Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUES OF ASSETS AND LIABILITIES

v3.8.0.1
FAIR VALUES OF ASSETS AND LIABILITIES
3 Months Ended
Mar. 31, 2018
Fair Value Disclosures [Abstract]  
FAIR VALUES OF ASSETS AND LIABILITIES
See Note 18 “Fair Value of Assets and Liabilities” to the Consolidated Financial Statements of the Annual Report on Form 10-K for the year ended December 31, 2017 for a description of the valuation methodologies used for instruments measured at fair value. Assets and liabilities measured at fair value rarely transfer between Level 1 and Level 2 measurements. There were no such transfers during the three-month periods ended March 31, 2018 and 2017.
Assets and Liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017 are summarized below:
 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
March 31, 2018
(dollar amounts in millions)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Trading account securities:
 
 
 
 
 
 
 
 
 
Municipal securities
$

 
$
2

 

 

 
$
2

Other securities
82

 
1

 

 

 
83

 
82

 
3

 

 

 
85

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
5

 

 

 

 
5

Residential CMOs

 
7,531

 

 

 
7,531

Residential MBS

 
724

 

 

 
724

Commercial MBS

 
1,791

 

 

 
1,791

Other agencies

 
187

 

 

 
187

Municipal securities

 
604

 
3,230

 

 
3,834

Asset-backed securities

 
427

 

 

 
427

Corporate debt

 
102

 

 

 
102

Other securities/sovereign debt

 
6

 

 

 
6

 
5

 
11,372

 
3,230

 

 
14,607

Other securities
21

 

 

 

 
21

Loans held for sale

 
426

 

 

 
426

Loans held for investment

 
49

 
37

 

 
86

MSRs

 

 
12

 

 
12

Derivative assets

 
350

 
6

 
(269
)
 
87

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
433

 
6

 
(282
)
 
157

Short-term borrowings
1

 

 

 

 
1

 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
December 31, 2017
(dollar amounts in millions)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Trading account securities:
 
 
 
 
 
 
 
 
 
Other securities
$
83

 
$
3

 

 

 
$
86

 
83

 
3

 

 

 
86

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
5

 

 

 

 
5

Residential CMOs

 
6,484

 

 

 
6,484

Residential MBS

 
1,367

 

 

 
1,367

Commercial MBS

 
2,487

 

 

 
2,487

Other agencies

 
70

 

 

 
70

Municipal securities

 
711

 
3,167

 

 
3,878

Asset-backed securities

 
443

 
24

 

 
467

Corporate debt

 
109

 

 

 
109

Other securities/sovereign debt

 
2

 

 

 
2

 
5

 
11,673

 
3,191

 

 
14,869

Other securities
19

 

 

 

 
19

Loans held for sale

 
413

 

 

 
413

Loans held for investment

 
55

 
38

 

 
93

MSRs

 

 
11

 

 
11

Derivative assets

 
316

 
6

 
(190
)
 
132

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
326

 
5

 
(245
)
 
86


(1)
Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and cash collateral held or placed with the same counterparties.
The tables below present a rollforward of the balance sheet amounts for the three-month periods ended March 31, 2018 and 2017, for financial instruments measured on a recurring basis and classified as Level 3. The classification of an item as Level 3 is based on the significance of the unobservable inputs to the overall fair value measurement. However, Level 3 measurements may also include observable components of value that can be validated externally. Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.
 
Level 3 Fair Value Measurements
Three Months Ended March 31, 2018
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in millions)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Opening balance
$
11

 
$
(1
)
 
$
3,167

 
$
24

 
$
38

Transfers into Level 3

 

 

 

 

Transfers out of Level 3 (1)

 
(5
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
1

 
6

 
(1
)
 
(2
)
 

Included in OCI

 

 
(28
)
 
11

 

Purchases/originations

 

 
193

 

 

Sales

 

 

 
(33
)
 

Repayments

 

 

 

 
(1
)
Settlements

 

 
(101
)
 

 

Closing balance
$
12

 
$

 
$
3,230

 
$

 
$
37

Change in unrealized gains or losses for the period included in earnings for assets held at end of the reporting date
$
1

 
$

 
$

 
$

 
$

 
Level 3 Fair Value Measurements
Three Months Ended March 31, 2017
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in millions)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Opening balance
$
14

 
$
(2
)
 
$
2,798

 
$
76

 
$
48

Transfers into Level 3

 

