Huntington National Bank 2007 Annual Report Download - page 51

Table 25 — 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, 2007 –0.3% +1.1% –4.4% –10.8%
December 31, 2006 +0.5% +1.4% –4.7% –11.3%
The EVE at risk reported as of December 31, 2007 incorporates a methodology change resulting from the acquisition of Sky
Financial. Prior to the acquisition, EVE at risk was measured on the basis of total shareholders’ equity. Subsequent to the
acquisition, EVE at risk is measured on the basis of net equity. This change in the measurement of EVE risk did not affect our
compliance with limits that have been set by our board of directors. The table below reconciles the difference between total
shareholders’ equity and net equity.
(in thousands of dollars) 2007 2006
December 31, December 31,
Total Shareholders’ Equity $5,949,140 $3,014,326
Less:
Goodwill 3,059,333 570,876
Other intangible assets
(1)
278,181 38,667
Add:
Allowance for credit losses
(2)
576,404 312,229
Net Equity $3,188,031 $2,717,012
(1) Other intangible assets are net of deferred tax.
(2) Limited to 1.25% of gross risk-weighted assets.
Mortgage Servicing Rights (MSRs)
(This section should be read in conjunction with Significant Item 5.)
MSR fair values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected
outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase
when mortgage interest rates decline and decrease when mortgage interest rates rise. A hedging strategy is used to minimize the
impact from MSR fair value changes. However, volatile changes in interest rates can diminish the effectiveness of these hedges. We
typically report MSR fair value adjustments net of hedge-related trading activity.
Beginning in 2006, we adopted Statement of Financial Accounting Standards (Statement) No. 156, Accounting for Servicing of
Financial Assets (an amendment of FASB Statement No. 140), which allowed us to carry MSRs at fair value. This resulted in a
$5.1 million pretax ($0.01 per common share) positive impact in 2006. Under the fair value approach, servicing assets and
liabilities are recorded at fair value at each reporting date. Changes in fair value between reporting dates are recorded as an
increase or decrease in mortgage banking income. MSR assets are included in other assets.
Prior to 2006, we recognized impairment when our valuation of MSRs was less than the recorded book value. We recognized
temporary impairment due to changes in interest rates through a valuation reserve and recorded a direct write-down of the book
value of MSRs for other-than-temporary declines in valuation. Changes and fluctuations in interest rate levels between periods
resulted in some periods reporting an MSR temporary impairment, while other periods report a recovery of previously recognized
MSR temporary impairment.
We use trading account securities and trading derivatives to offset MSR valuation changes. The valuations of trading securities and
trading derivatives that we use generally react to interest rate changes in an opposite direction compared with changes in MSR
valuations. As a result, changes in interest rate levels that impact MSR valuations should result in corresponding offsetting, or
partially offsetting, trading gains or losses. As such, in periods where MSR fair values decline, the fair values of trading account
securities and derivatives typically increase, resulting in a recognition of trading gains that offset, or partially offset, the decline in
fair value recognized for the MSR, and vice versa. The MSR valuation changes and the gains or losses from the trading account
securities and trading derivatives are recorded as a components of mortgage banking income, although any interest income from
the securities is included in interest income.
49
MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED