Annual report pursuant to Section 13 and 15(d)

Available for-Sale and Other Securities

v2.4.1.9
Available for-Sale and Other Securities
12 Months Ended
Dec. 31, 2014
Securities [Abstract]  
AVAILABLE-FOR-SALE AND OTHER SECURITIES

4. AVAILABLE-FOR-SALE AND OTHER Securities

Contractual maturities of available-for-sale and other securities as of December 31, 2014 and 2013 were:

2014 2013
Amortized Fair Amortized Fair
(dollar amounts in thousands) Cost Value Cost Value
Under 1 year $ 355,486 $ 355,465 $ 263,366 $ 262,752
1 - 5 years 1,047,492 1,066,041 1,665,644 1,697,234
6 - 10 years 1,517,974 1,527,195 1,440,056 1,433,303
Over 10 years 6,090,688 6,086,980 3,662,328 3,577,502
Other securities:
Nonmarketable equity securities 331,559 331,559 320,991 320,991
Marketable equity securities 16,687 17,430 16,522 16,971
Total available-for-sale and other securities $ 9,359,886 $ 9,384,670 $ 7,368,907 $ 7,308,753

Other securities at December 31, 2014 and 2013 include nonmarketable equity securities of $157.0 million and $165.6 million of stock issued by the FHLB of Cincinnati, and $174.5 million and $155.4 million of Federal Reserve Bank stock, respectively. Nonmarketable equity securities are recorded at amortized cost. Other securities also include marketable equity securities.

The following tables provide amortized cost, fair value, and gross unrealized gains and losses recognized in OCI by investment category at December 31, 2014 and 2013

Unrealized
Amortized Gross Gross Fair
(dollar amounts in thousands) Cost Gains Losses Value
December 31, 2014
U.S. Treasury $ 5,435 $ 17 $ --- $ 5,452
Federal agencies:
Mortgage-backed securities 5,273,899 63,906 (15,104) 5,322,701
Other agencies 349,715 2,871 (1,043) 351,543
Total U.S. Treasury and Federal agency securities 5,629,049 66,794 (16,147) 5,679,696
Municipal securities 1,841,311 37,398 (10,140) 1,868,569
Private-label CMO 43,730 1,116 (2,920) 41,926
Asset-backed securities 1,014,999 2,061 (61,062) 955,998
Corporate debt securities 479,151 9,442 (2,417) 486,176
Other securities 351,646 743 (84) 352,305
Total available-for-sale and other securities $ 9,359,886 $ 117,554 $ (92,770) $ 9,384,670

Unrealized
Amortized Gross Gross Fair
(dollar amounts in thousands) Cost Gains Losses Value
December 31, 2013
U.S. Treasury $ 51,301 $ 303 $ --- $ 51,604
Federal agencies:
Mortgage-backed securities 3,562,444 42,319 (38,542) 3,566,221
Other agencies 313,877 6,105 (94) 319,888
Total U.S. Treasury and Federal agency securities 3,927,622 48,727 (38,636) 3,937,713
Municipal securities (1) 1,140,263 18,825 (13,096) 1,145,992
Private-label CMO 51,238 1,188 (3,322) 49,104
Asset-backed securities 1,172,284 6,771 (88,015) 1,091,040
Covered bonds 280,595 5,279 --- 285,874
Corporate debt securities 455,493 11,241 (9,494) 457,240
Other securities 341,412 511 (133) 341,790
Total available-for-sale and other securities $ 7,368,907 $ 92,542 $ (152,696) $ 7,308,753
(1) Effective December 31, 2013 approximately $600.4 million of direct purchase municipal instruments were reclassified from C&I loans to available-for-sale securities.

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 December 31, 2014 and 2013:

Less than 12 Months Over 12 Months Total
Fair Unrealized Fair Unrealized Fair Unrealized
(dollar amounts in thousands ) Value Losses Value Losses Value Losses
December 31, 2014
Federal Agencies:
Mortgage-backed securities $ 501,858 $ (1,909) $ 527,280 $ (13,195) $ 1,029,138 $ (15,104)
Other agencies 159,708 (1,020) 1,281 (23) 160,989 (1,043)
Total Federal agency securities 661,566 (2,929) 528,561 (13,218) 1,190,127 (16,147)
Municipal securities 568,619 (9,127) 96,426 (1,013) 665,045 (10,140)
Private label CMO --- --- 22,650 (2,920) 22,650 (2,920)
Asset-backed securities 157,613 (641) 325,691 (60,421) 483,304 (61,062)
Corporate debt securities 49,562 (252) 88,398 (2,165) 137,960 (2,417)
Other securities --- --- 1,416 (84) 1,416 (84)
Total temporarily impaired securities $ 1,437,360 $ (12,949) $ 1,063,142 $ (79,821) $ 2,500,502 $ (92,770)

Less than 12 Months Over 12 Months Total
Fair Unrealized Fair Unrealized Fair Unrealized
(dollar amounts in thousands ) Value Losses Value Losses Value Losses
December 31, 2013
Federal Agencies
Mortgage-backed securities $ 1,628,454 $ (37,174) $ 12,682 $ (1,368) $ 1,641,136 $ (38,542)
Other agencies 2,069 (94) --- --- 2,069 (94)
Total Federal agency securities 1,630,523 (37,268) 12,682 (1,368) 1,643,205 (38,636)
Municipal securities 551,114 (12,395) 7,531 (701) 558,645 (13,096)
Private label CMO --- --- 22,639 (3,322) 22,639 (3,322)
Asset-backed securities 391,665 (9,720) 107,419 (78,295) 499,084 (88,015)
Corporate debt securities 146,308 (7,729) 26,155 (1,765) 172,463 (9,494)
Other securities 3,078 (72) 2,530 (61) 5,608 (133)
Total temporarily impaired securities $ 2,722,688 $ (67,184) $ 178,956 $ (85,512) $ 2,901,644 $ (152,696)

At December 31, 2014, 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 $3.6 billion. There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders’ equity at December 31, 2014.

