Huntington National Bank 2015 Annual Report Download - page 174

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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.
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 these automobile loan receivables 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. During the first quarter of 2014, Huntington canceled the 2009 and 2006 Automobile Trusts. Huntington continues to
report the associated automobile loan receivables at fair value due to its 2010 election.
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 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 servicing 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.
Derivative assets and liabilities
Derivatives classified as Level 2 consist of foreign exchange and commodity contracts, which are valued using exchange
traded swaps and futures market data. In addition, Level 2 includes interest rate contracts, which are valued using a discounted
cash flow method that incorporates current market interest rates. Level 2 also includes exchange traded options and forward
commitments to deliver mortgage-backed securities, which are valued using quoted prices.
Derivatives classified as Level 3 consist 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. A significant increase or decrease in the external market price would result in a
significantly higher or lower fair value measurement.
Short-term borrowings
Short-term borrowings classified as Level 2 consist primarily of U.S. treasury bond securities sold under agreement to
repurchase. These securities are borrowed from other institutions and must be repaid by purchasing the securities in the open
market.
Assets and Liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at December 31, 2015 and 2014 are summarized below: