| FAIR VALUES OF ASSETS AND LIABILITIES |
During the 2016 third quarter, management elected the fair value option for consumer loans with deteriorated credit quality acquired from FirstMerit in accordance with ASC 825. Management decided to elect the fair value option on these consumer loans to bring operational efficiencies not normally associated with purchased credit impaired loans. The consumer loans are classified as Level 3. The key assumptions used to determine the fair value of the consumer loans included projections of expected losses, prepayment of the underlying loans in the portfolio, and a market assumption of interest rate spreads.
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 additional 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 and nine-month periods ended September 30, 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 September 30, 2016 and December 31, 2015 are summarized below:
|
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|
|
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|
Fair Value Measurements at Reporting Date Using |
|
Netting Adjustments (1) |
|
September 30, 2016 |
(dollar amounts in thousands) |
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
Assets |
|
|
|
|
|
|
|
|
|
Loans held for sale |
$ |
— |
|
|
$ |
517,591 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
517,591 |
|
Loans held for investment |
— |
|
|
35,905 |
|
|
53,285 |
|
|
— |
|
|
89,190 |
|
Trading account securities: |
|
|
|
|
|
|
|
|
|
Municipal securities |
— |
|
|
2,854 |
|
|
— |
|
|
— |
|
|
2,854 |
|
Other securities |
32,074 |
|
|
1,143 |
|
|
— |
|
|
— |
|
|
33,217 |
|
|
32,074 |
|
|
3,997 |
|
|
— |
|
|
— |
|
|
36,071 |
|
Available-for-sale and other securities: |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
6,509 |
|
|
— |
|
|
— |
|
|
— |
|
|
6,509 |
|
Federal agencies: Mortgage-backed |
— |
|
|
10,880,880 |
|
|
— |
|
|
— |
|
|
10,880,880 |
|
Federal agencies: Other agencies |
— |
|
|
125,771 |
|
|
— |
|
|
— |
|
|
125,771 |
|
Municipal securities |
— |
|
|
405,888 |
|
|
2,905,273 |
|
|
— |
|
|
3,311,161 |
|
Asset-backed securities |
— |
|
|
1,007,363 |
|
|
73,819 |
|
|
— |
|
|
1,081,182 |
|
Corporate debt |
— |
|
|
552,491 |
|
|
— |
|
|
— |
|
|
552,491 |
|
Other securities |
16,353 |
|
|
3,947 |
|
|
— |
|
|
— |
|
|
20,300 |
|
|
22,862 |
|
|
12,976,340 |
|
|
2,979,092 |
|
|
— |
|
|
15,978,294 |
|
MSRs |
— |
|
|
— |
|
|
12,428 |
|
|
— |
|
|
12,428 |
|
Derivative assets |
— |
|
|
585,316 |
|
|
15,483 |
|
|
(172,666 |
) |
|
428,133 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Derivative liabilities |
— |
|
|
385,813 |
|
|
6,883 |
|
|
(278,458 |
) |
|
114,238 |
|
Short-term borrowings |
822 |
|
|
— |
|
|
— |
|
|
— |
|
|
822 |
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|
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 |
|
|
1,748 |
|
|
— |
|
|
34,637 |
|
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 |
|
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 and nine-month periods ended September 30, 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.
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Level 3 Fair Value Measurements
Three Months Ended September 30, 2016 |
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Available-for-sale securities |
|
|
(dollar amounts in thousands) |
MSRs |
|
Derivative
instruments
|
|
Municipal
securities
|
|
Asset-
backed
securities
|
|
Loans held for investment |
Opening balance |
$ |
13,105 |
|
|
$ |
12,751 |
|
|
$ |
2,237,975 |
|
|
$ |
71,379 |
|
|
$ |
925 |
|
Transfers into Level 3 |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Transfers out of Level 3 (1) |
— |
|
|
(1,692 |
) |
|
— |
|
|
— |
|
|
— |
|
Total gains/losses for the period: |
|
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|
|
|
|
|
|
|
Included in earnings |
(677 |
) |
|
(2,459 |
) |
|
4,166 |
|
|
— |
|
|
(249 |
) |
Included in OCI |
— |
|
|
— |
|
|
(28,272 |
) |
|
2,875 |
|
|
— |
|
Purchases/originations |
— |
|
|
— |
|
|
953,639 |
|
|
10 |
|
|
56,469 |
|
Sales |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Repayments |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,860 |
) |
Issues |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Settlements |
— |
|
|
— |
|
|
(262,235 |
) |
|
(445 |
) |
|
— |
|
Closing balance |
$ |
12,428 |
|
|
$ |
8,600 |
|
|
$ |
2,905,273 |
|
|
$ |
73,819 |
|
|
$ |
53,285 |
|
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 |
$ |
(677 |
) |
|
$ |
(2,459 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
(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.
