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, 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 September 30, 2016 and December 31, 2015:



	September 30, 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	$	1,000	$	1,000	$	—	$	—
After 1 year through 5 years	5,474		5,509		5,457		5,472
After 5 years through 10 years	—		—		—		—
After 10 years	—		—		—		—
Total U.S. Treasury	6,474		6,509		5,457		5,472
Federal agencies: mortgage-backed securities:
1 year or less	—		—		51,146		51,050
After 1 year through 5 years	112,813		114,408		111,655		113,393
After 5 years through 10 years	268,553		274,530		254,397		257,765
After 10 years	10,427,666		10,491,942		4,088,120		4,099,480
Total Federal agencies: mortgage-backed securities	10,809,032		10,880,880		4,505,318		4,521,688
Other agencies:
1 year or less	1,851		1,878		801		805
After 1 year through 5 years	9,806		10,132		9,101		9,395
After 5 years through 10 years	111,561		113,761		105,174		105,713
After 10 years	—		—		—		—
Total other agencies	123,218		125,771		115,076		115,913
Total U.S. Treasury, Federal agency, and other agency securities	10,938,724		11,013,160		4,625,851		4,643,073
Municipal securities:
1 year or less	171,499		165,902		281,644		280,823
After 1 year through 5 years	960,375		968,651		587,664		587,345
After 5 years through 10 years	1,434,758		1,440,241		1,053,502		1,048,550
After 10 years	727,541		736,367		509,133		539,678



Total municipal securities	3,294,173		3,311,161		2,431,943		2,456,396
Asset-backed securities:
1 year or less	—		—		—		—
After 1 year through 5 years	174,949		175,889		110,115		109,300
After 5 years through 10 years	292,649		295,441		128,342		128,208
After 10 years	639,277		609,852		662,602		623,905
Total asset-backed securities	1,106,875		1,081,182		901,059		861,413
Corporate debt:
1 year or less	79,248		80,146		300		302
After 1 year through 5 years	345,632		354,698		356,513		360,653
After 5 years through 10 years	66,223		68,428		107,394		105,522
After 10 years	48,861		49,219		—		—
Total corporate debt	539,964		552,491		464,207		466,477
Other:
1 year or less	—		—		—		—
After 1 year through 5 years	3,950		3,947		3,950		3,898
After 5 years through 10 years	—		—		—		—
After 10 years	—		—		—		—
Non-marketable equity securities	492,080		492,080		332,786		332,786
Mutual funds	2,113		2,553		10,604		10,604
Marketable equity securities	13,800		13,800		523		794
Total other	511,943		512,380		347,863		348,082
Total available-for-sale and other securities	$	16,391,679	$	16,470,374	$	8,770,923	$	8,775,441

Non-marketable equity securities includes $249 million and $157 million of stock issued by the FHLB of Cincinnati and $243 million and $176 million of Federal Reserve Bank stock at September 30, 2016 and December 31, 2015, respectively. 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, 2016 and December 31, 2015:



			Unrealized
(dollar amounts in thousands)	Amortized Cost		Gross Gains		Gross Losses			Fair Value
September 30, 2016
U.S. Treasury	$	6,474	$	35	$	—		$	6,509
Federal agencies:
Mortgage-backed securities	10,809,032		79,940		(8,092		)	10,880,880
Other agencies	123,218		2,553		—			125,771
Total U.S. Treasury, Federal agency securities	10,938,724		82,528		(8,092		)	11,013,160
Municipal securities	3,294,173		54,452		(37,464		)	3,311,161
Asset-backed securities	1,106,875		5,633		(31,326		)	1,081,182
Corporate debt	539,964		12,838		(311		)	552,491
Other securities	511,943		440		(3		)	512,380
Total available-for-sale and other securities	$	16,391,679	$	155,891	$	(77,196	)	$	16,470,374



			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 September 30, 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 $6.0 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, 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 September 30, 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
September 30, 2016
Federal agencies:
Mortgage-backed securities	$	2,583,032	$	(7,836	)	$	30,742	$	(256	)	$	2,613,774	$	(8,092	)
Other agencies	—		—			—		—			—		—
Total Federal agency securities	2,583,032		(7,836		)	30,742		(256		)	2,613,774		(8,092		)
Municipal securities	911,170		(30,367		)	178,540		(7,097		)	1,089,710		(37,464		)
Asset-backed securities	199,279		(2,085		)	125,304		(29,241		)	324,583		(31,326		)
Corporate debt	23,663		(306		)	299		(5		)	23,962		(311		)
Other securities	—		—			1,497		(3		)	1,497		(3		)
Total temporarily impaired securities	$	3,717,144	$	(40,594	)	$	336,382	$	(36,602	)	$	4,053,526	$	(77,196	)



	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	)

The following table is a summary of realized securities gains and losses for the three-month and nine-month periods ended September 30, 2016 and 2015:



	Three Months Ended September 30,						Nine Months Ended September 30,
(dollar amounts in thousands)	2016			2015			2016			2015
Gross gains on sales of securities	$	3,770		$	6,173		$	7,161		$	6,256
Gross (losses) on sales of securities	(2,739		)	(5,985		)	(5,474		)	(5,986		)
Net gain on sales of securities	$	1,031		$	188		$	1,687		$	270

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 July 6, 2016, the Federal Reserve extended the conformance period under section 13 of the BHC Act for all banking entities to conform investments in, and relationships with, legacy covered funds until July 21, 2017.

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, 2016, we had investments in seven different pools of trust preferred securities. Six 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 September 30, 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

September 30, 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)
ICONS	$	18,912	$	18,912	$	15,228	$	(3,684	)	BB	19/21	7	14	52
MM Comm III	4,633		4,426		3,553		(873		)	BB	5/8	5	6	34
Pre TSL IX	5,000		3,955		3,155		(800		)	C	27/38	18	10	8
Pre TSL XI	25,000		19,733		15,223		(4,510		)	C	44/53	12	7	14
Pre TSL XIII	27,530		19,277		16,524		(2,753		)	C	44/54	10	10	28
Reg Diversified (1)	25,500		4,610		1,749		(2,861		)	D	22/38	33	7	—
Tropic III	31,000		31,000		18,377		(12,623		)	BB	28/37	16	7	39
Total at September 30, 2016	$	137,575	$	101,913	$	73,809	$	(28,104	)
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 and nine-month periods ended September 30, 2016 and 2015, 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)	2016		2015		2016		2015
Available-for-sale and other securities:
Collateralized Debt Obligations	$	—	$	2,440	$	—	$	2,440
Municipal Securities	$	—	$	—	$	76	$	—
Total available-for-sale and other securities	$	—	$	2,440	$	76	$	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, 2016 and 2015 as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(dollar amounts in thousands)	2016			2015			2016			2015
Balance, beginning of period	$	9,831		$	30,869		$	18,368		$	30,869
Reductions from sales	(76		)	(14,941		)	(8,689		)	(14,941		)
Additional credit losses	—			2,440			76			2,440
Balance, end of period	$	9,755		$	18,368		$	9,755		$	18,368