Quarterly report pursuant to Section 13 or 15(d)

Loan Sales and Securitizations

Loan Sales and Securitizations
6 Months Ended
Jun. 30, 2011
Loan Sales and Securitizations [Abstract]  
Residential Mortgage Loans
The following table summarizes activity relating to residential mortgage loans sold with servicing retained for the three-month and six-month periods ended June 30, 2011 and 2010:
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(dollar amounts in thousands)   2011     2010     2011     2010  
Residential mortgage loans sold with servicing retained
  $ 492,015     $ 803,000     $ 1,749,518     $ 1,539,015  
Pretax gains resulting from above loan sales (1)
    12,565       18,661       45,244       33,424  
(1)   Recorded in other noninterest income.
A MSR is established only when the servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. At initial recognition, the MSR asset is established at its fair value using assumptions consistent with assumptions used to estimate the fair value of existing MSRs carried at fair value in the portfolio. At the time of initial capitalization, MSRs are grouped into one of two categories depending on whether or not Huntington intends to actively hedge the asset. MSR assets are recorded using the fair value method if Huntington will actively engage in hedging the asset and recorded using the amortization method if no active hedging will be performed. MSRs are included in accrued income and other assets. Any increase or decrease in the fair value of MSRs carried under the fair value method, as well as amortization or impairment of MSRs recorded using the amortization method, is recorded as an increase or decrease in mortgage banking income, which is included in noninterest income.
The following tables summarize the changes in MSRs recorded using either the fair value method or the amortization method for the three-month and six-month periods ended June 30, 2011 and 2010:
Fair Value Method:
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(dollar amounts in thousands)   2011     2010     2011     2010  
Fair value, beginning of period
  $ 119,207     $ 162,106     $ 125,679     $ 176,427  
Change in fair value during the period due to:
Time decay (1)
    (1,390 )     (1,536 )     (2,764 )     (3,208 )
Payoffs (2)
    (4,528 )     (6,800 )     (10,400 )     (13,677 )
Changes in valuation inputs or assumptions (3)
    (8,292 )     (21,365 )     (7,518 )     (27,137 )
Fair value, end of period:
  $ 104,997     $ 132,405     $ 104,997     $ 132,405  
(1)   Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns.
(2)   Represents decrease in value associated with loans that paid off during the period.
(3)   Represents change in value resulting primarily from market-driven changes in interest rates and prepayment spreads.
Amortization Method:
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(dollar amounts in thousands)   2011     2010     2011     2010  
Carrying value, beginning of year
  $ 83,352     $ 45,446     $ 70,516     $ 38,165  
New servicing assets created
    4,525       7,944       19,978       16,741  
Impairment charge
          (4,856 )           (4,856 )
Amortization and other
    (3,135 )     (1,801 )     (5,752 )     (3,317 )
Carrying value, end of period
  $ 84,742     $ 46,733     $ 84,742     $ 46,733  
Fair value, end of period
  $ 95,829     $ 47,565     $ 95,829     $ 47,565  
MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of MSRs.
A summary of key assumptions and the sensitivity of the MSR value at June 30, 2011, to changes in these assumptions follows:
            Decline in fair value due to  
            10%     20%  
            adverse     adverse  
(dollar amounts in thousands)   Actual     change     change  
Constant prepayment rate
    11.93 %   $ (5,954 )   $ (11,214 )
Spread over forward interest rate swap rates
  494 bps     (2,279 )     (4,557 )
MSR 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 impacted by the level of prepayments. Huntington hedges the fair value portfolio of MSRs against changes in value attributable to changes in interest rates through a combination of derivative instruments and trading securities.
Total servicing fees included in mortgage banking income amounted to $12.4 million and $12.2 million for the three-month periods ended June 30, 2011 and 2010, respectively. For the six-month periods ending June 30, 2011 and 2010, servicing fees totaled $25.0 million and $24.6 million, respectively.
Automobile Loans and Leases
The Company is currently considering an automobile loan securitization transaction during the second half of 2011. The potential securitization is expected to be between $1.0 billion and $1.3 billion. At June 30, 2011, and through the date of this filing, the Company has not yet identified the specific loans that would be securitized or finalized terms of the securitization, including whether the securitization would be recorded as a sale or as secured financing and, therefore, has not reclassified the loans to loans held for sale.