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|
Level 3 Fair Value Measurements
Three Months Ended September 30, 2015 |
|
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|
|
Available-for-sale securities |
|
|
(dollar amounts in thousands) |
MSRs |
|
Derivative
instruments
|
|
Municipal
securities
|
|
Private-
label
CMO
|
|
Asset-
backed
securities
|
|
Loans held for investment |
Opening balance |
$ |
20,681 |
|
|
$ |
5,166 |
|
|
$ |
1,716,845 |
|
|
$ |
29,429 |
|
|
$ |
102,071 |
|
|
$ |
3,998 |
|
Transfers into Level 3 |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Transfers out of Level 3 |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Total gains/losses for the period: |
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
(2,616 |
) |
|
3,023 |
|
|
— |
|
|
20 |
|
|
(2,440 |
) |
|
(142 |
) |
Included in OCI |
— |
|
|
— |
|
|
3,514 |
|
|
1,309 |
|
|
1,997 |
|
|
— |
|
Purchases/originations |
— |
|
|
— |
|
|
426,501 |
|
|
— |
|
|
— |
|
|
— |
|
Sales |
— |
|
|
— |
|
|
— |
|
|
(30,077 |
) |
|
— |
|
|
— |
|
Repayments |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,293 |
) |
Issues |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Settlements |
— |
|
|
(405 |
) |
|
(196,304 |
) |
|
(681 |
) |
|
(456 |
) |
|
— |
|
Closing balance |
$ |
18,065 |
|
|
$ |
7,784 |
|
|
$ |
1,950,556 |
|
|
$ |
— |
|
|
$ |
101,172 |
|
|
$ |
2,563 |
|
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 |
$ |
(2,616 |
) |
|
$ |
3,023 |
|
|
$ |
3,514 |
|
|
$ |
— |
|
|
$ |
1,997 |
|
|
$ |
(142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurements
Nine months ended September 30, 2016 |
|
|
|
|
|
Available-for-sale securities |
|
|
|
(dollar amounts in thousands) |
MSRs |
|
Derivative
instruments
|
|
Municipal
securities
|
|
Asset-
backed
securities
|
|
Loans held for investment |
|
Opening balance |
$ |
17,585 |
|
|
$ |
6,056 |
|
|
$ |
2,095,551 |
|
|
$ |
100,337 |
|
|
$ |
1,748 |
|
|
Transfers into Level 3 |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Transfers out of Level 3 (1) |
— |
|
|
(5,115 |
) |
|
— |
|
|
— |
|
|
— |
|
|
Total gains/losses for the period: |
|
|
|
|
|
|
|
|
|
|
Included in earnings |
(5,157 |
) |
|
7,659 |
|
|
4,166 |
|
|
2 |
|
|
(249 |
) |
|
Included in OCI |
— |
|
|
— |
|
|
(8,946 |
) |
|
3,549 |
|
|
— |
|
|
Purchases/originations |
— |
|
|
— |
|
|
1,237,546 |
|
|
10 |
|
|
56,469 |
|
|
Sales |
— |
|
|
— |
|
|
(36,657 |
) |
|
(27,794 |
) |
|
— |
|
|
Repayments |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(4,683 |
) |
|
Issues |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Settlements |
— |
|
|
— |
|
|
(386,387 |
) |
|
(2,285 |
) |
|
— |
|
|
Closing balance |
$ |
12,428 |
|
|
$ |
8,600 |
|
|
$ |
2,905,273 |
|
|
$ |
73,819 |
|
|
$ |
53,285 |
|
|
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 |
$ |
(5,157 |
) |
|
$ |
7,759 |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
|
(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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurements
Nine months ended September 30, 2015 |
|
|
|
|
|
Available-for-sale securities |
|
|
(dollar amounts in thousands) |
MSRs |
|
Derivative
instruments
|
|
Municipal
securities
|
|
Private-
label
CMO
|
|
Asset-
backed
securities
|
|
Loans held for investment |