The following table is a summary of realized securities gains and losses for the years ended December 31, 2014, 2013, and 2012:

(dollar amounts in thousands) 2014 2013 2012
Gross gains on sales of securities $ 17,729 $ 2,932 $ 8,612
Gross (losses) on sales of securities (175) (712) (2,224)
Net gain (loss) on sales of securities $ 17,554 $ 2,220 $ 6,388

Collateralized Debt Obligations and Private-Label CMO Securities

Our highest risk segments of our investment portfolio are the CDO and 2003-2006 vintage private-label CMO portfolios. Of the $41.9 million private-label CMO securities reported at fair value at December 31, 2014, approximately $20.3 million are rated below investment grade. The CDOs are in the asset-backed securities portfolio. These segments are in run-off, and we have not purchased these types of securities since 2008. The performance of the underlying securities in each of these segments reflects the deterioration of CDO issuers and 2003 to 2006 non-agency mortgages. Each of these securities in these two segments is subjected to a rigorous review of its projected cash flows. These reviews are supported with analysis from independent third parties.

The following table presents the credit ratings for our CDO and private label CMO securities as of December 31, 2014 and 2013:

Credit Ratings of Selected Investment Securities
(dollar amounts in thousands) Average Credit Rating of Fair Value Amount (1)
Amortized
Cost Fair Value AAA AA +/- A +/- BBB +/- <BBB-
Private-label CMO securities $ 43,730 $ 41,926 $ 11,461 $ --- $ --- $ 10,161 $ 20,304
Collateralized debt obligations 139,194 82,738 --- --- --- --- 82,738
Total at December 31, 2014 $ 182,924 $ 124,664 $ 11,461 $ --- $ --- $ 10,161 $ 103,042
Total at December 31, 2013 $ 212,968 $ 133,240 $ 16,964 $ --- $ 17,855 $ 11,785 $ 86,636
(1) Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency.

Beginning January 1, 2015, the credit ratings of our private label CMO and CDO securities will no longer be used to determine risk weighting for regulatory capital purposes. Private label CMO and CDO securities will be subject to the Simplified Supervisory Formula Approach (SSFA) for risk weighting under BASEL III.

The fair values of the private label CMO and CDO assets have been impacted by various market conditions. The unrealized losses were primarily the result of wider liquidity spreads on asset-backed securities and increased market volatility on non-agency mortgage and asset-backed securities that are collateralized by certain mortgage loans. In addition, the expected average lives of the asset-backed securities backed by trust-preferred securities have been extended, due to changes in the expectations of when the underlying securities would be repaid. 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 fair value is recovered, which may be maturity, and therefore, does not consider them to be other-than-temporarily impaired at December 31, 2014.

The following table summarizes the relevant characteristics of our CDO securities portfolio, which are included in asset-backed securities, at December 31, 2014 and 2013. 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 Securities Data
(dollar amounts in thousands) Actual
Deferrals Expected
and Defaults
# of Issuers Defaults as a % of
Lowest Currently as a % of Remaining
Amortized Fair Unrealized Credit Performing/ Original Performing Excess
Deal Name Par Value Cost Value Loss (2) Rating (3) Remaining (4) Collateral Collateral Subordination (5)
Alesco II (1) $ 41,646 $ 28,834 $ 16,758 $ (12,076) C 30/33 8 % 7 % --- %
ICONS 19,837 19,837 15,786 (4,051) BB 19/21 7 15 57
MM Comm III 5,584 5,335 4,418 (917) BB 5/9 5 9 31
Pre TSL IX 5,000 3,955 2,403 (1,552) C 28/40 19 9 4
Pre TSL XI (1) 25,000 20,632 12,248 (8,384) C 43/56 16 9 8
Pre TSL XIII (1) 27,530 20,252 13,302 (6,950) C 44/58 16 16 13
Reg Diversified (1) 25,500 6,908 1,142 (5,766) D 23/41 38 9 ---
Soloso (1) 12,500 2,440 368 (2,072) C 38/61 29 18 ---
Tropic III 31,000 31,001 16,313 (14,688) CCC+ 28/40 21 8 37
Total at December 31, 2014 $ 193,597 $ 139,194 $ 82,738 $ (56,456)
Total at December 31, 2013 $ 214,419 $ 161,730 $ 84,136 $ (77,594)
(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.

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.

For the periods ended December 31, 2014, 2013 and 2012, the following table summarizes by security type, the total OTTI losses recognized in the Consolidated Statements of Income for securities evaluated for impairment as described above:

Year ended December 31,
(dollar amounts in thousands) 2014 2013 2012
Available-for-sale and other securities:
Collateralized Debt Obligations --- (1,466) ---
Private label CMO --- (336) (1,614)
Total debt securities --- (1,802) (1,614)
Equity securities --- --- (5)
Total available-for-sale and other securities $ --- $ (1,802) $ (1,619)

The following table rolls forward the OTTI recognized in earnings on debt securities held by Huntington for the years ended December 31, 2014 and 2013 as follows:

Year Ended December 31,
(dollar amounts in thousands) 2014 2013
Balance, beginning of year $ 30,869 $ 49,433
Reductions from sales --- (20,366)
Credit losses not previously recognized --- ---
Additional credit losses --- 1,802
Balance, end of year $ 30,869 $ 30,869

As of December 31, 2014, Management has evaluated other available-for-sale and other securities, including those with unrealized losses and all nonmarketable equity securities for impairment and concluded no OTTI is required.