Huntington National Bank 2012 Annual Report Download - page 105

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provided by the third party pricing specialist by comparing the current PD to the assumptions used the previous quarter, actual defaults
and deferrals in the current period, and trend data on certain financial ratios of the issuers. Huntington also evaluates the assumptions
related to discount rates. Relying on cash flows is necessary because there was a lack of observable transactions in the market and
many of the original sponsors or dealers for these securities are no longer able to provide a fair value that is compliant with ASC 820
Derivatives used for hedging purposes
Derivatives designated as qualified hedges are tested for hedge effectiveness on a quarterly basis. Assessments are made at the
inception of the hedge and on a recurring basis to determine whether the derivative used in the hedging transaction has been and is
expected to continue to be highly effective in offsetting changes in fair values or cash flows of the hedged item. A statistical
regression analysis is performed to measure the effectiveness.
If, based on the assessment, a derivative is not expected to be a highly effective hedge or it has ceased to be a highly effective
hedge, hedge accounting is discontinued as of the quarter the hedge is not highly effective. As the statistical regression analysis
requires the use of estimates regarding the amount and timing of future cash flows which are sensitive to significant changes in future
periods based on changes in market rates, we consider this a critical accounting estimate.
Loans held for sale
Certain residential mortgage loans are classified as held for sale at origination in which Huntington has elected to apply the fair
value option. The fair value is estimated based on security prices for similar product types.
Certain consumer and commercial loans are classified as held for sale and are accounted for at the lower of amortized cost or fair
value. The determination of fair value for these consumer receivables is based on security prices for similar product types or
discounted expected cash flows, which takes into consideration factors such as future interest rates, prepayment speeds, default and
loss curves, and market discount rates. The determination of fair value for commercial loans takes into account factors such as the
location and appraised value of the related collateral, as well as the estimated cash flows from realization of the collateral.
Mortgage Servicing Rights
Retained rights to service mortgage loans are recognized as a separate and distinct asset at the time the loans are sold. Mortgage
servicing rights (“MSRs”) are initially recorded at fair value at the time the related loans are sold and subsequently re-measured at
each reporting date under either the fair value or amortization method. Any increase or decrease in fair value of MSRs accounted for
under the fair value method, as well as any amortization and/or impairment of MSRs recorded under the amortization method, is
reflected in earnings in the period that the changes occur. MSRs are subject to interest rate risk in that their fair value will fluctuate as
a result of changes in the interest rate environment. Fair value is determined based upon the application of an income approach
valuation model based. The valuation model, maintained by an independent third party, incorporates assumptions in estimating future
cash flows. These assumptions include time decay, payoffs, and changes in valuation inputs and assumptions. The reasonableness of
these pricing models is validated on a minimum of a quarterly basis by at least one independent external service broker valuation.
Because the fair values of MSRs are significantly impacted by the use of estimates, the use of different assumption estimates can
result in different estimated fair values of those MSRs.
Pension Valuation
Pension plan assets consist of mutual funds, corporate bonds, US government bonds and our common stock. Investments are
accounted for at cost on the trade date and are reported at fair value. Mutual funds are valued at quoted Net Asset Value. Our
common stock is traded on a national securities exchange and is valued at the last reported sales price.
The discount rate and expected return on plan assets used to determine the benefit obligation and pension expense are both
significant assumptions. Actual results may be materially different. (See Note 18 of the Notes to the Consolidated Financial
Statements).
Contingent Liabilities
We are parties to various claims, litigation, and legal proceedings resulting from ordinary business activities relating to our
current and/or former operations. We estimate and provide for potential losses that may arise out of litigation and regulatory
proceedings to the extent that such losses are probable and can be reasonably estimated. Significant judgment is required in making
these estimates and our final liabilities may ultimately be more or less than the current estimate. Our total estimated liability in respect
of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after
considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases