Huntington National Bank 2011 Annual Report Download - page 171

that are not credit-related and, therefore, are recognized in OCI. Huntington believes that it will fully collect the
carrying value of securities on which noncredit-related impairment has been recognized in OCI. Noncredit-
related OTTI results from other factors, including increased liquidity spreads and extension of the security. For
securities which Huntington does expect to sell, or if it is more likely than not Huntington will be required to sell
the security before recovery of its amortized cost basis, all OTTI is recognized in earnings. Presentation of OTTI
is made in the Condensed Consolidated Statements of Income on a gross basis with a reduction for the amount of
OTTI recognized in OCI. Once an OTTI is recorded, when future cash flows can be reasonably estimated, future
cash flows are re-allocated between interest and principal cash flows to provide for a level-yield on the security.
Huntington applied the related OTTI guidance on the debt security types listed below.
Alt-A mortgage-backed and private-label CMO securities are collateralized by first-lien residential
mortgage loans. The securities are valued by a third party specialist using a discounted cash flow approach and
proprietary pricing model. 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,
discount rates that are implied by market prices for similar securities, collateral structure types, and house price
depreciation / appreciation rates that are based upon macroeconomic forecasts.
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. A third party specialist with direct industry
experience in pooled trust preferred security evaluations is engaged to provide assistance estimating the fair
value and expected cash flows on this portfolio. The full cash flow analysis is completed by evaluating the
relevant credit and structural aspects of each pooled trust preferred security in the portfolio, including collateral
performance projections for each piece of collateral in the security and terms of the security’s structure. The
credit review includes an analysis of profitability, credit quality, operating efficiency, leverage, and liquidity
using available financial and regulatory information for each underlying collateral issuer. The analysis also
includes a review of historical industry default data, current/near term operating conditions, and the impact of
macroeconomic and regulatory changes. Using the results of our analysis, we estimate appropriate default and
recovery probabilities for each piece of collateral then estimate the expected cash flows for each security. The
cumulative probability of default ranges from a low of 1% to 100%.
Many collateral issuers have the option of deferring interest payments on their debt for up to five years. For
issuers who are deferring interest, assumptions are made regarding the issuers ability to resume interest payments
and make the required principal payment at maturity; the cumulative probability of default for these issuers
currently ranges from 27% to 100%, and a 10% recovery assumption. The fair value of each security is obtained
by discounting the expected cash flows at a market discount rate, ranging from LIBOR plus 5.00% to LIBOR
plus 17% as of 2011. The market discount rate is determined by reference to yields observed in the market for
similarly rated collateralized debt obligations, specifically high-yield collateralized loan obligations. The
relatively high market discount rate is reflective of the uncertainty of the cash flows and illiquid nature of these
securities. The large differential between the fair value and amortized cost of some of the securities reflects the
high market discount rate and the expectation that the majority of the cash flows will not be received until near
the final maturity of the security (the final maturities range from 2031 to 2035).
157