Huntington National Bank 2015 Annual Report Download - page 70

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Table 19 - 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, 2015 -0.4%-0.5%-2.1%
December 31, 2014 -0.6% 0.4% -1.5%
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 of director policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the
-25 basis point scenario. The EVE reported at December 31, 2015 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. When interest rates rise, fixed rate
liabilities generally increase economic value; the longer the duration, the greater the value gained. The opposite is true when interest
rates fall. The EVE at risk reported as of December 31, 2015 for the +200 basis points scenario shows a more liability sensitive
position compared with December 31, 2014. The primary factors contributing to this change were the growth of longer duration
HQLA in preparation for LCR compliance and an increase in Automobile loans, offset somewhat by the growth of both Consumer and
Commercial deposit balances.
MSRs
(This section should be read in conjunction with Note 6 of Notes to the Consolidated Financial Statements.)
At December 31, 2015, we had a total of $161 million of capitalized MSRs representing the right to service $16.2 billion in
mortgage loans. Of this $161 million, $18 million was recorded using the fair value method and $143 million was recorded using the
amortization method.
MSR fair values are 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 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. However, volatile changes in interest rates can diminish the effectiveness of these economic hedges.
We 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
subsidiary, foreign exchange positions, equity investments, and investments in securities backed by mortgage loans. 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.
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.