Huntington National Bank 2012 Annual Report Download - page 68

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Table 24 - Economic Value Sensitivity
Percent of
Total Net Percent Change in Economic Value
Tangible For a Given Change in Interest Rates
Assets (1) Over / (Under) Base Case Parallel Shocks
Basis point change scenario -25 +100 +200
Total loans 73 % 0.4 %-1.6 % -3.3 %
Total investments and other earning assets 18 0.7 -3.3 -6.9
Total net tangible assets (2) 0.4 -1.9 -3.9
Total deposits 83 -0.4 1.7 3.2
Total borrowings 5 -0.1 0.4 0.8
Total net tangible liabilities (3) -0.4 1.6 3.1
(1) At December 31, 2012.
(2) Tangible assets excluding ALLL.
(3) Tangible liabilities excluding AULC.
MSR
(This section should be read in conjunction with Note 6 of the Notes to the Consolidated Financial Statements.)
At December 31, 2012, we had $120.7 million of capitalized MSRs representing the right to service $15.6 billion in mortgage
loans. Of this $120.7 million, $35.2 million was recorded using the fair value method, and $85.5 million was recorded using the
amortization method.
MSR fair 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 reduced by prepayments. Prepayments usually
increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed strategies to reduce
the risk of MSR fair value changes or impairment. In addition, we engage a third party to provide valuation tools and assistance with
our strategies with the objective to decrease the volatility from MSR fair value changes. However, volatile changes in interest rates
can diminish the effectiveness of these hedges. We typically report MSR fair value adjustments net of hedge-related trading activity
in the mortgage banking income category of noninterest income. Changes in fair value between reporting dates are recorded as an
increase or a decrease in mortgage banking income.
MSRs recorded using the amortization method generally relate to loans originated with historically low interest rates, resulting in
a lower probability of prepayments and, ultimately, impairment. MSR assets are included in other assets in the Consolidated Balance
Sheets.
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair
value and subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer
subsidiaries, foreign exchange positions, equity investments, investments in mortgage-backed securities, and marketable equity
securities held by our insurance subsidiaries. We have established loss limits on the trading portfolio, the amount of foreign exchange
exposure that can be maintained, and the amount of marketable equity securities that can be held by the insurance subsidiaries.
Liquidity Risk
Liquidity risk is the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments
resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to us, such as
war, terrorism, or financial institution market specific issues. In addition, the mix and maturity structure of Huntington’s balance
sheet, amount of cash on-hand and unencumbered securities, and the availability of contingent sources of funding, can have an impact
on Huntington’s ability to satisfy current or future funding commitments. We manage liquidity risk at both the Bank and the parent
company.