Huntington National Bank 2005 Annual Report Download - page 115

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
The amount of interest that would have been recorded under the original terms for total loans classified as non-accrual or
renegotiated was $7.7 million for 2005, $3.3 million for 2004, and $6.3 million for 2003. Amounts actually collected and recorded
as interest income for these loans totaled $1.9 million, $1.9 million, and $3.0 million for 2005, 2004, and 2003, respectively.
5. LOAN SALES AND SECURITIZATIONS
A
UTOMOBILE LOANS
Huntington sold $0.4 billion, $1.5 billion and $2.1 billion of automobile loans in 2005, 2004 and 2003, respectively. Pre-tax gains
from the sales of automobile loans totaled $1.2 million, $14.2 million and $40.0 million in 2005, 2004 and 2003, respectively.
During 2005, Huntington used the following assumptions to measure fair value of retained servicing rights at the time of the sale:
estimated servicing income of 0.55%, requires adequate compensation for servicing of approximately 0.62%, receives other
ancillary fees of approximately 0.33%, applies a discount rate of 10% and receives an estimated return on payments prior to
remittance to investors. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when
carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The
primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely
heavily on the predicted payoff assumption, and if actual payoff is quicker than expected, then future value would be impaired.
Other impairment concerns would be changes to the other assumptions mentioned above.
Changes in the carrying value of automobile loan servicing rights for the three years ended December 31, 2005, and the fair value
at the end of each period were as follows:
Year Ended December 31,
(in thousands of dollars) 2005 2004 2003
Carrying value, beginning of year $ 20,286 $17,662 $12,676
New servicing assets 2,113 16,249 25,106
Amortization (11,528) (13,625) (8,434)
Impairment charges (66) ——
Adoption of FIN 46 —— (11,686)
Carrying value, end of year $10,805 $20,286 $17,662
Fair value, end of year $ 11,658 $21,361 $18,501
Huntington has retained servicing responsibilities and receives annual servicing fees from 0.55% to 1.00% of the outstanding loan
balances. Servicing income, net of amortization of capitalized servicing assets, included in other non-interest income amounted to
$12.5 million in 2005, $10.1 million in 2004, and $4.3 million in 2003. The unpaid principal balance of automobile loans
serviced for third parties was $1.7 billion, $2.3 billion, and $1.8 billion at December 31, 2005, 2004, and 2003, respectively.
There were no automobile loan securitizations in 2005 or 2004. As a result of adopting FIN 46 (subsequently amended as
FIN 46R) in the third quarter of 2003, one of the securitization trusts sponsored by Huntington was consolidated. The impact of
this consolidation was to reduce the outstanding automobile loans serviced by $1.0 billion, reduce the retained interest asset by
$142.3 million, and reduce the servicing asset by $11.7 million. In the second quarter of 2004, Huntington repurchased all the
outstanding loans of an unconsolidated trust for $23.9 million, resulting in a $1.5 million pre-tax gain. There were no
impairment charges related to Huntington’s retained interest in automobile loans during 2004 and 2003.
R ESIDENTIAL M ORTGAGE L OANS
There were no sales of residential mortgage loans held for investment in 2005 and 2003. During 2004, Huntington sold
$199.8 million of residential mortgage loans held for investment, resulting in a net pre-tax gain of $0.5 million. Huntington also
exchanged for federal agency mortgage-backed securities $15.1 million, $115.9 million and $354.2 million of residential mortgage
loans in 2005, 2004 and 2003, respectively, and retained all of the resulting securities. Accordingly, these amounts were reclassified
from loans to investment securities.
A mortgage servicing right (MSR) is established only when the loans are sold or when servicing is contractually separated from
the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. The initial carrying value of
the asset is established based on its relative fair value at the time of sale using assumptions that are consistent with assumptions
used at the time to estimate the fair value of the total MSR portfolio. All servicing rights are subsequently carried at the lower of
the initial carrying value, adjusted for amortization, or fair value, and are included in other assets. From time to time, loans may
be sold with recourse. This recourse may be for a limited period of time or for the life of the loan.
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