Huntington National Bank 2012 Annual Report Download - page 152

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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 pricing 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 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 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 1% 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 4.25% to LIBOR plus 16.25% as of December 31, 2012. 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).
For the periods ended December 31, 2012, 2011 and 2010, the following table summarizes by security type, OTTI recognized in
the Consolidated Statements of Income for securities evaluated for impairment as described above:
Year ended December 31,
(dollar amounts in thousands) 2012 2011 2010
Available-for-sale and other securities:
Alt-A Mortgage-backed $ --- $ (361) $ (1,632)
Pooled-trust-preferred --- (3,798) (4,922)
Private label CMO (1,614) (2,550) (7,149)
Total debt securities (1,614) (6,709) (13,703)
Equity securities (5) (654) (19)
Total available-for-sale and other securities $ (1,619) $ (7,363) $ (13,722)
The following table rolls forward the OTTI recognized in earnings on debt securities held by Huntington for the years ended
December 31, 2012 and 2011 as follows:
Year Ended December 31,
(dollar amounts in thousands) 2012 2011
Balance, beginning of year $ 56,764 $ 54,536
Reductions from sales (8,945) (4,481)
Credit losses not previously recognized --- 42
Additional credit losses 1,614 6,667
Balance, end of year $ 49,433 $ 56,764