Huntington National Bank 2014 Annual Report Download - page 146

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Security Impairment
Huntington evaluated OTTI 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 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. The remaining Alt-A mortgage backed securities were sold during the third quarter 2014.
Collateralized Debt Obligations 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 pricing 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 2% 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 30% 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 4.3% to LIBOR plus 13.3% as of December 31, 2014. 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 2032 to 2035).
On December 10, 2013, the Federal Reserve, the OCC, the FDIC, the CFTC and the SEC issued final rules to implement the
Volcker Rule contained in section 619 of the Dodd-Frank Act, generally to become effective on July 21, 2015. The Volcker Rule
prohibits an insured depository institution and its affiliates (referred to as “banking entities”) from: (i) engaging in “proprietary
trading” and (ii) investing in or sponsoring certain types of funds (“covered funds”) subject to certain limited exceptions. These
prohibitions impact the ability of U.S. banking entities to provide investment management products and services that are competitive
with nonbanking firms generally and with non-U.S. banking organizations in overseas markets. The rule also effectively prohibits
short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted
for trading.
On January 14, 2014, the five federal agencies approved an interim final rule to permit banking entities to retain interests in
certain collateralized debt obligations backed primarily by trust preferred securities from the investment prohibitions of section 619 of
the Volcker Rule. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by
banking entities if certain qualifications are met. In addition, the agencies released a non-exclusive list of issuers that meet the
requirements of the interim final rule. At December 31, 2014, we had investments in nine different pools of trust preferred
securities. Eight of our pools are included in the list of non-exclusive issuers. We have analyzed the ICONS pool that was not
included on the list and believe that it is more likely than not that we will be able to hold the ICONS security to recovery under the
final Volcker Rule regulations.