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 |
(4,721 |
) |
|
6,244 |
|
|
— |
|
|
47 |
|
|
(2,435 |
) |
|
(497 |
) |
Included in OCI |
— |
|
|
— |
|
|
2,199 |
|
|
1,832 |
|
|
23,860 |
|
|
— |
|
Purchases/originations |
— |
|
|
— |
|
|
768,529 |
|
|
— |
|
|
— |
|
|
— |
|
Sales |
— |
|
|
— |
|
|
— |
|
|
(30,077 |
) |
|
— |
|
|
— |
|
Repayments |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(7,530 |
) |
Issues |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Settlements |
— |
|
|
(1,820 |
) |
|
(237,765 |
) |
|
(2,266 |
) |
|
(2,991 |
) |
|
— |
|
Closing balance |
$ |
18,065 |
|
|
$ |
7,784 |
|
|
$ |
1,950,556 |
|
|
$ |
— |
|
|
$ |
101,172 |
|
|
$ |
2,563 |
|
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 |
$ |
(4,721 |
) |
|
$ |
6,244 |
|
|
$ |
2,199 |
|
|
$ |
— |
|
|
$ |
23,860 |
|
|
$ |
(497 |
) |
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 and nine-month periods ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurements
Three Months Ended September 30, 2016 |
|
|
|
|
|
Available-for-sale securities |
|
|
(dollar amounts in thousands) |
MSRs |
|
Derivative
instruments
|
|
Municipal
securities
|
|
Asset-
backed
securities
|
|
Loans held for investment |
Classification of gains and losses in earnings: |
|
|
|
|
|
|
|
|
|
Mortgage banking income |
$ |
(677 |
) |
|
$ |
(2,459 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Securities gains (losses) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Interest and fee income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Noninterest income |
— |
|
|
— |
|
|
4,166 |
|
|
— |
|
|
(249 |
) |
Total |
$ |
(677 |
) |
|
$ |
(2,459 |
) |
|
$ |
4,166 |
|
|
$ |
— |
|
|
$ |
(249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurements
Three Months Ended September 30, 2015 |
|
|
|
|
|
Available-for-sale securities |
|
|
(dollar amounts in thousands) |
MSRs |
|
Derivative
instruments
|
|
Municipal
securities
|
|
Private-
label CMO
|
|
Asset-
backed
securities
|
|
Loans held for investment |
Classification of gains and losses in earnings: |
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income |
$ |
(2,616 |
) |
|
$ |
3,023 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Securities gains (losses) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,440 |
) |
|
— |
|
Interest and fee income |
— |
|
|
— |
|
|
— |
|
|
20 |
|
|
— |
|
|
(142 |
) |
Noninterest income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Total |
$ |
(2,616 |
) |
|
$ |
3,023 |
|
|
$ |
— |
|
|
$ |
20 |
|
|
$ |
(2,440 |
) |
|
$ |
(142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurements
Nine months ended September 30, 2016 |
|
|
|
|
|
Available-for-sale securities |
|
|
(dollar amounts in thousands) |
MSRs |
|
Derivative
instruments
|
|
Municipal
securities
|
|
Asset-
backed
securities
|
|
Loans held for investment |
Classification of gains and losses in earnings: |
|
|
|
|
|
|
|
|
|
Mortgage banking income |
$ |
(5,157 |
) |
|
$ |
7,659 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Securities gains (losses) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Interest and fee income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Noninterest income |
— |
|
|
— |
|
|
4,166 |
|
|
2 |
|
|
(249 |
) |
Total |
$ |
(5,157 |
) |
|
$ |
7,659 |
|
|
$ |
4,166 |
|
|
$ |
2 |
|
|
$ |
