Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUES OF ASSETS AND LIABILITIES

v3.4.0.3
FAIR VALUES OF ASSETS AND LIABILITIES
3 Months Ended
Mar. 31, 2016
Fair Value Disclosures [Abstract]  
FAIR VALUES OF ASSETS AND LIABILITIES
FAIR VALUES OF ASSETS AND LIABILITIES
See Note 17 “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, 2015 for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. 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 period ended March 31, 2016 and 2015.
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, 2016 and December 31, 2015 are summarized below:
 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
March 31, 2016
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$
364,967

 
$

 
$

 
$
364,967

Loans held for investment

 
38,113

 

 

 
38,113

Trading account securities:
 
 
 
 
 
 
 
 
 
Municipal securities

 
9,752

 

 

 
9,752

Other securities
35,539

 
633

 

 

 
36,172

 
35,539

 
10,385

 

 

 
45,924

Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
6,307

 

 

 

 
6,307

Federal agencies: Mortgage-backed

 
4,841,992

 

 

 
4,841,992

Federal agencies: Other agencies

 
114,496

 

 

 
114,496

Municipal securities

 
352,013

 
2,281,743

 

 
2,633,756

Asset-backed securities

 
743,045

 
94,329

 

 
837,374

Corporate debt

 
536,661

 

 

 
536,661

Other securities
11,404

 
3,931

 

 

 
15,335

 
17,711

 
6,592,138

 
2,376,072

 

 
8,985,921

Automobile loans

 

 
1,216

 

 
1,216

MSRs

 

 
14,819

 

 
14,819

Derivative assets

 
566,637

 
11,082

 
(219,347
)
 
358,372

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
338,164

 
735

 
(201,418
)
 
137,481

Short-term borrowings

 
624

 

 

 
624

 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
December 31, 2015
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$
337,577

 
$

 
$

 
$
337,577

Loans held for investment

 
32,889

 

 

 
32,889

Trading account securities:
 
 
 
 
 
 
 
 
 
Municipal securities

 
4,159

 

 

 
4,159

Other securities
32,475

 
363

 

 

 
32,838

 
32,475

 
4,522

 

 

 
36,997

Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
5,472

 

 

 

 
5,472

Federal agencies: Mortgage-backed

 
4,521,688

 

 

 
4,521,688

Federal agencies: Other agencies

 
115,913

 

 

 
115,913

Municipal securities

 
360,845

 
2,095,551

 

 
2,456,396

Asset-backed securities

 
761,076

 
100,337

 

 
861,413

Corporate debt

 
466,477

 

 

 
466,477

Other securities
11,397

 
3,899

 

 

 
15,296

 
16,869

 
6,229,898

 
2,195,888

 

 
8,442,655

Automobile loans

 

 
1,748

 

 
1,748

MSRs

 

 
17,585

 

 
17,585

Derivative assets

 
429,448

 
6,721

 
(161,297
)
 
274,872

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
287,994

 
665

 
(144,309
)
 
144,350

Short-term borrowings

 
1,770

 

 

 
1,770


(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, 2016 and 2015, 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, 2016
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-
backed
securities
 
Automobile
loans
Opening balance
$
17,585

 
$
6,056

 
$
2,095,551

 
$
100,337

 
$
1,748

Transfers into Level 3

 

 

 

 

Transfers out of Level 3 (1)

 
(915
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(2,766
)
 
5,206

 

 

 

Included in OCI

 

 
11,840

 
(5,168
)
 

Purchases/originations

 

 
237,450

 

 

Sales

 

 

 

 

Repayments

 

 

 

 
(532
)
Issues

 

 

 

 

Settlements

 

 
(63,098
)
 
(840
)
 

Closing balance
$
14,819

 
$
10,347

 
$
2,281,743

 
$
94,329

 
$
1,216

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date
$
(2,766
)
 
$
5,306

 
$

 
$

 
$

(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.

 
Level 3 Fair Value Measurements
Three months ended March 31, 2015
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label
CMO
 
Asset-
backed
securities
 
Automobile
loans
Opening balance
$
22,786

 
$
3,360

 
$
1,417,593

 
$
30,464

 
$
82,738

 
$
10,590

Transfers into Level 3

 

 

 

 

 

Transfers out of Level 3

 

 

 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
(2,331
)
 
5,001

 

 
16

 

 
(213
)
Included in OCI

 

 
(3,992
)
 
18

 
7,511

 

Purchases/originations

 

 
242,997

 

 

 

Sales

 

 

 

 

 

Repayments

 

 

 

 

 
(3,882
)
Issues

 

 

 

 

 

Settlements

 
(536
)
 
(20,790
)
 
(426
)
 
(1,094
)
 

Closing balance
$
20,455

 
$
7,825

 
$
1,635,808

 
$
30,072

 
$
89,155

 
$
6,495

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date
$
(2,331
)
 
$
4,465

 
$
(3,992
)
 
