Huntington National Bank 2010 Annual Report Download - page 162

The following tables summarize the changes in MSRs recorded using either the fair value method or the
amortization method for the years ended December 31, 2010 and 2009:
Fair Value Method 2010 2009
(Dollar amounts in thousands)
Fair value, beginning of year .................................... $176,427 $167,438
New servicing assets created .................................... —23,074
Change in fair value during the period due to:
Time decay(1) ............................................. (5,359) (6,798)
Payoffs(2) ................................................ (32,668) (38,486)
Changes in valuation inputs or assumptions(3) ..................... (12,721) 34,305
Other changes ............................................... —(3,106)
Fair value, end of year ....................................... $125,679 $176,427
(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 and prepay-
ment spreads.
Amortization Method 2010 2009
(Dollar amounts in thousands)
Carrying value, beginning of year .................................. $38,165 $ —
New servicing assets created . . . ................................... 41,489 40,452
Amortization and other .......................................... (9,138) (2,287)
Carrying value, end of year ..................................... $70,516 $38,165
Fair value, end of year ......................................... $87,461 $43,769
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, contractu-
ally 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.
A summary of key assumptions and the sensitivity of the MSR value at December 31, 2010 to changes in
these assumptions follows:
Actual
10%
Adverse
Change
20%
Adverse
Change
Decline in Fair Value Due to
(Dollar amounts in thousands)
Constant prepayment rate ............................. 10.74% $(7,235) $(13,311)
Spread over forward interest rate swap rates ............... 511bps (2,791) (5,583)
MSR 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
impacted by the level of prepayments. The Company hedges against changes in MSR fair value attributable to
changes in interest rates through a combination of derivative instruments and trading securities.
Total servicing fees included in mortgage banking income amounted to $48.1 million, $48.5 million, and
$45.6 million in 2010, 2009, and 2008, respectively. The unpaid principal balance of residential mortgage
148