Huntington National Bank 2011 Annual Report Download - page 175

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. At initial recognition, the MSR asset is
established at its fair value using assumptions consistent with assumptions used to estimate the fair value of
existing MSRs. At the time of initial capitalization, MSRs are grouped into one of two categories. MSR assets
are recorded using the fair value method or the amortization method. The election of fair value or amortization is
made at the time each servicing asset is established and is based upon Management’s forward assumptions
regarding interest rates. MSRs are included in accrued income and other assets. Any increase or decrease in the
fair value of MSRs carried under the fair value method, as well as amortization or impairment of MSRs recorded
using the amortization method, during the period is recorded as an increase or decrease in mortgage banking
income, which is reflected in noninterest income in the Consolidated Statements of Income.
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, 2011 and 2010:
Fair Value Method 2011 2010
(dollar amounts in thousands)
Fair value, beginning of year ....................................... $125,679 $176,427
Change in fair value during the period due to:
Time decay(1) ................................................ (4,966) (5,359)
Payoffs(2) ................................................... (19,464) (32,668)
Changes in valuation inputs or assumptions(3) ...................... (36,248) (12,721)
Fair value, end of year .......................................... $ 65,001 $125,679
(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 prepayment
spreads.
Amortization Method 2011 2010
(dollar amounts in thousands)
Carrying value, beginning of year .................................... $ 70,516 $38,165
New servicing assets created ........................................ 32,505 41,489
Impairment charge ................................................ (17,649) —
Amortization and other ............................................ (12,938) (9,138)
Carrying value, end of year ........................................ $ 72,434 $70,516
Fair value, end of year ............................................ $ 72,586 $87,461
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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