Huntington Bancshares Incorporated Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

AVAILABLE-FOR-SALE AND OTHER SECURITIES

AVAILABLE-FOR-SALE AND OTHER SECURITIES

3 Months Ended

Mar. 31, 2016

Investments, Debt and Equity Securities [Abstract]

Listed below are the contractual maturities (1 year or less, 1-5 years, 6-10 years, and over 10 years) of available-for-sale and other securities at March 31, 2016 and December 31, 2015:



	March 31, 2016				December 31, 2015
(dollar amounts in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Treasury, Federal agency, and other agency securities:
U.S. Treasury:
1 year or less	$	798	$	798	$	—	$	—
After 1 year through 5 years	5,463		5,509		5,457		5,472
After 5 years through 10 years	—		—		—		—
After 10 years	—		—		—		—
Total U.S. Treasury	6,261		6,307		5,457		5,472
Federal agencies: mortgage-backed securities:
1 year or less	51,065		50,983		51,146		51,050
After 1 year through 5 years	104,732		106,924		111,655		113,393
After 5 years through 10 years	241,927		247,936		254,397		257,765
After 10 years	4,371,145		4,436,149		4,088,120		4,099,480
Total Federal agencies: mortgage-backed securities	4,768,869		4,841,992		4,505,318		4,521,688
Other agencies:
1 year or less	2,202		2,242		801		805
After 1 year through 5 years	8,146		8,549		9,101		9,395
After 5 years through 10 years	101,107		103,705		105,174		105,713
After 10 years	—		—		—		—
Total other agencies	111,455		114,496		115,076		115,913
Total U.S. Treasury, Federal agency, and other agency securities	4,886,585		4,962,795		4,625,851		4,643,073
Municipal securities:
1 year or less	285,763		275,832		281,644		280,823
After 1 year through 5 years	587,570		592,057		587,664		587,345
After 5 years through 10 years	1,164,206		1,171,111		1,053,502		1,048,550
After 10 years	557,927		594,756		509,133		539,678
Total municipal securities	2,595,466		2,633,756		2,431,943		2,456,396
Asset-backed securities:
1 year or less	—		—		—		—
After 1 year through 5 years	150,053		149,844		110,115		109,300
After 5 years through 10 years	88,267		89,019		128,342		128,208
After 10 years	641,296		598,511		662,602		623,905
Total asset-backed securities	879,616		837,374		901,059		861,413
Corporate debt:
1 year or less	29,307		29,919		300		302
After 1 year through 5 years	346,591		353,571		356,513		360,653
After 5 years through 10 years	152,382		153,171		107,394		105,522



After 10 years	—		—		—		—
Total corporate debt	528,280		536,661		464,207		466,477
Other:
1 year or less	—		—		—		—
After 1 year through 5 years	3,950		3,931		3,950		3,898
After 5 years through 10 years	—		—		—		—
After 10 years	—		—		—		—
Non-marketable equity securities	333,460		333,460		332,786		332,786
Mutual funds	10,506		10,506		10,604		10,604
Marketable equity securities	524		898		523		794
Total other	348,440		348,795		347,863		348,082
Total available-for-sale and other securities	$	9,238,387	$	9,319,381	$	8,770,923	$	8,775,441

Non-marketable equity securities at March 31, 2016 and December 31, 2015 include $157 million of stock issued by the FHLB of Cincinnati and $176 million of Federal Reserve Bank stock. Non-marketable equity securities are recorded at amortized cost.

The following tables provide amortized cost, fair value, and gross unrealized gains and losses recognized in OCI by investment category at March 31, 2016 and December 31, 2015:



			Unrealized
(dollar amounts in thousands)	Amortized Cost		Gross Gains		Gross Losses			Fair Value
March 31, 2016
U.S. Treasury	$	6,261	$	46	$	—		$	6,307
Federal agencies:
Mortgage-backed securities	4,768,869		74,186		(1,063		)	4,841,992
Other agencies	111,455		3,041		—			114,496
Total U.S. Treasury, Federal agency securities	4,886,585		77,273		(1,063		)	4,962,795
Municipal securities	2,595,466		72,956		(34,666		)	2,633,756
Asset-backed securities	879,616		1,724		(43,966		)	837,374
Corporate debt	528,280		8,495		(114		)	536,661
Other securities	348,440		375		(20		)	348,795
Total available-for-sale and other securities	$	9,238,387	$	160,823	$	(79,829	)	$	9,319,381



			Unrealized
(dollar amounts in thousands)	Amortized Cost		Gross Gains		Gross Losses			Fair Value
December 31, 2015
U.S. Treasury	$	5,457	$	15	$	—		$	5,472
Federal agencies:
Mortgage-backed securities	4,505,318		30,078		(13,708		)	4,521,688
Other agencies	115,076		888		(51		)	115,913
Total U.S. Treasury, Federal agency securities	4,625,851		30,981		(13,759		)	4,643,073
Municipal securities	2,431,943		51,558		(27,105		)	2,456,396
Asset-backed securities	901,059		535		(40,181		)	861,413
Corporate debt	464,207		4,824		(2,554		)	466,477
Other securities	347,863		271		(52		)	348,082
Total available-for-sale and other securities	$	8,770,923	$	88,169	$	(83,651	)	$	8,775,441

At March 31, 2016, the carrying value of investment securities pledged to secure public and trust deposits, trading account liabilities, U.S. Treasury demand notes, and security repurchase agreements totaled $2.9 billion. There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders’ equity at March 31, 2016.

