Huntington National Bank 2008 Annual Report Download - page 61

risk of MSR fair value changes. In addition, a third party has been engaged to provide improved valuation tools and assistance
with our strategies with the objective to decrease the volatility 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 in the mortgage banking income category of noninterest income.
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, and are presented in Table 10.
Through late 2008, we used 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.
At December 31, 2008, we had a total of $167.4 million of MSRs representing the right to service $15.8 billion in mortgage loans.
(See Note 7 of the Notes to the Consolidated Financial Statements.)
PRICE RISK
(This section should be read in conjunction with Significant Item 5.)
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 fair value accounting. We have price risk from trading securities, which included instruments to hedge
MSRs, however the strategy of using trading securities to hedge MSRs ceased in late 2008. We also have price risk from securities
owned by our broker-dealer subsidiaries, foreign exchange positions, equity investments, investments in securities backed by
mortgage loans, and marketable equity securities held by our insurance subsidiaries. We have established loss limits on the trading
portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of marketable equity securities
that can be held by the insurance subsidiaries.
Equity Investment Portfolios
In reviewing our equity investment portfolio, we consider general economic and market conditions, including industries in which
private equity merchant banking and community development investments are made, and adverse changes affecting the availability
of capital. We determine any impairment based on all of the information available at the time of the assessment. New information
or economic developments in the future could result in recognition of additional impairment.
From time to time, we invest in various investments with equity risk. Such investments include investment funds that buy and sell
publicly traded securities, investment funds that hold securities of private companies, direct equity or venture capital investments
in companies (public and private), and direct equity or venture capital interests in private companies in connection with our
mezzanine lending activities. These investments are reported as a component of “accrued income and other assets” on our
consolidated balance sheet. At December 31, 2008, we had a total of $44.7 million of such investments, down from $48.7 million at
December 31, 2007. The following table details the components of this change during 2008:
Table 36 — Equity Investment Activity
(in thousands)
Balance at
December 31, 2007
New
Investments
Returns of
Capital Gain/(Loss)
Balance at
December 31, 2008
Type:
Public equity $16,583 $ — $ — $(4,454) $12,129
Private equity 20,202 7,579 (391) (1,439) 25,951
Direct investment 11,962 2,161 (4,443) (3,104) 6,576
Total $48,747 $9,740 $(4,834) $(8,997) $44,656
The equity investment losses in 2008 reflected a $5.9 million venture capital loss during the 2008 first quarter, and $4.5 million of
losses on public equity investment funds that buy and sell publicly traded securities, and private equity investments. These
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Management’s Discussion and Analysis Huntington Bancshares Incorporated