(249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurements
Nine months ended September 30, 2015 |
|
|
|
|
|
Available-for-sale securities |
|
|
(dollar amounts in thousands) |
MSRs |
|
Derivative
instruments
|
|
Municipal
securities
|
|
Private-
label CMO
|
|
Asset-
backed
securities
|
|
Loans held for investment |
Classification of gains and losses in earnings: |
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income |
$ |
(4,721 |
) |
|
$ |
6,244 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Securities gains (losses) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,440 |
) |
|
— |
|
Interest and fee income |
— |
|
|
— |
|
|
— |
|
|
47 |
|
|
5 |
|
|
(497 |
) |
Noninterest income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Total |
$ |
(4,721 |
) |
|
$ |
6,244 |
|
|
$ |
— |
|
|
$ |
47 |
|
|
$ |
(2,435 |
) |
|
$ |
(497 |
) |
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016 |
|
Total Loans |
|
Loans that are 90 or more days past due |
(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 |
$ |
517,591 |
|
|
$ |
494,092 |
|
|
$ |
23,499 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Loans held for investment |
89,190 |
|
|
100,283 |
|
|
(11,093 |
) |
|
11,837 |
|
|
15,636 |
|
|
(3,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015 |
|
Total Loans |
|
Loans that are 90 or more days past due |
(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 |
$ |
337,577 |
|
|
$ |
326,802 |
|
|
$ |
10,775 |
|
|
$ |
1,268 |
|
|
$ |
1,294 |
|
|
$ |
(26 |
) |
Loans held for investment |
34,637 |
|
|
35,385 |
|
|
(748 |
) |
|
428 |
|
|
497 |
|
|
(69 |
) |
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 and nine-month periods ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) from
fair value changes
|
|
Net gains (losses) from
fair value changes |
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
(dollar amounts in thousands) |
2016 |
|
2015 |
|
2016 |
|
2015 |
Assets |
|
|
|
|
|
|
|
Loans held for sale |
$ |
(4,439 |
) |
|
$ |
6,801 |
|
|
$ |
9,080 |
|
|
$ |
1,244 |
|
Loans held for investment |
— |
|
|
(142 |
) |
|
— |
|
|
(568 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) included
in fair value changes associated
with instrument specific credit risk
|
|
Gains (losses) included
in fair value changes associated
with instrument specific credit risk |
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
(dollar amounts in thousands) |
2016 |
|
2015 |
|
2016 |
|
2015 |
Assets |
|
|
|
|
|
|
|
Loans held for investment |
$ |
68 |
|
|
$ |
37 |
|
|
$ |
255 |
|
|
$ |
108 |
|
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
September 30, 2016
|
|
Total
Gains/(Losses)
Nine months ended
September 30, 2016
|
MSRs |
$ |
143,289 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
143,289 |
|
|
$ |
2,543 |
|
|
$ |
(21,093 |
) |
Impaired loans |
56,976 |
|
|
— |
|
|
— |
|
|
56,976 |
|
|
(216 |
) |
|
5,606 |
|
Other real estate owned |
71,336 |
|
|
— |
|
|
— |
|
|
71,336 |
|
|
(768 |
) |
|
(1,988 |
) |
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 September 30, 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 September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements at September 30, 2016 |
(dollar amounts in thousands) |
Fair Value |
|
Valuation Technique |
|