$
18

 
$
7,511

 
$
(213
)

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, 2016 and 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Fair Value Measurements
Three months ended March 31, 2016
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label CMO
 
Asset-
backed
securities
 
Automobile
loans
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(2,766
)
 
$
5,206

 
$

 
$

 
$

 
$

Securities gains (losses)

 

 

 

 

 

Interest and fee income

 

 

 

 

 

Noninterest income

 

 

 

 

 

Total
$
(2,766
)
 
$
5,206

 
$

 
$

 
$

 
$

 
Level 3 Fair Value Measurements
Three months ended March 31, 2015
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label CMO
 
Asset-
backed
securities
 
Automobile
loans
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(2,331
)
 
$
5,001

 
$

 
$

 
$

 
$

Securities gains (losses)

 

 

 

 

 

Interest and fee income

 

 

 
16

 

 
(213
)
Noninterest income

 

 

 

 

 

Total
$
(2,331
)
 
$
5,001

 
$

 
$
16

 
$

 
$
(213
)

Assets and liabilities under the fair value option
The following table presents the fair value and aggregate principal balance of certain assets and liabilities under the fair value option:
 
March 31, 2016
 
December 31, 2015
(dollar amounts in thousands)
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
 
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
364,967

 
$
348,302

 
$
16,665

 
$
337,577

 
$
326,802

 
$
10,775

Loans held for investment
38,113

 
38,811

 
(698
)
 
32,889

 
33,637

 
(748
)
Automobile loans
1,216

 
1,216

 

 
1,748

 
1,748

 

The following tables present the net gains (losses) from fair value changes, including net gains (losses) associated with instrument specific credit risk for the three-month periods ended March 31, 2016 and 2015:
 
Net gains (losses) from
fair value changes
 
Three months ended
March 31,
(dollar amounts in thousands)
2016
 
2015
Assets
 
 
 
Loans held for sale
$
4,649

 
$
1,001

Automobile loans

 
(213
)
 
Gains (losses) included
in fair value changes associated
with instrument specific credit risk
 
Three months ended
March 31,
(dollar amounts in thousands)
2016
 
2015
Assets
 
 
 
Automobile loans
$
90

 
$
66


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. Assets measured at fair value on a nonrecurring basis were as follows:
 
 
 
Fair Value Measurements Using
 
 
(dollar amounts in thousands)
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, 2016
MSRs
$
125,957

 
$

 
$

 
$
125,957

 
$
(16,340
)
Impaired loans
68,726

 

 

 
68,726

 
1,417

Other real estate owned
26,132

 

 

 
26,132

 
(505
)

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 ACL. 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, less estimated selling costs.
The appraisals supporting the fair value of the collateral to recognize loan impairment or unrealized loss on other real estate owned properties may not have been obtained as of March 31, 2016.
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, 2016 and December 31, 2015:
 
Quantitative Information about Level 3 Fair Value Measurements at March 31, 2016
(dollar amounts in thousands)
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
MSRs
$
14,819

 
Discounted cash flow
 
Constant prepayment rate
 
7.0% - 26.5% (12.3%)

 
 
 
 
 
Spread over forward interest rate
swap rates
 
3.0% - 9.2% (5.5%)

Derivative assets
11,082

 
Consensus Pricing
 
Net market price
 
-2.5% - 22.1% (2.3%)

Derivative liabilities
735

 
 
 
Estimated Pull through %
 
7.9% - 99.8% (79.4%)

Municipal securities
2,281,743

 
Discounted cash flow
 
Discount rate
 
0.6% - 7.8% (3.5%)

 
 
 
 
 
Cumulative default
 
0.1% - 56.0% (2.9%)

 
 
 
 
 
Loss given default
 
5.0% - 80.0% (21.8%)

Asset-backed securities
94,329

 
Discounted cash flow
 
Discount rate
 
4.9% - 11.4% (6.5%)

 
 
 
 
 
Cumulative prepayment rate
 
0.0% - 100% (9.6%)

 
 
 
 
 
Cumulative default
 
1.5% - 100% (11.1%)

 
 
 
 
 
Loss given default
 
85% - 100% (96.7%)

 
 
 
 
 
Cure given deferral
 
0.0% - 75.0% (36.5%)

Automobile loans
1,216

 
Discounted cash flow
 
Constant prepayment rate
 
154.2
%
 
 
 
 
 
Discount rate
 
0.2% - 5.0% (2.3%)

 
 
 
 
 
Life of pool cumulative losses
 
2.1
%
Impaired loans
68,726

 
Appraisal value
 
NA
 
NA

Other real estate owned
26,132

 
Appraisal value
 
NA
 
NA

 
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2015
(dollar amounts in thousands)
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
MSRs
$
17,585

 
Discounted cash flow
 
Constant prepayment rate
 
7.9% - 25.7% (14.7%)

 
 
 
 
 
Spread over forward interest rate
swap rates
 
3.3% - 9.2% (5.4%)

