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

9 Months Ended

Sep. 30, 2015

Investments, Debt and Equity Securities [Abstract]

Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years, and over 10 years) of available-for-sale and other securities at September 30, 2015 and December 31, 2014:



	September 30, 2015				December 31, 2014
(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	$	8,583	$	8,585	$	—	$	—
After 1 year through 5 years	5,451		5,510		5,435		5,452
After 5 years through 10 years	—		—		—		—
After 10 years	—		—		—		—
Total U.S. Treasury	14,034		14,095		5,435		5,452
Federal agencies: mortgage-backed securities:
1 year or less	52,951		53,052		47,023		47,190
After 1 year through 5 years	125,173		128,473		216,775		221,078



After 5 years through 10 years	227,466		231,846		184,576		186,938
After 10 years	6,261,562		6,350,842		4,825,525		4,867,495
Total Federal agencies: mortgage-backed securities	6,667,152		6,764,213		5,273,899		5,322,701
Other agencies:
1 year or less	1,702		1,712		33,047		33,237
After 1 year through 5 years	8,264		8,672		9,122		9,575
After 5 years through 10 years	214,184		219,193		103,530		105,019
After 10 years	144,292		146,961		204,016		203,712
Total other agencies	368,442		376,538		349,715		351,543
Total U.S. Treasury, Federal agency, and other agency securities	7,049,628		7,154,846		5,629,049		5,679,696
Municipal securities:
1 year or less	280,971		276,600		256,399		255,835
After 1 year through 5 years	499,125		501,559		269,385		274,003
After 5 years through 10 years	987,208		993,630		938,780		945,954
After 10 years	530,386		556,302		376,747		392,777
Total municipal securities	2,297,690		2,328,091		1,841,311		1,868,569
Private-label CMO:
1 year or less	—		—		—		—
After 1 year through 5 years	—		—		—		—
After 5 years through 10 years	—		—		1,314		1,371
After 10 years	—		—		42,416		40,555
Total private-label CMO	—		—		43,730		41,926
Asset-backed securities:
1 year or less	—		—		—		—
After 1 year through 5 years	90,168		90,580		228,852		229,364
After 5 years through 10 years	128,425		129,530		144,163		144,193
After 10 years	624,998		593,899		641,984		582,441
Total asset-backed securities	843,591		814,009		1,014,999		955,998
Corporate debt:
1 year or less	20,695		20,746		18,767		18,953
After 1 year through 5 years	325,773		333,460		314,773		323,503
After 5 years through 10 years	95,909		94,883		145,611		143,720
After 10 years	—		—		—		—
Total corporate debt	442,377		449,089		479,151		486,176
Other:
1 year or less	—		—		250		250
After 1 year through 5 years	3,950		3,914		3,150		3,066
After 5 years through 10 years	—		—		—		—
After 10 years	—		—		—		—
Non-marketable equity securities	332,418		332,418		331,559		331,559
Mutual funds	11,154		11,153		16,151		16,161
Marketable equity securities	755		1,348		536		1,269
Total other	348,277		348,833		351,646		352,305
Total available-for-sale and other securities	$	10,981,563	$	11,094,868	$	9,359,886	$	9,384,670

Non-marketable equity securities at September 30, 2015 and December 31, 2014 include $157.0 million of stock issued by the FHLB of Cincinnati and $175.4 million and $174.5 million, respectively, 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 September 30, 2015 and December 31, 2014:



			Unrealized
(dollar amounts in thousands)	Amortized Cost		Gross Gains		Gross Losses			Fair Value
September 30, 2015
U.S. Treasury	$	14,034	$	61	$	—		$	14,095
Federal agencies:
Mortgage-backed securities	6,667,152		104,044		(6,983		)	6,764,213
Other agencies	368,442		8,096		—			376,538
Total U.S. Treasury, Federal agency securities	7,049,628		112,201		(6,983		)	7,154,846
Municipal securities	2,297,690		49,426		(19,025		)	2,328,091
Private-label CMO	—		—		—			—
Asset-backed securities	843,591		4,471		(34,053		)	814,009
Corporate debt	442,377		7,983		(1,271		)	449,089
Other securities	348,277		592		(36		)	348,833
Total available-for-sale and other securities	$	10,981,563	$	174,673	$	(61,368	)	$	11,094,868



			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

At September 30, 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 $3.7 billion. There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders’ equity at September 30, 2015.

