasted transactions);
• the derivative expires or is sold, terminated, or exercised;
• it is unlikely that a forecasted transaction will occur;
• the hedged firm commitment no longer meets the definition of a firm commitment; or
• the designation of the derivative as a hedging instrument is removed.
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value
or cash flow hedge, the derivative will continue to be carried on the balance sheet at fair value.
In the case of a discontinued fair value hedge of a recognized asset or liability, as long as the hedged item continues to exist on
the balance sheet, the hedged item will no longer be adjusted for changes in fair value. The basis adjustment that had previously been
recorded to the hedged item during the period from the hedge designation date to the hedge discontinuation date is recognized as an
adjustment to the yield of the hedged item over the remaining life of the hedged item.
In the case of a discontinued cash flow hedge of a recognized asset or liability, as long as the hedged item continues to exist on
the balance sheet, the effective portion of the changes in fair value of the hedging derivative will no longer be recorded to other
comprehensive income. The balance applicable to the discontinued hedging relationship will be recognized in earnings over the
remaining life of the hedged item as an adjustment to yield. If the discontinued hedged item was a forecasted transaction that is not
expected to occur, any amounts recorded on the balance sheet related to the hedged item, including any amounts recorded in
accumulated other comprehensive income, are immediately reclassified to current period earnings.
In the case of either a fair value hedge or a cash flow hedge, if the previously hedged item is sold or extinguished, the basis
adjustment to the underlying asset or liability or any remaining unamortized other comprehensive income balance will be reclassified
to current period earnings.
In all other situations in which hedge accounting is discontinued, the derivative will be carried at fair value on the consolidated
balance sheets, with changes in its fair value recognized in current period earnings unless re-designated as a qualifying hedge.
Like other financial instruments, derivatives contain an element of credit risk, which is the possibility that Huntington will incur
a loss because the counterparty fails to meet its contractual obligations. Notional values of interest rate swaps and other off-balance
sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual balances on
which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of positions
that have become favorable to Huntington, including any accrued interest receivable due from counterparties. Potential credit losses
are mitigated through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high
quality institutions, collateral agreements, and other contract provisions. Huntington considers the value of collateral held and
collateral provided in determining the net carrying value of derivatives.
Huntington offsets the fair value amounts recognized for derivative instruments and the fair value for the right to reclaim cash
collateral or the obligation to return cash collateral arising from derivative instrument(s) recognized at fair value executed with the
same counterparty under a master netting arrangement.