Huntington National Bank 2011 Annual Report Download - page 198

assumptions provided to the third party pricing service by comparing the current PD to the assumptions used the
previous quarter, actual defaults and deferrals in the current period, and trend data on certain financial ratios of
the issuers. Huntington also evaluates the assumptions related to discount rates and prepayments. Each quarter,
the Company seeks to obtain information on actual trades of securities with similar characteristics to further
support our fair value estimates and our underlying assumptions. For purposes of determining fair value at
December 31, 2011, the discounted cash flow modeling was the predominant input.
Huntington utilizes the same processes to determine the fair value of investment securities classified as
held-to-maturity for impairment evaluation purposes.
Automobile loans
Effective January 1, 2010, Huntington consolidated an automobile loan securitization that previously had
been accounted for as an off-balance sheet transaction. As a result, Huntington elected to account for the
automobile loan receivables and the associated notes payable at fair value per guidance supplied in ASC 825,
“Financial Instruments”. The automobile loan receivables are classified as Level 3. The key assumptions used to
determine the fair value of the automobile loan receivables included projections of expected losses and
prepayment of the underlying loans in the portfolio and a market assumption of interest rate spreads. Certain
interest rates are available from similarly traded securities while other interest rates are developed internally
based on similar asset-backed security transactions in the market.
MSRs
MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these
assets is classified as Level 3. Huntington determines the fair value of MSRs using an income approach model
based upon our month-end interest rate curve and prepayment assumptions. The model, which is operated and
maintained by a third party, utilizes assumptions to estimate future net servicing income cash flows, including
estimates of time decay, payoffs, and changes in valuation inputs and assumptions. Servicing brokers and other
sources of information (e.g. discussion with other mortgage servicers and industry surveys) are used to obtain
information on market practice and assumptions. On at least a quarterly basis, third party marks are obtained
from at least one service broker. Huntington reviews the valuation assumptions against this market data for
reasonableness and adjusts the assumptions if deemed appropriate. Any recommended change in assumptions
and / or inputs are presented for review to the Mortgage Price Risk Subcommittee for final approval.
Derivatives
Derivatives classified as Level 1 consist of exchange traded options and forward commitments to deliver
mortgage-backed securities which are valued using quoted prices. Asset and liability conversion swaps and
options, and interest rate caps are classified as Level 2. These derivative positions are valued using a discounted
cash flow method that incorporates current market interest rates. Derivatives classified as Level 3 consist
primarily of interest rate lock agreements related to mortgage loan commitments. The determination of fair value
includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is
a significant unobservable assumption.
Securitization trust notes payable
Consists of certain securitization trust notes payable related to the automobile loan receivables measured at
fair value. The notes payable are classified as Level 2 and are valued based on interest rates for similar financial
instruments.
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