Derivative assets
6,721

 
Consensus Pricing
 
Net market price
 
-3.2% - 20.9% (1.9%)

Derivative liabilities
665

 
 
 
Estimated Pull through %
 
11.9% - 99.8% (76.7%)

Municipal securities
2,095,551

 
Discounted cash flow
 
Discount rate
 
0.3% - 7.2% (3.1%)

 
 
 
 
 
Cumulative default
 
0.1% - 50.0% (2.1%)

 
 
 
 
 
Loss given default
 
5.0% - 80.0% (20.5%)

Asset-backed securities
100,337

 
Discounted cash flow
 
Discount rate
 
4.6% - 10.9% (6.2%)

 
 
 
 
 
Cumulative prepayment rate
 
0.0% - 100.% (9.6%)

 
 
 
 
 
Cumulative default
 
1.6% - 100% (11.1%)

 
 
 
 
 
Loss given default
 
85% - 100% (96.6%)

 
 
 
 
 
Cure given deferral
 
0.0% - 75.0% (36.8%)

Automobile loans
1,748

 
Discounted cash flow
 
Constant prepayment rate
 
154.2
%
 
 
 
 
 
Discount rate
 
0.2% - 5.0% (2.3%)

 
 
 
 
 
Life of pool cumulative losses
 
2.1
%
Impaired loans
62,029

 
Appraisal value
 
NA
 
NA

Other real estate owned
27,342

 
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 result in lower fair values for MSR assets, Private-label CMO securities, Asset-backed securities, and Automobile loans.
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 that are carried either at fair value or cost at March 31, 2016 and December 31, 2015:
 
March 31, 2016
 
December 31, 2015
(dollar amounts in thousands)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash and short-term assets
$
882,916

 
$
882,916

 
$
898,994

 
$
898,994

Trading account securities
45,924

 
45,924

 
36,997

 
36,997

Loans held for sale
567,165

 
570,609

 
474,621

 
484,511

Available-for-sale and other securities
9,319,381

 
9,319,381

 
8,775,441

 
8,775,441

Held-to-maturity securities
5,946,144

 
6,042,243

 
6,159,590

 
6,135,458

Net loans and direct financing leases
50,925,640

 
49,897,026

 
49,743,256

 
48,024,998

Derivatives
358,372

 
358,372

 
274,872

 
274,872

Financial Liabilities
 
 
 
 
 
 
 
Deposits
55,628,842

 
55,641,189

 
55,294,979

 
55,299,435

Short-term borrowings
471,375

 
471,375

 
615,279

 
615,279

Long-term debt
7,935,412

 
7,928,482

 
7,067,614

 
7,043,014

Derivatives
137,481

 
137,481

 
144,350

 
144,350

The following table presents the level in the fair value hierarchy for the estimated fair values of only Huntington’s financial instruments that are not already on the Unaudited Condensed Consolidated Balance Sheets at fair value at March 31, 2016 and December 31, 2015:
 
Estimated Fair Value Measurements at Reporting Date Using
 
March 31, 2016
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Held-to-maturity securities
$

 
$
6,042,243

 
$

 
$
6,042,243

Net loans and direct financing leases

 

 
49,897,026

 
49,897,026

Financial Liabilities
 
 
 
 
 
 
 
Deposits

 
52,544,042

 
3,097,147

 
55,641,189

Short-term borrowings

 
624

 
470,751

 
471,375

Long-term debt

 

 
7,928,482

 
7,928,482

 
Estimated Fair Value Measurements at Reporting Date Using
 
December 31, 2015
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Held-to-maturity securities
$

 
$
6,135,458

 
$

 
$
6,135,458

Net loans and direct financing leases

 

 
48,024,998

 
48,024,998

Financial Liabilities

 

 

 
 
Deposits

 
51,869,105

 
3,430,330

 
55,299,435

Short-term borrowings

 
1,770

 
613,509

 
615,279

Long-term debt

 

 
7,043,014

 
7,043,014


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. Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC Topic 820.
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.
The following methods and assumptions were used by Huntington to estimate the fair value of the remaining classes of financial instruments:
Held-to-maturity securities
Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, and interest rate spreads on relevant benchmark securities.
Loans and Direct Financing Leases
Variable-rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans and leases are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans and leases with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of expected losses and the credit risk associated in the loan and lease portfolio. The valuation of the loan portfolio reflected discounts that Huntington believed are consistent with transactions occurring in the marketplace.
Deposits
Demand deposits, savings accounts, and money market deposits are, by definition, equal to the amount payable on demand. The fair values of fixed-rate time deposits are estimated by discounting cash flows using interest rates currently being offered on certificates with similar maturities.
Debt
Long-term debt is based upon quoted market prices, which are inclusive of Huntington’s credit risk. In the absence of quoted market prices, discounted cash flows using market rates for similar debt with the same maturities are used in the determination of fair value.