Huntington National Bank 2005 Annual Report Download - page 65

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
Table 21 — Economic Value of Equity at Risk
Economic Value of Equity at Risk (%)
Basis point change scenario –200 –100 +100 +200
Board policy limits –12.0% –5.0% –5.0% –12.0%
December 31, 2005 –0.8% +0.5% –2.5% –6.2%
December 31, 2004 –1.9% –0.2% –1.5% –4.5%
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair
value and are subject to mark-to-market accounting. We have price risk from mortgage servicing rights (MSRs) and trading
securities, which includes the instruments to hedge MSRs. We also have price risk from securities owned by our broker-dealer
subsidiaries, foreign exchange positions, investments in private equity limited partnerships, and marketable equity securities held
by our insurance subsidiaries. We have established loss limits on the trading portfolio and on the amount of foreign exchange
exposure that can be maintained and the amount of marketable equity securities that can be held by the insurance subsidiaries.
Lease Residual Risk
(This section should be read in conjunction with Significant Factor 1 and the Operating Lease Assets section.)
Lease residual risk associated with retail automobile and commercial equipment leases is the potential for declines in the fair
market value of the vehicle or equipment below the maturity value estimated at origination. Most of our lease residual risk is in
our automobile leases. Used car values are the primary factor in determining the magnitude of the risk exposure. Since used car
values are subject to many factors, lease residual risk has been extremely volatile throughout the history of automobile leasing.
We mitigate lease residual risk by purchasing residual value insurance. Residual value insurance provides for the recovery of a
decline in the vehicle residual value, as specified at the inception of the lease by the Automotive Lease Guide (ALG), an
authoritative industry source. As a result, the risk associated with market driven declines in used car values is mitigated. Market
driven declines include economic factors, environmental factors, and consumer sentiment, but not vehicle condition or accrued
mileage.
As of December 31, 2005, three distinct residual value insurance policies were in place to address the residual risk in the
automobile lease portfolio. One residual value insurance policy covered all vehicles leased between October 1, 2000 and April 30,
2002 and had a total payment cap of $50 million. Any losses above the cap result in additional operating lease depreciation
expense. It is our assessment that the $50 million cap remains sufficient to cover any expected losses. A second residual insurance
policy covers all originations from May 2002 through June 2005, and does not have a payment cap. A third policy went into
effect July 1, 2005, and covers all originations for a period of one year with no payment cap.
Liquidity Risk
The objective of effective liquidity management is to ensure that cash flow needs can be met on a timely basis at a reasonable
cost under both normal operating conditions and unforeseen circumstances. The liquidity of the Bank is used to originate loans
and leases and to repay deposit and other liabilities as they become due or are demanded by customers. Liquidity risk arises from
the possibility that funds may not be available to satisfy current or future commitments based on external macro market issues,
asset and liability activities, investor perception of financial strength, and events unrelated to the company such as war, terrorism,
or financial institution market specific issues.
Liquidity policies and limits are established by our board of directors, with operating limits set by our MRC, based upon analyses
of the ratio of loans to deposits, the percentage of assets funded with non-core or wholesale funding, and the amount of liquid
assets available to cover non-core funds maturities. In addition, guidelines are established to ensure diversification of wholesale
funding by type, source, and maturity and provide sufficient balance sheet liquidity to cover 100% of wholesale funds maturing
within a six-month time period. A contingency funding plan is in place, which includes forecasted sources and uses of funds
under various scenarios in order to prepare for unexpected liquidity shortages, including the implications of any credit rating
changes. Our MRC meets monthly to identify and monitor liquidity issues, provide policy guidance, and oversee adherence to,
and the maintenance of, an evolving contingency funding plan. We believe that sufficient liquidity exists to meet the funding
needs of the Bank and the parent company.
63