Huntington National Bank 2008 Annual Report Download - page 101

RELATED PARTY TRANSACTIONS
Huntington has made loans to its officers, directors, and their associates. These loans were made in the ordinary course of business
under normal credit terms, including interest rate and collateralization, and do not represent more than the normal risk of
collection. These loans to related parties for the year ended December 31 are summarized as follows:
(in thousands) 2008 2007
Balance, beginning of year $ 96,393 $ 56,506
Loans made 121,417 125,229
Repayments (127,023) (98,366)
Changes due to status of executive officers and directors —13,024
Balance, end of year $ 90,787 $ 96,393
6. MORTGAGE SERVICING RIGHTS
For the years ended December 31, 2008 and 2007, Huntington sold $2.8 billion and $1.9 billion of residential mortgage loans with
servicing retained, resulting in net pre-tax gains of $27.8 million and $23.9 million, respectively recorded in other non-interest
income.
A MSR is established only when the servicing is contractually separated from the underlying mortgage loans by sale or
securitization of the loans with servicing rights retained. MSRs are accounted for under the fair value provisions of Statement
No. 156. The same risk management practices are applied to all MSRs and, accordingly, MSRs were identified as a single asset class
and were re-measured to fair value as of January 1, 2006, with an adjustment of $12.1 million, net of tax, to retained earnings.
At initial recognition, the MSR asset is established at its fair value using assumptions that are consistent with assumptions used at
the time to estimate the fair value of the total MSR portfolio. Subsequent to initial capitalization, MSR assets are carried at fair
value and are included in accrued income and other assets. Any increase or decrease in fair value during the period is recorded as
an increase or decrease in servicing income, which is reflected in mortgage banking income in the consolidated statements of
income.
In the second quarter of 2008, Huntington refined its MSR valuation to incorporate market implied forward interest rates to
estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve
for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. In prior periods, the MSR
valuation model assumed that interest rates remained constant over the life of the servicing asset cash flows. The impact of this
change was not material to the valuation of the MSR asset.
The following table is a summary of the changes in MSR fair value for the years ended December 31, 2008 and 2007:
(in thousands) 2008 2007
Fair value, beginning of period $207,894 $131,104
New servicing assets created 38,846 32,058
Servicing assets acquired —81,450
Change in fair value during the period due to:
Time decay
(1)
(7,842) (6,226)
Payoffs
(2)
(18,792) (14,361)
Changes in valuation inputs or assumptions
(3)
(52,668) (16,131)
Fair value, end of year $167,438 $207,894
(1) Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns.
(2) Represents decrease in value associated with loans that paid off during the period.
(3) Represents change in value resulting primarily from market-driven changes in interest rates.
MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and
conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow
model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments,
delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions
used may have a significant impact on the valuation of MSRs.
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Notes to Consolidated Financial Statements Huntington Bancshares Incorporated