Annual report pursuant to Section 13 and 15(d)

AVAILABLE-FOR-SALE AND OTHER SECURITIES

v3.3.1.900
AVAILABLE-FOR-SALE AND OTHER SECURITIES
 12 Months Ended
Dec. 31, 2015
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, 2015 and 2014 were:
 
 
2015
 
2014
(dollar amounts in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Under 1 year
$
333,891

 
$
332,980

 
$
355,486

 
$
355,465

After 1 year through 5 years
1,184,454

 
1,189,455

 
1,047,492

 
1,066,041

After 5 years through 10 years
1,648,808

 
1,645,759

 
1,517,974

 
1,527,195

After 10 years
5,259,855

 
5,263,063

 
6,090,688

 
6,086,980

Other securities:
 
 
 
 
 
 
 
Nonmarketable equity securities
332,786

 
332,786

 
331,559

 
331,559

Mutual funds
10,604

 
10,604

 
16,151

 
16,161

Marketable equity securities
525

 
794

 
536

 
1,269

Total available-for-sale and other securities
$
8,770,923

 
$
8,775,441

 
$
9,359,886

 
$
9,384,670


Other securities at December 31, 2015 and 2014 include nonmarketable equity securities of $157 million and $157 million of stock issued by the FHLB of Cincinnati, and $176 million and $175 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, 2015 and 2014:
 
 
 
 
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

 
 
 
 
Unrealized
 
 
(dollar amounts in thousands)
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Fair 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, 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
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


 
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, 2015 and 2014:
 
 
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
)
 
 
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, 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
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
)

At December 31, 2015, 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 $2.6 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, 2015.
The following table is a summary of realized securities gains and losses for the years ended December 31, 2015, 2014, and 2013:
 
 
Year ended December 31,
(dollar amounts in thousands)
2015
 
2014
 
2013
Gross gains on sales of securities
$
6,730

 
$
17,729

 
$
2,932

Gross (losses) on sales of securities
(3,546
)
 
(175
)
 
(712
)
Net gain (loss) on sales of securities
$
3,184

 
$
17,554

 
$
2,220


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 December 31, 2015, 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 December 31, 2015 and 2014. 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)
Alesco II (1)
$
41,646

 
$
28,022

 
$
25,296

 
$
(2,727
)
 
C
 
30/32
 
5
%
 
7
%
 
4
%
ICONS
19,214

 
19,214

 
15,567

 
(3,647
)
 
BB
 
19/21
 
7

 
14

 
52

MM Comm III
4,684

 
4,475

 
3,682

 
(793
)
 
BB
 
5/8
 
5

 
6

 
36

Pre TSL IX (1)
5,000

 
3,955

 
3,009

 
(946
)
 
C
 
27/38
 
18

 
10

 
7

Pre TSL XI (1)
25,000

 
20,155

 
15,418

 
(4,737
)
 
C
 
42/55
 
16

 
9

 
10

Pre TSL XIII (1)
27,530

 
19,735

 
16,769

 
(2,966
)
 
C
 
47/56
 
9

 
10

 
24

Reg Diversified (1)
25,500

 
5,435

 
1,994

 
(3,441
)
 
D
 
23/39
 
33

 
7

 
—

Tropic III
31,000

 
31,000

 
18,603

 
(12,397
)
 
CCC+
 
30/40
 
19

 
9

 
40

Total at December 31, 2015
$
179,574

 
$
131,991

 
$
100,338

 
$
(31,654
)
 
 
 
 
 
 
 
 
 
 
Total at December 31, 2014
$
193,597

 
$
139,194

 
$
82,738

 
$
(56,456
)
 
 
 
 
 
 
 
 
 
 

(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 periods ended December 31, 2015, 2014, and 2013, 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)
2015
 
2014
 
2013
Available-for-sale and other securities:
 
 
 
 
 
Collateralized Debt Obligations
$
(2,440
)
 
$
—

 
$
(1,466
)
Private label CMO
—

 
—

 
(336
)
Total debt securities
(2,440
)
 
—

 
(1,802
)
Equity securities
—

 
—

 
—

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

 
$
(1,802
)
The following table rolls forward the OTTI recognized in earnings on debt securities held by Huntington for the years ended December 31, 2015, and 2014 as follows:
 
 
Year Ended December 31,
(dollar amounts in thousands)
2015
 
2014
Balance, beginning of year
$
30,869

 
$
30,869

Reductions from sales
(14,941
)
 
—

Credit losses not previously recognized
—

 
—

Additional credit losses
2,440

 
—

Balance, end of year
$
18,368

 
$
30,869


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.