Huntington National Bank 2011 Annual Report Download - page 141

to facilitate hedging of the loans. Fair value is determined based on collateral value and prevailing market prices
for loans with similar characteristics. Subsequent declines in fair value are recognized either as a charge-off or as
noninterest income, depending on the length of time the loan has been recorded as loans held for sale. When a
decision is made to sell a loan that was not originated or initially acquired with the intent to sell, the loan is
reclassified into loans held for sale.
Huntington consolidates an automobile loan securitization in which the associated $296.3 million loan
receivables and $123.0 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 rates. 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 determined to be other than temporary 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 of a MSR, 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. MSR assets are recorded
using the fair value method or recorded using the amortization method. The election of fair value of amortization
method is made at the time each servicing asset is established and is based upon management forward
assumptions about interest rates. During 2011, all newly created MSR’s were recorded using the amortization
method. 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 certain MSRs using
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