Huntington National Bank 2015 Annual Report Download - page 103

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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. The election of the fair value or amortization method is made
at the time each servicing asset is established. All newly created MSRs since 2009 are recorded using the 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. We use an independent third-party valuation model, which
incorporates assumptions in estimating future cash flows. These assumptions include prepayment speeds, 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 assumptions can result in different estimated fair values of those MSRs.
Contingent Liabilities
We are a party 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
or proceedings, and the opinions and views of legal counsel. Litigation exposure represents a key area of judgment and is subject to
uncertainty and certain factors outside of our control.
Income Taxes
The calculation of our provision for income taxes is complex and requires the use of estimates and judgments. We have two
accruals for income taxes: (1) our income tax payable represents the estimated net amount currently due to the federal, state, and local
taxing jurisdictions, net of any reserve for potential audit issues and any tax refunds and the net receivable balance is reported as a
component of accrued income and other assets in our consolidated balance sheet; (2) our deferred federal and state income tax and
related valuation accounts, reported as a component of accrued income and other assets, represents the estimated impact of temporary
differences between how we recognize our assets and liabilities under GAAP, and how such assets and liabilities are recognized under
federal and state tax law.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and non-income taxes.
The effective tax rate is based in part on our interpretation of the relevant current tax laws. We believe the aggregate liabilities related
to taxes are appropriately reflected in the consolidated financial statements. We review the appropriate tax treatment of all transactions
taking into consideration statutory, judicial, and regulatory guidance in the context of our tax positions. In addition, we rely on various
tax opinions, recent tax audits, and historical experience.
From time-to-time, we engage in business transactions that may affect our tax liabilities. Where appropriate, we obtain opinions
of outside experts and assess the relative merits and risks of the appropriate tax treatment of business transactions taking into account
statutory, judicial, and regulatory guidance in the context of the tax position. However, changes to our estimates of accrued taxes can
occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding
previously taken tax positions, and newly enacted statutory, judicial, and regulatory guidance. Such changes could affect the amount
of our accrued taxes and could be material to our financial position and/or results of operations. (See Note 16 of the Notes to
Consolidated Financial Statements.)
Deferred Tax Assets
At December 31, 2015, we had a net federal deferred tax asset of $7 million and a net state deferred tax asset of $43 million. A
valuation allowance is provided when it is more-likely-than-not some portion of the deferred tax asset will not be realized. All
available evidence, both positive and negative, was considered to determine whether, based on the weight of that evidence, impairment
should be recognized. Our forecast process includes judgmental and quantitative elements that may be subject to significant change. If
our forecast of taxable income within the carryforward periods available under applicable law is not sufficient to cover the amount of
net deferred tax assets, such assets may be impaired. Based on our analysis of both positive and negative evidence and our ability to
offset the net deferred tax assets against our forecasted future taxable income, there was no impairment of the net deferred tax assets at
December 31, 2015, other than a valuation allowance relating to state net operating loss carryovers.
Recent Accounting Pronouncements and Developments