Annual report pursuant to Section 13 and 15(d)

AVAILABLE-FOR-SALE AND OTHER SECURITIES

v3.6.0.2
AVAILABLE-FOR-SALE AND OTHER SECURITIES
 12 Months Ended
Dec. 31, 2016
Investments, Debt and Equity Securities [Abstract]  
AVAILABLE-FOR-SALE AND OTHER SECURITIES
AVAILABLE-FOR-SALE AND OTHER SECURITIES
Contractual maturities of available-for-sale and other securities as of December 31, 2016 and 2015 were:
 
2016
 
2015
(dollar amounts in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Under 1 year
$
223,789

 
$
221,495

 
$
333,891

 
$
332,980

After 1 year through 5 years
1,147,510

 
1,149,460

 
1,184,454

 
1,189,455

After 5 years through 10 years
1,956,893

 
1,962,345

 
1,648,808

 
1,645,759

After 10 years
11,884,812

 
11,665,245

 
5,259,855

 
5,263,063

Other securities:
 
 
 
 
 
 
 
Nonmarketable equity securities
547,704

 
547,704

 
332,786

 
332,786

Mutual funds
15,286

 
15,286

 
10,604

 
10,604

Marketable equity securities
861

 
1,302

 
525

 
794

Total available-for-sale and other securities
$
15,776,855

 
$
15,562,837

 
$
8,770,923

 
$
8,775,441


Other securities at December 31, 2016 and 2015 include nonmarketable equity securities of $249 million and $157 million of stock issued by the FHLB and $299 million and $176 million of Federal Reserve Bank stock, respectively. Nonmarketable equity securities are recorded at amortized cost. Other securities also include mutual funds and 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, 2016 and 2015: 
 
 
 
Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair Value
December 31, 2016
 
 
 
 
 
 
 
U.S. Treasury
$
5,480

 
$
17

 
$
—

 
$
5,497

Federal agencies:
 
 
 
 
 
 
 
Mortgage-backed securities
10,851,461

 
12,548

 
(190,667
)
 
10,673,342

Other agencies
73,012

 
536

 
(6
)
 
73,542

Total U.S. Treasury, Federal agency securities
10,929,953

 
13,101

 
(190,673
)
 
10,752,381

Municipal securities
3,260,428

 
28,431

 
(38,802
)
 
3,250,057

Asset-backed securities
824,124

 
1,492

 
(32,135
)
 
793,481

Corporate debt
194,537

 
4,161

 
(15
)
 
198,683

Other securities
567,813

 
441

 
(19
)
 
568,235

Total available-for-sale and other securities
$
15,776,855

 
$
47,626

 
$
(261,644
)
 
$
15,562,837

 
 
 
 
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


 
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, 2016 and 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
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
8,908,470

 
$
(189,318
)
 
$
41,706

 
$
(1,349
)
 
$
8,950,176

 
$
(190,667
)
Other agencies
924

 
(6
)
 
—

 
—

 
924

 
(6
)
Total Federal agency securities
8,909,394

 
(189,324
)
 
41,706

 
(1,349
)
 
8,951,100

 
(190,673
)
Municipal securities
1,412,152

 
(29,175
)
 
272,292

 
(9,627
)
 
1,684,444

 
(38,802
)
Asset-backed securities
361,185

 
(3,043
)
 
178,924

 
(29,092
)
 
540,109

 
(32,135
)
Corporate debt
3,567

 
(15
)
 
200

 
—

 
3,767

 
(15
)
Other securities
790

 
(11
)
 
1,492

 
(8
)
 
2,282

 
(19
)
Total temporarily impaired securities
$
10,687,088

 
$
(221,568
)
 
$
494,614

 
$
(40,076
)
 
$
11,181,702

 
$
(261,644
)
 
 
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
)
At December 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 $5.0 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, 2016.
The following table is a summary of realized securities gains and losses for the years ended December 31, 2016, 2015, and 2014:
 
Year ended December 31,
(dollar amounts in thousands)
2016
 
2015
 
2014
Gross gains on sales of securities
$
23,095

 
$
6,730

 
$
17,729

Gross (losses) on sales of securities
(21,060
)
 
(3,546
)
 
(175
)
Net gain (loss) on sales of securities
$
2,035

 
$
3,184

 
$
17,554


Security Impairment
Huntington evaluates the available-for-sale securities portfolio on a quarterly basis for impairment. The Company conducts a comprehensive security-level assessment on all available-for-sale securities. 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. 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 credit 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.
OTTI totaling $2 million was recorded on two direct purchase municipal instruments during 2016. Direct purchase municipal instruments are underwritten and managed by Huntington. At December 31, 2016, $2.8 billion of direct purchase municipal instruments were managed by Huntington.
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 the Company has 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 the analysis, the Company estimates appropriate default and recovery probabilities for each piece of collateral then estimates 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).
The following table summarizes the relevant characteristics of the Company's CDO securities portfolio, which are included in asset-backed securities, at December 31, 2016 and 2015. 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
(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)
ICONS
18,594

 
18,594

 
15,307

 
(3,287
)
 
BB
 
19/21
 
7
 
13
 
54
MM Comm III
4,573

 
4,369

 
3,618

 
(751
)
 
BB
 
5/8
 
5
 
6
 
38
Pre TSL IX (1)
5,000

 
3,955

 
3,253

 
(702
)
 
C
 
27/37
 
16
 
9
 
8
Pre TSL XI (1)
25,000

 
19,576

 
15,767

 
(3,809
)
 
C
 
43/53
 
14
 
8
 
14
Pre TSL XIII (1)
27,530

 
19,106

 
17,146

 
(1,960
)
 
C
 
45/54
 
9
 
11
 
29
Reg Diversified (1)
25,500

 
4,610

 
1,752

 
(2,858
)
 
D
 
20/37
 
35
 
8
 
—
Tropic III
31,000

 
31,000

 
19,160

 
(11,840
)
 
BB
 
28/37
 
16
 
7
 
42
Total at December 31, 2016
$
137,197

 
$
101,210

 
$
76,003

 
$
(25,207
)
 
 
 
 
 
 
 
 
 
 
Total at December 31, 2015
$
179,574

 
$
131,991

 
$
100,338

 
$
(31,654
)
 
 
 
 
 
 
 
 
 
 
(1)
Security was determined to have OTTI. As such, the amortized cost 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 periods ended December 31, 2016, 2015, and 2014, 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)
2016
 
2015
 
2014
Available-for-sale and other securities:
 
 
 
 
 
Collateralized Debt Obligations
$
—

 
$
(2,440
)
 
$
—

Municipal Securities
(2,119
)
 
—

 
—

Total available-for-sale and other securities
$
(2,119
)
 
$
(2,440
)
 
$
—

The following table rolls forward the OTTI recognized in earnings on debt securities held by Huntington for the years ended December 31, 2016, and 2015 as follows:
 
Year Ended December 31,
(dollar amounts in thousands)
2016
 
2015
Balance, beginning of year
$
18,368

 
$
30,869

Reductions from sales
(8,690
)
 
(14,941
)
Credit losses not previously recognized
2,119

 
—

Additional credit losses
—

 
2,440

Balance, end of year
$
11,797

 
$
18,368


To reduce asset risk weighting and credit risk in the investment portfolio, the remainder of the private-label CMO portfolio was sold in the 2015 third quarter.  Huntington recognized OTTI on this portfolio in prior periods.