Huntington National Bank 2013 Annual Report Download - page 63

57
INCOME SIMULATION AND ECONOMIC VALUE ANALYSIS
Interest rate risk measurement is calculated and reported to the ALCO monthly and ROC at least quarterly. The information
reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and
the action plan and timeline for resolution, mitigation, or assumption of the risk.
Huntington uses two approaches to model interest rate risk: Interest Sensitive Earnings at Risk (ISE analysis) and Economic
Value of Equity (EVE analysis). Under ISE analysis, net interest income is modeled utilizing various assumptions for assets,
liabilities, and derivative positions under various interest rate scenarios over a one-year time horizon. Market implied forward rates
and various likely and extreme interest rate scenarios are used for ISE analysis. These likely and extreme scenarios include rapid and
gradual interest rate ramps, rate shocks, and yield curve twists. EVE analysis measures the market value of assets minus the market
value of liabilities and the change in this value as rates change.
Table 20 - Interest Sensitive Earnings at Risk
Net Interest Income at Risk (%)
Basis point change scenario -25 +100 +200
Board policy limits --- -2.0 % -4.0 %
December 31, 2013 -0.4 % 0.2 % 0.0 %
The ISE results included in the table above reflect the analysis used monthly by management. It models gradual -25, +100 and
+200 basis point parallel shifts in market interest rates over the next one-year period, beyond the interest rate change implied by the
forward yield curve. Due to the current low level of short-term interest rates, the analysis reflects a declining interest rate scenario of
25 basis points, the point at which many assets and liabilities reach zero percent.
Huntington is within Board policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis
point scenario. The ISE analysis reported at December 31, 2013, shows that Huntington’s earnings are not significantly sensitive to
changes in interest rates. Due to an increase in the amount of fixed rate assets, consisting primarily of indirect auto loans and fixed
rate securities, the amount of asset sensitivity declined through the year. The scenarios above also include the impact of market rate
changes on the duration of fixed-rate mortgage-related assets, which extend as rates rise and reduce asset sensitivity. As interest rates
rise, the net earnings from our interest rate swaps declines faster under the +200 than +100 basis point scenario resulting in lower asset
sensitivity as shown above.
Table 21 - Economic Value of Equity at Risk
Economic Value of Equity at Risk (%)
Basis point change scenario -25 +100 +200
Board policy limits --- -5.0 % -12.0 %
December 31, 2013 0.6 % -3.9 % -9.3 %
The EVE results included in the table above reflect the analysis used monthly by management. It models immediate -25, +100
and +200 basis point parallel shifts in market interest rates. Due to the current low level of short-term interest rates, the analysis
reflects a declining interest rate scenario of 25 basis points, the point at which many assets and liabilities reach zero percent.
Huntington is within Board policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis
point scenario. The EVE at risk reported at December 31, 2013, shows that as interest rates increase (decrease) immediately, the
economic value of equity position will decrease (increase). When interest rates rise, fixed rate assets generally lose economic value;
the longer the duration, the greater the value lost. The opposite is true when interest rates fall.
Compared to recent periods, the EVE results for December 31, 2013, reflect the impact of additional mortgage-backed securities,
which were added to increase the amount of highly liquid assets in our investment portfolio, and higher market rates.

MSR
(This section should be read in conjunction with Note 6 of the Notes to the Consolidated Financial Statements.)
At December 31, 2013 we had a total of $162.3 million of capitalized MSRs representing the right to service $15.2 billion in
mortgage loans. Of this $162.3 million, $34.2 million was recorded using the fair value method and $128.1 million was recorded
using the amortization method.