Huntington National Bank 2015 Annual Report Download - page 147

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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