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 September 30, 2015 and December 31, 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
September 30, 2015
Federal agencies:
Mortgage-backed securities	$	417,246	$	(1,087	)	$	262,384	$	(5,896	)	$	679,630	$	(6,983	)
Other agencies	—		—			—		—			—		—
Total Federal agency securities	417,246		(1,087		)	262,384		(5,896		)	679,630		(6,983		)
Municipal securities	282,128		(11,078		)	243,660		(7,947		)	525,788		(19,025		)
Private-label CMO	—		—			—		—			—		—
Asset-backed securities	102,467		(221		)	248,239		(33,832		)	350,706		(34,053		)
Corporate debt	45,450		(469		)	21,876		(802		)	67,326		(1,271		)
Other securities	788		(22		)	1,486		(14		)	2,274		(36		)
Total temporarily impaired securities	$	848,079	$	(12,877	)	$	777,645	$	(48,491	)	$	1,625,724	$	(61,368	)



	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	)

The following table is a summary of realized securities gains and losses for the three-month and nine-month periods ended September 30, 2015 and 2014:



	Three Months Ended September 30,					Nine Months Ended September 30,
(dollar amounts in thousands)	2015			2014		2015			2014
Gross gains on sales of securities	$	6,173		$	198	$	6,256		$	17,678
Gross (losses) on sales of securities	(5,985		)	—		(5,986		)	(20		)
Net gain on sales of securities	$	188		$	198	$	270		$	17,658

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. 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.

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 September 30, 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 which was not included on the list and believe that it is more likely than not that we would not be required to sell and will be able to hold the security to recovery under the final Volcker Rule regulations.

For the three-month and nine-month periods ended September 30, 2015 and 2014, the following table summarizes by security type the total OTTI losses recognized in the Unaudited Condensed Consolidated Statements of Income for securities evaluated for impairment as described above.



	Three Months Ended September 30,				Nine Months Ended September 30,
(dollar amounts in thousands)	2015		2014		2015		2014
Available-for-sale and other securities:
Pooled-trust-preferred	$	2,440	$	—	$	2,440	$	—
Total debt securities	2,440		—		2,440		—
Total available-for-sale and other securities	$	2,440	$	—	$	2,440	$	—

The following table rolls forward the OTTI recognized in earnings on debt securities held by Huntington for the three-month and nine-month periods ended September 30, 2015 and 2014 as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
(dollar amounts in thousands)	2015			2014		2015			2014
Balance, beginning of period	$	30,869		$	30,869	$	30,869		$	30,869
Reductions from sales/maturities	(14,941		)	—		(14,941		)	—
Additional credit losses	2,440			—		2,440			—
Balance, end of period	$	18,368		$	30,869	$	18,368		$	30,869

The following table summarizes the relevant characteristics of our CDO securities portfolio, which are included in asset-backed securities, at September 30, 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 Data

September 30, 2015

(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	$	28,229	$	25,392	$	(2,838	)	C	30/32	5	%	7	%	4	%
ICONS	19,515		19,515		15,670		(3,844		)	BB	19/21	7		16		57
MM Comm III	5,459		5,216		4,341		(875		)	BB	6/9	5		6		32
Pre TSL IX	5,000		3,955		3,019		(936		)	C	27/38	18		10		6
Pre TSL XI	25,000		20,278		15,475		(4,803		)	C	42/55	16		9		9
Pre TSL XIII	27,530		19,869		16,840		(3,028		)	C	46/56	10		11		23
Reg Diversified (1)	25,500		5,706		1,765		(3,942		)	D	24/40	33		7		—
Tropic III	31,000		31,000		18,671		(12,329		)	CCC+	29/40	20		8		39
Total at September 30, 2015	$	180,650	$	133,768	$	101,173	$	(32,595	)
Total at December 31, 2014	$	193,597	$	139,194	$	82,738	$	(56,456	)


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


(2)	These securities have been in a continuous loss position for longer than 12 months.


(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.