 

 

 

Transfers out of Level 3 (1)

 

 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(1
)
 
5

 
(1
)
 

 

Included in OCI

 

 
20

 
3

 

Purchases/originations

 

 
133

 

 

Sales

 

 


 
(19
)
 

Repayments

 

 

 

 
(4
)
Settlements

 

 
(82
)
 
(1
)
 

Closing balance
$
13

 
$
3

 
$
2,868

 
$
59

 
$
44

Change in unrealized gains or losses for the period included in earnings for assets held at end of the reporting date
$

 
$
5

 
$
20

 
$
1

 
$

(1)
Transfers out of Level 3 represent the settlement value of the derivative instruments (i.e. interest rate lock agreements) that is transferred to loans held for sale, which is classified as Level 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The tables below summarize the classification of gains and losses due to changes in fair value, recorded in earnings for Level 3 assets and liabilities for the three-month periods ended March 31, 2018 and 2017:
 
Level 3 Fair Value Measurements
Three Months Ended March 31, 2018
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in millions)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
1

 
$
6

 
$

 
$

 
$

Securities gains (losses)

 

 

 
(2
)
 

Other expense

 

 
(1
)
 

 

Total
$
1

 
$
6

 
$
(1
)
 
$
(2
)
 
$

 
Level 3 Fair Value Measurements
Three Months Ended March 31, 2017
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in millions)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-backed
securities
 
Loans held for investment
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(1
)
 
$
5

 
$

 
$

 
$

Securities gains (losses)

 

 
(1
)
 

 

Total
$
(1
)
 
$
5

 
$
(1
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets and liabilities under the fair value option
The following tables present the fair value and aggregate principal balance of certain assets and liabilities under the fair value option:
 
March 31, 2018
(dollar amounts in millions)
Total Loans
 
Loans that are 90 or more days past due
Assets
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
 
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
Loans held for sale
$
426

 
$
416

 
$
10

 
$
1

 
$
1

 
$

Loans held for investment
86

 
94

 
(8
)
 
8

 
9

 
(1
)
 
December 31, 2017
(dollar amounts in millions)
Total Loans
 
Loans that are 90 or more days past due
Assets
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
 
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
Loans held for sale
$
413

 
$
400

 
$
13

 
$
1

 
$
1

 
$

Loans held for investment
93

 
102

 
(9
)
 
10

 
11

 
(1
)
The following tables present the net gains (losses) from fair value changes for the three-month periods ended March 31, 2018 and 2017.
 
 
Net gains (losses) from fair value changes
(dollar amounts in millions)
 
Three Months Ended
March 31,
Assets
 
2018
 
2017
Loans held for sale
 
$
(2
)
 
$
9

Loans held for investment
 

 

Assets and Liabilities measured at fair value on a nonrecurring basis
Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. For the three months ended March 31, 2018, assets measured at fair value on a nonrecurring basis were as follows:
 
 
 
Fair Value Measurements Using
 
 
(dollar amounts in millions)
Fair Value
 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
Gains/(Losses)
Three Months Ended
March 31, 2018
Impaired loans
58

 

 

 
58

 

Other real estate owned
30

 

 

 
30

 


MSRs accounted for under the amortization method are subject to nonrecurring fair value measurement when the fair value is lower than the carrying amount.
Periodically, Huntington records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the ALLL. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and cost of construction. In cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized.
Other real estate owned properties are included in accrued income and other assets and valued based on appraisals and third-party price opinions.
Significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis
The table below presents quantitative information about the significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at March 31, 2018 and December 31, 2017:
 
Quantitative Information about Level 3 Fair Value Measurements at March 31, 2018
(dollar amounts in millions)
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
Measured at fair value on a recurring basis:
MSRs
$
12

 
Discounted cash flow
 
Constant prepayment rate
 
6% - 31% (9%)
 
 
 
 
 
Spread over forward interest rate
swap rates
 
5% - 11% (8%)
Derivative assets
6

 
Consensus Pricing
 
Net market price
 
-5% - 20% (2%)
 
 
 
 
 
Estimated Pull through %
 
0% - 100% (85%)
Derivative liabilities
6

 
Discounted cash flow
 
Estimated conversion factor
 
165%
 
 
 
 
 
Estimated growth rate of Visa Class A shares
 
7%
 
 
 
 
 
 Discount rate
 
3%
 
 
 
 
 
