Huntington National Bank 2013 Annual Report Download - page 64

58
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 accrued income and other assets in the
Consolidated Financial Statements.
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 are 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 securities backed by mortgage loans, and marketable
equity securities held by our insurance subsidiaries. We have established loss limits on the trading portfolio, on the amount of foreign
exchange exposure that can be maintained, and on 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, the amount of on-hand cash 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.
The overall objective of liquidity risk management is to ensure that we can obtain cost-effective funding to meet current and
future obligations, and can maintain sufficient levels of on-hand liquidity, under both normal business-as-usual and unanticipated
stressed circumstances. The ALCO was appointed by the ROC to oversee liquidity risk management and the establishment of
liquidity risk policies and limits. Contingency funding plans are in place, which measure forecasted sources and uses of funds under
various scenarios in order to prepare for unexpected liquidity shortages. Liquidity risk is reviewed monthly for the Bank and the
parent company, as well as its subsidiaries. In addition, liquidity working groups meet regularly to identify and monitor liquidity
positions, provide policy guidance, review funding strategies, and oversee the adherence to, and maintenance of, the contingency
funding plans.
Available-for-sale and other securities portfolio
(This section should be read in conjunction with the Critical Accounting Policies and Use of Significant Estimates discussion, and
Note 4 of the Notes to Consolidated Financial Statements.)
Our investment securities portfolio is evaluated under established asset/liability management objectives. Changing market
conditions could affect the profitability of the portfolio, as well as the level of interest rate risk exposure.
Our available-for-sale and other securities portfolio is comprised of various financial instruments. At December 31, 2013, our
available-for-sale and other securities portfolio totaled $7.3 billion, a decrease of $0.3 billion from 2012. The duration of the portfolio
increased by 1.3 years to 4.2 years.