Huntington National Bank 2012 Annual Report Download - page 176

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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. 96% 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. 3% 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. A significant change in the unobservable inputs for these securities may result in a significant change in the
ending fair value measurement of these securities.
The Alt-A, private label CMO and pooled-trust-preferred securities portfolios are classified as Level 3 and as such use significant
estimates to determine the fair value of these securities which results in greater subjectivity. The Alt-A and private label CMO
securities portfolios are subjected to a monthly review of the projected cash flows, while the cash flows of the pooled-trust-preferred
securities portfolio are reviewed quarterly. These reviews are supported with analysis from independent third parties, and are used as a
basis for impairment analysis.
Alt-A mortgage-backed and private-label CMO securities are collateralized by first-lien residential mortgage loans. The securities
are valuation methodology incorporates values obtained from a third party pricing specialist using a discounted cash flow approach
and a proprietary pricing model and includes assumptions management believes market participants would use to value the securities
under current market conditions. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are
implied by the underlying performance of collateral in the structure or similar structures, house price depreciation / appreciation rates
that are based upon macroeconomic forecasts and discount rates that are implied by market prices for similar securities with similar
collateral structures.
Pooled-trust-preferred securities are CDOs backed by a pool of debt securities issued by financial institutions. The collateral
generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and
insurance companies. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this
portfolio. We engage a third party pricing specialist with direct industry experience in pooled-trust-preferred securities valuations to
provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. The PD of each issuer and
the market discount rate are the most significant inputs in determining fair value. Management evaluates the PD assumptions
provided by the third party pricing specialist 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. Relying on cash flows is necessary because there was a lack of observable transactions in the market and
many of the original sponsors or dealers for these securities are no longer able to provide a fair value that is compliant with ASC 820
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. 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.