Timing of the resolution of the litigation
 
3/31/2018 - 06/30/2020
Municipal securities
3,230

 
Discounted cash flow
 
Discount rate
 
0% - 9% (3%)
 
 
 
 
 
Cumulative default
 
0% - 64% (3%)
 
 
 
 
 
Loss given default
 
5% - 90% (25%)
Loans held for investment
37

 
Discounted cash flow
 
Discount rate
 
7% - 18% (8%)
 
 
 
 
 
Constant prepayment rate
 
2% - 22% (8%)
Measured at fair value on a nonrecurring basis:
Impaired loans
58

 
Appraisal value
 
NA
 
NA
Other real estate owned
30

 
Appraisal value
 
NA
 
NA
 
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2017
(dollar amounts in millions)
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
Measured at fair value on a recurring basis:
MSRs
$
11

 
Discounted cash flow
 
Constant prepayment rate
 
8% - 33% (12%)
 
 
 
 
 
Spread over forward interest rate
swap rates
 
8% - 10% (8%)
Derivative assets
6

 
Consensus Pricing
 
Net market price
 
-5% - 20% (2%)
 
 
 
 
 
Estimated Pull through %
 
3% - 100% (75%)
Derivative liabilities
5

 
Discounted cash flow
 
Estimated conversion factor
 
165%
 
 
 
 
 
Estimated growth rate of Visa Class A shares
 
7%
 
 
 
 
 
 Discount rate
 
3%
 
 
 
 
 
Timing of the resolution of the litigation
 
12/31/2017 - 06/30/2020
Municipal securities
3,167

 
Discounted cash flow
 
Discount rate
 
0% - 10% (4%)
 
 
 
 
 
Cumulative default
 
0% - 64% (3%)
 
 
 
 
 
Loss given default
 
5% - 90% (24%)
Asset-backed securities
24

 
Discounted cash flow
 
Discount rate
 
7% - 7% (7%)
 
 
 
 
 
Cumulative prepayment rate
 
0% - 72% (7%)
 
 
 
 
 
Cumulative default
 
3% - 53% (7%)
 
 
 
 
 
Loss given default
 
90% - 100% (98%)
 
 
 
 
 
Cure given deferral
 
50% - 50% (50%)
Loans held for investment
38

 
Discounted cash flow
 
Discount rate
 
7% - 18% (8%)
 
 
 
 
 
Constant prepayment rate
 
2% - 22% (9%)
Measured at fair value on a nonrecurring basis:
MSRs
190

 
Discounted cash flow
 
Constant prepayment rate
 
6% - 21% (8%)
 
 
 
 
 
Spread over forward interest rate
swap rates
 
2% - 20% (10%)
Impaired loans
36

 
Appraisal value
 
NA
 
NA
Other real estate owned
33

 
Appraisal value
 
NA
 
NA

The following provides a general description of the impact of a change in an unobservable input on the fair value measurement and the interrelationship between unobservable inputs, where relevant/significant. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below.
A significant change in the unobservable inputs may result in a significant change in the ending fair value measurement of Level 3 instruments. In general, prepayment rates increase when market interest rates decline and decrease when market interest rates rise and higher prepayment rates generally resulting in lower fair values for MSR assets and asset-backed securities.
Credit loss estimates, such as probability of default, constant default, cumulative default, loss given default, cure given deferral, and loss severity, are driven by the ability of the borrowers to pay their loans and the value of the underlying collateral and are impacted by changes in macroeconomic conditions, typically increasing when economic conditions worsen and decreasing when conditions improve. An increase in the estimated prepayment rate typically results in a decrease in estimated credit losses and vice versa. Higher credit loss estimates generally result in lower fair values. Credit spreads generally increase when liquidity risks and market volatility increase and decrease when liquidity conditions and market volatility improve.
Discount rates and spread over forward interest rate swap rates typically increase when market interest rates increase and/or credit and liquidity risks increase and decrease when market interest rates decline and/or credit and liquidity conditions improve. Higher discount rates and credit spreads generally result in lower fair market values.
Net market price and pull through percentages generally increase when market interest rates increase and decline when market interest rates decline. Higher net market price and pull through percentages generally result in higher fair values.
Fair values of financial instruments
The following table provides the carrying amounts and estimated fair values of Huntington’s financial instruments at March 31, 2018 and December 31, 2017:
 