Significant Unobservable Input |
|
Range (Weighted Average) |
MSRs |
$ |
12,428 |
|
|
Discounted cash flow |
|
Constant prepayment rate |
|
7.0% - 26.5% (12.4%) |
|
|
|
|
|
Spread over forward interest rate
swap rates |
|
3.0% - 9.2% (5.5%) |
Derivative assets |
15,483 |
|
|
Consensus Pricing |
|
Net market price |
|
-2.7% - 25.1% (3.0%) |
Derivative liabilities |
6,883 |
|
|
|
|
Estimated Pull through % |
|
7.6% - 99.8% (77.7%) |
Municipal securities |
2,905,273 |
|
|
Discounted cash flow |
|
Discount rate |
|
0.0% - 10.6% (3.6%) |
|
|
|
|
|
Cumulative default |
|
0.3% - 37.8% (4.8%) |
|
|
|
|
|
Loss given default |
|
5.0% - 80.0% (24.1%) |
Asset-backed securities |
73,819 |
|
|
Discounted cash flow |
|
Discount rate |
|
4.9% - 11.9% (6.2%) |
|
|
|
|
|
Cumulative prepayment rate |
|
0.0% - 73% (7.8%) |
|
|
|
|
|
Cumulative default |
|
1.2% - 100% (11.1%) |
|
|
|
|
|
Loss given default |
|
85% - 100% (96.7%) |
|
|
|
|
|
Cure given deferral |
|
0.0% - 75.0% (31.4%) |
Loans held for investment |
53,285 |
|
|
Discounted cash flow |
|
Discount rate |
|
5.4% - 16.2% (5.6%) |
Impaired loans |
56,976 |
|
|
Appraisal value |
|
NA |
|
NA |
Other real estate owned |
71,336 |
|
|
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%) |
|
Loans held for investment |
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 September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016 |
|
December 31, 2015 |
(dollar amounts in thousands) |
Carrying
Amount
|
|
Fair Value |
|
Carrying
Amount
|
|
Fair Value |
Financial Assets |
|
|
|
|
|
|
|
Cash and short-term assets |
$ |
1,713,052 |
|
|
$ |
1,713,052 |
|
|
$ |
898,994 |
|
|
$ |
898,994 |
|
Trading account securities |
36,071 |
|
|
36,071 |
|
|
36,997 |
|
|
36,997 |
|
Loans held for sale |
3,414,497 |
|
|
3,419,078 |
|
|
474,621 |
|
|
484,511 |
|
Available-for-sale and other securities |
16,470,374 |
|
|
16,470,374 |
|
|
8,775,441 |
|
|
8,775,441 |
|
Held-to-maturity securities |
5,301,387 |
|
|
5,389,093 |
|
|
6,159,590 |
|
|
6,135,458 |
|
Net loans and direct financing leases |
65,687,568 |
|
|
64,235,535 |
|
|
49,743,256 |
|
|
48,024,998 |
|
Derivatives |
428,132 |
|
|
428,132 |
|
|
274,872 |
|
|
274,872 |
|
Financial Liabilities |
|
|
|
|
|
|
|
Deposits |
77,405,096 |
|
|
78,232,991 |
|
|
55,294,979 |
|
|
55,299,435 |
|
Short-term borrowings |
2,148,118 |
|
|
2,148,118 |
|
|
615,279 |
|
|
615,279 |
|
Long-term debt |
8,998,571 |
|
|
9,101,522 |
|
|
7,067,614 |
|
|
7,043,014 |
|
Derivatives |
114,239 |
|
|
114,239 |
|
|
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 September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value Measurements at Reporting Date Using |
|
September 30, 2016 |
(dollar amounts in thousands) |
Level 1 |
|
Level 2 |
|
Level 3 |
|
Financial Assets |
|
|
|
|
|
|
|
Held-to-maturity securities |
$ |
— |
|
|
$ |
5,389,093 |
|
|
$ |
— |
|
|
$ |
5,389,093 |
|
Net loans and direct financing leases |
— |
|
|
— |
|
|
64,235,535 |
|
|
64,235,535 |
|
Financial Liabilities |
|
|
|
|
|
|
|
Deposits |
— |
|
|
74,056,244 |
|
|
4,176,747 |
|
|
78,232,991 |
|
Short-term borrowings |
822 |
|
|
— |
|
|
2,147,296 |
|
|
2,148,118 |
|
Long-term debt |
— |
|
|
— |
|
|
9,101,522 |
|
|
9,101,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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