Huntington National Bank 2015 Annual Report Download - page 121

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Purchased Credit-Impaired Loans — Purchased loans with evidence of deterioration in credit quality since origination for
which it is probable at acquisition that we will be unable to collect all contractually required payments are considered to be credit
impaired. Purchased credit-impaired loans are initially recorded at fair value, which is estimated by discounting the cash flows
expected to be collected at the acquisition date. Because the estimate of expected cash flows reflects an estimate of future credit losses
expected to be incurred over the life of the loans, an allowance for credit losses is not recorded at the acquisition date. The excess of
cash flows expected at acquisition over the estimated fair value, referred to as the accretable yield, is recognized in interest income
over the remaining life of the loan, or pool of loans, on a level-yield basis. The difference between the contractually required payments
at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. A subsequent
decrease in the estimate of cash flows expected to be received on purchased credit-impaired loans generally results in the recognition
of an allowance for credit losses. Subsequent increases in cash flows result in reversal of any nonaccretable difference (or allowance
for loan and lease losses to the extent any has been recorded) with a positive impact on interest income subsequently recognized. The
measurement of cash flows involves assumptions and judgments for interest rates, prepayments, default rates, loss severity, and
collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the
loan can result.
Transfers of Financial Assets and Securitizations — Transfers of financial assets in which we have surrendered control over
the transferred assets are accounted for as sales. In assessing whether control has been surrendered, we consider whether the transferee
would be a consolidated affiliate, the existence and extent of any continuing involvement in the transferred financial assets, and the
impact of all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not
entered into at the time of transfer. Control is generally considered to have been surrendered when (i) the transferred assets have been
legally isolated from us or any of our consolidated affiliates, even in bankruptcy or other receivership, (ii) the transferee (or, if the
transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing that is constrained from pledging or
exchanging the assets it receives, each third-party holder of its beneficial interests) has the right to pledge or exchange the assets (or
beneficial interests) it received without any constraints that provide more than a trivial benefit to us, and (iii) neither we nor our
consolidated affiliates and agents have (a) both the right and obligation under any agreement to repurchase or redeem the transferred
assets before their maturity, (b) the unilateral ability to cause the holder to return specific financial assets that also provides us with a
more-than-trivial benefit (other than through a cleanup call) or (c) an agreement that permits the transferee to require us to repurchase
the transferred assets at a price so favorable that it is probable that it will require us to repurchase them.
If the sale criteria are met, the transferred financial assets are removed from our balance sheet and a gain or loss on sale is
recognized. If the sale criteria are not met, the transfer is recorded as a secured borrowing in which the assets remain on our balance
sheet and the proceeds from the transaction are recognized as a liability. For the majority of financial asset transfers, it is clear whether
or not we have surrendered control. For other transfers, such as in connection with complex transactions or where we have continuing
involvement, we generally obtain a legal opinion as to whether the transfer results in a true sale by law.
We have historically securitized certain automobile receivables. Gains and losses on the loans and leases sold and servicing
rights associated with loan and lease sales are determined when the related loans or leases are sold to either a securitization trust or
third-party. For loan or lease sales with servicing retained, a servicing asset is recorded at fair value for the right to service the loans
sold.
Derivative Financial Instruments — A variety of derivative financial instruments, principally interest rate swaps, caps, floors,
and collars, are used in asset and liability management activities to protect against the risk of adverse price or interest rate movements.
These instruments provide flexibility in adjusting Huntington’s sensitivity to changes in interest rates without exposure to loss of
principal and higher funding requirements.
Huntington also uses derivatives, principally loan sale commitments, in hedging its mortgage loan interest rate lock
commitments and its mortgage loans held for sale. Mortgage loan sale commitments and the related interest rate lock commitments are
carried at fair value on the Consolidated Balance Sheets with changes in fair value reflected in mortgage banking income. Huntington
also uses certain derivative financial instruments to offset changes in value of its MSRs. These derivatives consist primarily of forward
interest rate agreements and forward mortgage contracts. The derivative instruments used are not designated as qualifying hedges.
Accordingly, such derivatives are recorded at fair value with changes in fair value reflected in mortgage banking income.
Derivative financial instruments are recorded in the Consolidated Balance Sheets as either an asset or a liability (in accrued
income and other assets or accrued expenses and other liabilities, respectively) and measured at fair value. On the date a derivative
contract is entered into, we designate it as either:
• a qualifying hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value
hedge);
• a qualifying hedge of the variability of cash flows to be received or paid related to a recognized asset liability or forecasted
transaction (cash flow hedge); or
• a trading instrument or a non-qualifying (economic) hedge.