March 31, 2018
(dollar amounts in millions)
Amortized Cost
 
Lower of Cost or Market
 
Fair Value or
Fair Value Option
 
Total Carrying Amount
 
Estimated Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
Cash and short-term assets
1,115

 

 

 
1,115

 
1,115

Trading account securities

 

 
85

 
85

 
85

Available-for-sale securities

 

 
14,607

 
14,607

 
14,607

Held-to-maturity securities
8,789

 

 

 
8,789

 
8,550

Other securities
581

 

 
21

 
602

 
602

Loans held for sale

 
80

 
426

 
506

 
510

Net loans and direct financing leases (1)
70,356

 

 
86

 
70,442

 
69,820

Derivatives

 

 
87

 
87

 
87

Financial Liabilities
 
 
 
 
 
 
 
 
 
Deposits
79,471

 

 

 
79,471

 
79,425

Short-term borrowings
2,854

 

 

 
2,854

 
2,854

Long-term debt
8,618

 

 

 
8,618

 
8,771

Derivatives

 

 
157

 
157

 
157

(1)
Includes collateral-dependent loans measured for impairment.
 
December 31, 2017
(dollar amounts in millions)
Amortized Cost
 
Lower of Cost or Market
 
Fair Value or
Fair Value Option
 
Total Carrying Amount
 
Estimated Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
Cash and short-term assets
1,567

 

 

 
$
1,567

 
$
1,567

Trading account securities

 

 
86

 
86

 
86

Available-for-sale securities

 

 
14,869

 
14,869

 
14,869

Held-to-maturity securities
9,091

 

 

 
9,091

 
8,971

Other securities
581

 

 
19

 
600

 
600

Loans held for sale

 
75

 
413

 
488

 
491

Net loans and direct financing leases (1)
69,333

 

 
93

 
69,426

 
69,146

Derivatives

 

 
132

 
132

 
132

Financial Liabilities
 
 
 
 
 
 
 
 
 
Deposits
77,041

 

 

 
77,041

 
77,010

Short-term borrowings
5,056

 

 

 
5,056

 
5,056

Long-term debt
9,206

 

 

 
9,206

 
9,402

Derivatives

 

 
86

 
86

 
86

(1)
Includes collateral-dependent loans measured for impairment.

 
 
 
 
 
 
 
 

The following table presents the level in the fair value hierarchy for the estimated fair values at March 31, 2018 and December 31, 2017:
 
Estimated Fair Value Measurements at Reporting Date Using
 
March 31, 2018
(dollar amounts in millions)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Trading account securities
$
82

 
$
3

 
$

 
$
85

Available-for-sale securities
5

 
11,372

 
3,230

 
14,607

Held-to-maturity securities

 
8,550

 

 
8,550

Other securities
21

 

 

 
21

Loans held for sale

 
426

 
84

 
510

Net loans and direct financing leases

 

 
69,820

 
69,820

Financial Liabilities
 
 
 
 
 
 
 
Deposits

 
74,573

 
4,852

 
79,425

Short-term borrowings
1

 

 
2,853

 
2,854

Long-term debt

 
8,299

 
472

 
8,771

 
Estimated Fair Value Measurements at Reporting Date Using
 
December 31, 2017
(dollar amounts in millions)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Trading account securities
$
83

 
$
3

 
$

 
$
86

Available-for-sale securities
5

 
11,673

 
3,191

 
14,869

Held-to-maturity securities

 
8,971

 

 
8,971

Other securities
19

 

 

 
19

Loans held for sale

 
413

 
78

 
491

Net loans and direct financing leases

 

 
69,146

 
69,146

Financial Liabilities

 

 

 
 
Deposits

 
73,975

 
3,035

 
77,010

Short-term borrowings

 

 
5,056

 
5,056

Long-term debt

 
8,944

 
458

 
9,402


The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include trading account securities, customers’ acceptance liabilities, short-term borrowings, bank acceptances outstanding, FHLB advances, and cash and short-term assets, which include cash and due from banks, interest-bearing deposits in banks, and federal funds sold and securities purchased under resale agreements. Loan commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses that limit Huntington’s exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value.
Certain assets, the most significant being operating lease assets, bank owned life insurance, and premises and equipment, do not meet the definition of a financial instrument and are excluded from this disclosure. Similarly, mortgage and nonmortgage servicing rights, deposit base, and other customer relationship intangibles are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent Huntington’s underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by Management. These estimations necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.