Huntington National Bank 2010 Annual Report Download - page 131

We analyzed both our Alt-A mortgage-backed and private-label CMO securities portfolios to determine if
the securities in these portfolios were other-than-temporarily impaired. We used the analysis to determine
whether we believed it was probable that all contractual cash flows would not be collected. All securities in
these portfolios remained current with respect to interest and principal, except for one security which
experienced a minor interest shortfall at December 31, 2010.
Our analysis indicated that, as of December 31, 2010, one Alt-A mortgage-backed security and seven
private-label CMO securities could experience a loss of principal in the future. The future expected losses of
principal on these other-than-temporarily impaired securities ranged from 4.2% to 38.5% of their par value.
These losses were projected to occur anywhere from eight months to as many as 25 years in the future. We
measured the amount of credit impairment on these securities using the cash flows discounted at each
security’s effective rate. In 2010, a total of $1.6 million of credit OTTI was recorded in our Alt-A mortgage-
backed securities portfolio, and $7.1 million of credit OTTI was recorded in our private-label CMO securities
portfolio. These OTTI adjustments negatively impacted our earnings.
Pooled-trust-preferred securities represent CDOs backed by a pool of debt securities issued by financial
institutions. 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 this portfolio as Level 3 in the fair value
hierarchy. The collateral generally consisted of trust-preferred securities and subordinated debt securities issued
by banks, bank holding companies, and insurance companies. A full cash flow analysis was used to estimate
fair values and assess impairment for each security within this portfolio. Impairment was calculated as the
difference between the carrying amount and the amount of cash flows discounted at each security’s effective
rate. We engaged a third party 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. Relying on cash flows was necessary because there was a lack of observable transactions in the
market and many of the original sponsors or dealers for these securities were no longer able to provide a fair
value.
The analysis was 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 each security and terms of each security’s structure. The credit review included analysis of
profitability, credit quality, operating efficiency, leverage, and liquidity using the most recently available
financial and regulatory information for each underlying collateral issuer. We also reviewed historical industry
default data and current / near term operating conditions. Using the results of our analysis, we estimated
appropriate default and recovery probabilities for each piece of collateral and then estimated the expected cash
flows for each security. No recoveries were assumed on issuers who are in default. The recovery assumptions
on issuers who were deferring interest ranged from 10% to 55% with a cure assumed after the maximum
deferral period. As a result of this testing, we believe we will likely experience a loss of principal or interest
on nine securities and, as such, recorded credit OTTI of $1.5 million for one newly impaired and eight
previously impaired pooled-trust-preferred securities in the 2010 fourth quarter. In 2010, $4.9 million of total
OTTI was recorded for impairment of the pooled-trust-preferred securities. These OTTI adjustments negatively
impacted our earnings.
Please refer to the Securities discussion and Note 1 and Note 4 of the Notes to the Consolidated Financial
Statements for additional information regarding OTTI.
Certain other assets and liabilities which are not financial instruments also involve fair value measure-
ments. A description of these assets and liabilities, and the methodologies utilized to determine fair value are
discussed below:
GOODWILL
Goodwill is an intangible asset representing the difference between the purchase price of an asset and its
fair market value and is created when a company pays a premium to acquire the assets of another company.
We test goodwill for impairment annually, as of October 1, using a two-step process that begins with an
estimation of the fair value of a reporting unit. Goodwill impairment exists when a reporting unit’s carrying
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