The following tables provide detail on investment securities with unrealized losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at March 31, 2016 and December 31, 2015:



	Less than 12 Months					Over 12 Months					Total
(dollar amounts in thousands )	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2016
Federal agencies:
Mortgage-backed securities	$	266,950	$	(709	)	$	61,611	$	(354	)	$	328,561	$	(1,063	)
Other agencies	—		—			—		—			—		—
Total Federal agency securities	266,950		(709		)	61,611		(354		)	328,561		(1,063		)
Municipal securities	521,994		(19,927		)	208,458		(14,739		)	730,452		(34,666		)
Asset-backed securities	305,927		(5,319		)	173,013		(38,647		)	478,940		(43,966		)
Corporate debt	17,333		(35		)	10,217		(79		)	27,550		(114		)
Other securities						2,280		(20		)	2,280		(20		)
Total temporarily impaired securities	$	1,112,204	$	(25,990	)	$	455,579	$	(53,839	)	$	1,567,783	$	(79,829	)



	Less than 12 Months					Over 12 Months					Total
(dollar amounts in thousands )	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2015
Federal agencies:
Mortgage-backed securities	$	1,658,516	$	(11,341	)	$	84,147	$	(2,367	)	$	1,742,663	$	(13,708	)
Other agencies	37,982		(51		)	—		—			37,982		(51		)
Total Federal agency securities	1,696,498		(11,392		)	84,147		(2,367		)	1,780,645		(13,759		)
Municipal securities	570,916		(15,992		)	248,204		(11,113		)	819,120		(27,105		)
Asset-backed securities	552,275		(5,791		)	207,639		(34,390		)	759,914		(40,181		)
Corporate debt	167,144		(1,673		)	21,965		(881		)	189,109		(2,554		)
Other securities	772		(28		)	1,476		(24		)	2,248		(52		)
Total temporarily impaired securities	$	2,987,605	$	(34,876	)	$	563,431	$	(48,775	)	$	3,551,036	$	(83,651	)

There were no realized securities gains or losses for the three-month periods ended March 31, 2016 and 2015.

Security Impairment

Huntington evaluates the available-for-sale securities portfolio on a quarterly basis for impairment. We conduct a comprehensive security-level assessment on all available-for-sale securities. Impairment would exist when the present value of the expected cash flows are not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any impairment would be recognized in earnings. The contractual terms and/or cash flows of the investments do not permit the issuer to settle the securities at a price less than the amortized cost. Huntington does not intend to sell, nor does it believe it will be required to sell these securities until the amortized cost is recovered, which may be maturity.

The highest risk segment in our investment portfolio is the trust preferred CDO securities which are in the asset-backed securities portfolio. This portfolio is in run off, and we have not purchased these types of securities since 2005. The fair values of the CDO assets have been impacted by various market conditions. The unrealized losses are primarily the result of wider liquidity spreads on asset-backed securities and the longer expected average lives of the trust-preferred CDO securities, due to changes in the expectations of when the underlying securities will be repaid.

Collateralized Debt Obligations are 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. Many collateral issuers have the option of deferring interest payments on their debt for up to five years. 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 fair value of each security is obtained by discounting the expected cash flows at a market discount rate. 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 March 31, 2016, we had investments in eight different pools of trust preferred securities. Seven 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.

The following table summarizes the relevant characteristics of our CDO securities portfolio, which are included in asset-backed securities, at March 31, 2016. Each security is part of a pool of issuers and supports a more senior tranche of securities except for the MM Comm III securities which are the most senior class.

Collateralized Debt Obligation Data

March 31, 2016

(dollar amounts in thousands)



Deal Name	Par Value		Amortized Cost		Fair Value		Unrealized Loss (2)			Lowest Credit Rating (3)	# of Issuers Currently Performing/ Remaining (4)	Actual Deferrals and Defaults as a % of Original Collateral		Expected Defaults as a % of Remaining Performing Collateral		Excess Subordination (5)
Alesco II	$	41,646	$	27,794	$	23,447	$	(4,347	)	C	30/36	15	%	6	%	5	%
ICONS	19,214		19,214		15,131		(4,083		)	BB	19/21	7		14		51
MM Comm III	4,684		4,475		3,545		(930		)	BB	5/8	5		7		33
Pre TSL IX	5,000		3,955		2,963		(992		)	C	27/38	18		10		7
Pre TSL XI	25,000		20,020		14,288		(5,732		)	C	43/55	16		8		11
Pre TSL XIII	27,530		19,588		15,505		(4,083		)	C	46/56	10		11		24
Reg Diversified (1)	25,500		5,104		1,762		(3,342		)	D	22/38	33		7		—
Tropic III	31,000		31,000		17,689		(13,311		)	CCC+	30/40	19		8		39
Total at March 31, 2016	$	179,574	$	131,150	$	94,330	$	(36,820	)
Total at December 31, 2015	$	179,574	$	131,911	$	100,338	$	(31,654	)


(1)	Security was determined to have OTTI. As such, the book value is net of recorded credit impairment.


(2)	The majority of securities have been in a continuous loss position for 12 months or longer.


(3)	For purposes of comparability, the lowest credit rating expressed is equivalent to Fitch ratings even where the lowest rating is based on another nationally recognized credit rating agency.


(4)	Includes both banks and/or insurance companies.

(5)

Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages.

For the three-month periods ended March 31, 2016 and 2015, there were no OTTI losses recognized in the Unaudited Condensed Consolidated Statements of Income for securities evaluated for impairment as described above.