Huntington National Bank 2010 Annual Report Download - page 130

Financial Instrument(1) Hierarchy Valuation methodology
MSRs(3) Level 3 MSRs do not trade in an active, open market with readily
observable prices. Although sales of MSRs do occur, the
precise terms and conditions typically are not readily available.
Fair value is determined on an income approach model based
upon month-end interest rate curve and prepayment
assumptions.
Derivatives(4) Level 1 Consist of exchange traded options and forward commitments
to deliver mortgage-backed securities which are valued using
quoted prices.
Level 2 Consist of basic asset and liability conversion swaps and
options, and interest rate caps. These derivative positions are
valued using a discounted cash flow method that incorporates
current market interest rates.
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(4)
Level 2 Consists of certain securitization trust notes payable related to
the automobile loans measured at fair value. The notes payable
are valued based on interest rates for similar financial
instruments. The change in fair value for the year ended
December 31, 2010 was $9.6 million.
(1) Refer to Note 1 of the Notes to Consolidated Financial Statements for additional information.
(2) Refer to Note 4 of the Notes to Consolidated Financial Statements for additional information.
(3) Refer to Note 5 of the Notes to Consolidated Financial Statements for additional information.
(4) Refer to Note 20 of the Notes to Consolidated Financial Statements for additional information.
INVESTMENT SECURITIES
(This section should be read in conjunction with the Investment Securities Portfolio discussion and Note 1
and Note 4 in the Notes to Consolidated Financial Statements.)
Level 3 Analysis on Certain Securities Portfolios
Our Alt-A, private label CMO, and pooled-trust-preferred securities portfolios are classified as Level 3,
and as such, the significant estimates used to determine the fair value of these securities have 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 our 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. These three portfolios, and the results of our impairment analysis for each portfolio, are
discussed in further detail below:
Alt-A mortgage-backed / Private-label collateralized mortgage obligation (CMO) securities represent
securities collateralized by first-lien residential mortgage loans. As the lowest level input that is significant to
the fair value measurement of these securities in its entirety was a Level 3 input, we classified all securities
within these portfolios as Level 3 in the fair value hierarchy. The securities were priced with the assistance of
an outside third party specialist using a discounted cash flow approach and the independent third party’s
proprietary pricing model. The model used inputs such as estimated prepayment speeds, losses, recoveries, and
default rates that were implied by the underlying performance of collateral in the structure or similar
structures, discount rates that were implied by market prices for similar securities, collateral structure types,
and housing price depreciation / appreciation rates that were based upon macroeconomic forecasts.
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