Huntington National Bank 2010 Annual Report Download - page 148

Huntington consolidates an automobile loan securitization in which the associated $522.7 million loan
receivables and $356.1 million notes payable are held at fair value. The valuation of the loan receivables and
notes payable are evaluated on a quarterly basis with any market value changes recorded in noninterest
income. The key assumptions used to determine the fair value of the automobile loans included a projection of
expected losses and prepayment of the underlying loans in the portfolio and a market assumption of interest
rate spreads. The notes payable are valued based on interest rates for similar financial assets.
Residual values on leased automobiles and equipment are evaluated quarterly for impairment. Impairment
of the residual values of direct financing leases is recognized by writing the leases down to fair value with a
charge to other noninterest expense. Residual value losses arise if the expected fair value at the end of the
lease term is less than the residual value recorded at the lease origination, net of estimated amounts
reimbursable by the lessee. Future declines in the expected residual value of the leased equipment would result
in expected losses of the leased equipment.
For leased equipment, the residual component of a direct financing lease represents the estimated fair
value of the leased equipment at the end of the lease term. Huntington uses industry data, historical
experience, and independent appraisals to establish these residual value estimates. Additional information
regarding product life cycle, product upgrades, as well as insight into competing products are obtained through
relationships with industry contacts and are factored into residual value estimates where applicable.
Sold Loans and Leases — Gains and losses on the loans and leases sold and servicing rights associated
with loan and lease sales are determined when the related loans or leases are sold to either a securitization
trust or third party. For loan or lease sales with servicing retained, a servicing asset is recorded at fair value
for the right to service the loans sold. To determine the fair value, Huntington uses an option adjusted spread
cash flow analysis incorporating market implied forward interest rates to estimate the future direction of
mortgage and market interest 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. The current and
projected mortgage interest rate influences the prepayment rate and, therefore, the timing and magnitude of the
cash flows associated with the MSR. Expected mortgage loan prepayment assumptions are derived from a
third party model. Management believes these prepayment assumptions are consistent with assumptions used
by other market participants valuing similar MSRs. The servicing rights are recorded in accrued income and
other assets in the Consolidated Balance Sheets. Servicing revenues on mortgage and automobile loans are
included in mortgage banking income and other noninterest income, respectively.
Accrued Income and Mortgage Banking Activities — Huntington recognizes the rights to service mortgage
loans as separate assets, which are included in other assets in the Consolidated Balance Sheets, only when
purchased or when servicing is contractually separated from the underlying mortgage loans by sale or
securitization of the loans with servicing rights retained.
At the time of initial capitalization, MSRs are grouped into one of two categories depending on whether
Huntington intends to actively hedge the asset. MSR assets are recorded using the fair value method if the
Company will engage in actively hedging the asset or recorded using the amortization method if no active
hedging will be performed. Any change in the fair value of MSRs carried under the fair value method, as well
as amortization and impairment of MSRs under the amortization method, during the period is recorded in
mortgage banking income, which is reflected in the Consolidated Statements of Income. Huntington hedges
the value of MSRs using derivative instruments and trading account securities. Changes in fair value of these
derivatives and trading account securities are reported as a component of mortgage banking income.
ACL — Huntington maintains two reserves, both of which reflect Management’s judgment regarding the
adequate level necessary to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the
AULC. Combined, these reserves comprise the total ACL. The determination of the ACL requires significant
estimates, including the timing and amounts of expected future cash flows on impaired loans and leases,
consideration of current economic conditions, and historical loss experience pertaining to pools of homoge-
neous loans and leases, all of which may be susceptible to change.
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