Huntington National Bank 2011 Annual Report Download - page 197

Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. Transfers in and out of Level 1, 2, or 3 are recorded at fair
value at the beginning of the reporting period.
Following is a description of the valuation methodologies used for instruments measured at fair value, as
well as the general classification of such instruments pursuant to the valuation hierarchy.
Mortgage loans held for sale
Huntington elected to apply the fair value option for mortgage loans originated with the intent to sell which
are included in loans held for sale. Mortgage loans held for sale are classified as Level 2 and are estimated using
security prices for similar product types.
Available-for-sale securities and trading account securities
Securities accounted for at fair value include both the available-for-sale and trading portfolios. Huntington
uses prices obtained from third party pricing services and recent trades to determine the fair value of securities.
AFS and trading securities are classified as Level 1 using quoted market prices (unadjusted) in active markets for
identical securities that Huntington has the ability to access at the measurement date. 1% of the positions in these
portfolios are Level 1, and consist of U.S. Treasury securities and money market mutual funds. When quoted
market prices are not available, fair values are classified as Level 2 using quoted prices for similar assets in
active markets, quoted prices of identical or similar assets in markets that are not active, and inputs that are
observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument.
95% of the positions in these portfolios are Level 2, and consist of U.S. Government and agency debt securities,
agency mortgage backed securities, asset-backed securities, municipal securities and other securities. For both
Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained
from the pricing service, including reference to dealer or other market quotes, and by reviewing valuations of
comparable instruments. If relevant market prices are limited or unavailable, valuations may require significant
management judgment or estimation to determine fair value, in which case the fair values are classified as Level
3. 4% of our positions are Level 3, and consist of non-agency ALT-A asset-backed securities, private-label CMO
securities, pooled-trust-preferred CDO securities and municipal securities.
For non-agency ALT-A asset-backed securities, private-label CMO securities, and pooled-trust-preferred
CDO securities the fair value methodology incorporates values obtained from proprietary discounted cash flow
models provided by a third party. The modeling process for the ALT-A asset-backed securities and private-label
CMO securities incorporates assumptions management believes market participants would use to value the
security under current market conditions. The assumptions used include prepayment projections, credit loss
assumptions, and discount rates, which include a risk premium due to liquidity and uncertainty that are based on
both observable and unobservable inputs. Huntington validates the reasonableness of the assumptions by
comparing the assumptions with market information. Huntington uses the discounted cash flow analysis, in
conjunction with other relevant pricing information obtained from third party pricing services or broker quotes to
establish the fair value that management believes is representative under current market conditions. For purposes
of determining fair value at December 31, 2011, the discounted cash flow modeling was the predominant input.
The modeling of the fair value of the pooled-trust-preferred CDO’s utilizes a similar methodology, with the
probability of default (“PD”) of each issuer being the most critical input. Management evaluates the PD
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