Annual report pursuant to Section 13 and 15(d)

FAIR VALUES OF ASSETS AND LIABILITIES

v3.8.0.1
FAIR VALUES OF ASSETS AND LIABILITIES
12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
FAIR VALUES OF ASSETS AND LIABILITIES
FAIR VALUES OF ASSETS AND LIABILITIES
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Loans held for sale
Huntington has elected to apply the fair value option for mortgage loans originated with the intent to sell which are included in loans held for sale. Mortgage loans held for sale are classified as Level 2 and are estimated using security prices for similar product types.
Loans held for investment
Certain mortgage loans originated with the intent to sell have been reclassified to mortgage loans held for investment. These loans continue to be measured at fair value. The fair value is determined using fair value of similar mortgage-backed securities adjusted for loan specific variables.
Huntington elected the fair value option for consumer loans with deteriorated credit quality acquired from FirstMerit in accordance with ASC 825 to allow for operational efficiencies not normally associated with purchased credit impaired loans. The consumer loans are classified as Level 3. The key assumption used to determine the fair value of the consumer loans is discounted cash flows.
Available-for-sale securities and trading account securities
Securities accounted for at fair value include both the available-for-sale and trading portfolios. Huntington uses prices obtained from third-party pricing services and recent trades to determine the fair value of securities. AFS and trading securities are classified as Level 1 using quoted market prices (unadjusted) in active markets for identical securities that Huntington has the ability to access at the measurement date. Less than 1% of the positions in these portfolios are Level 1, and consist of U.S. Treasury securities and money market mutual funds. When quoted market prices are not available, fair values are classified as Level 2 using quoted prices for similar assets in active markets, quoted prices of identical or similar assets in markets that are not active, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument. 78% of the positions in these portfolios are Level 2, and consist of U.S. Government and agency debt securities, agency mortgage backed securities, asset-backed securities other than the CDO-preferred securities portfolio, certain municipal securities and other securities. For Level 2 securities Huntington uses various methods and techniques to corroborate prices obtained from the pricing service, including references to dealer or other market quotes, and by reviewing valuations of comparable instruments. If relevant market prices are limited or unavailable, valuations may require significant management judgment or estimation to determine fair value, in which case the fair values are classified as Level 3. 21% of our positions are Level 3, and consist of CDO-preferred securities and municipal securities. A significant change in the unobservable inputs for these securities may result in a significant change in the ending fair value measurement of these securities.
The municipal securities portion that is classified as Level 3 uses significant estimates to determine the fair value of these securities which results in greater subjectivity. The fair value is determined by utilizing third-party valuation services. The third-party service provider reviews credit worthiness, prevailing market rates, analysis of similar securities, and projected cash flows. The third-party service provider also incorporates industry and general economic conditions into their analysis. Huntington evaluates the analysis provided for reasonableness.
The CDO-preferred securities portfolios are classified as Level 3 and as such use significant estimates to determine the fair value of these securities which results in greater subjectivity. The CDO-preferred securities portfolio are subjected to a quarterly review of the projected cash flows. These reviews are supported with analysis from independent third parties, and are used as a basis for impairment analysis.
MSRs
MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. Huntington determines the fair value of MSRs using an income approach model based upon the month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs, and changes in valuation inputs and assumptions. Servicing brokers and other sources of information (e.g. discussion with other mortgage servicers and industry surveys) are used to obtain information on market practice and assumptions. On at least a quarterly basis, third-party marks are obtained from at least one servicing broker. Huntington reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. Any recommended change in assumptions and/or inputs are presented for review to the Mortgage Price Risk Subcommittee for final approval.
Derivative assets and liabilities
Derivatives classified as Level 2 consist of foreign exchange and commodity contracts, which are valued using exchange traded swaps and futures market data. In addition, Level 2 includes interest rate contracts, which are valued using a discounted cash flow method that incorporates current market interest rates. Level 2 also includes exchange traded options and forward commitments to deliver mortgage-backed securities, which are valued using quoted prices.
Derivatives classified as Level 3 consist of interest rate lock agreements related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.
Assets and Liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at December 31, 2017 and 2016 are summarized below:
 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
December 31, 2017
(dollar amounts in millions)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$
413

 
$

 
$

 
$
413

Loans held for investment

 
55

 
38

 

 
93

Trading account securities:
 
 
 
 
 
 
 
 
 
Other securities
83

 
3

 

 

 
86

 
83

 
3

 

 

 
86

Available-for-sale and other 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
20

 
1

 

 

 
21

 
25

 
11,672

 
3,191

 

 
14,888

MSRs

 

 
11

 

 
11

Derivative assets

 
316

 
6

 
(190
)
 
132

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
326

 
5

 
(245
)
 
86

Short-term borrowings

 

 

 

 

 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
December 31, 2016
(dollar amounts in millions)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Loans held for sale
$

 
$
438

 
$

 
$

 
$
438

Loans held for investment

 
34

 
48

 

 
82

Trading account securities:
 
 
 
 
 
 
 
 
 
Municipal securities

 
1

 

 

 
1

Other securities
132

 

 

 

 
132

 
132

 
1

 

 

 
133

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

 

 

 

 
6

Residential CMOs

 
6,810

 

 

 
6,810

Residential MBS
 
 
200

 
 
 
 
 
200

Commercial MBS
 
 
3,663

 
 
 
 
 
3,663

Other agencies

 
73

 

 

 
73

Municipal securities

 
452

 
2,798

 

 
3,250

Asset-backed securities

 
718

 
76

 

 
794

Corporate debt

 
199

 

 

 
199

Other securities
16

 
4

 

 

 
20

 
22

 
12,119

 
2,874

 

 
15,015

MSRs

 

 
14

 

 
14

Derivative assets

 
414

 
6

 
(182
)
 
238

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
363

 
8

 
(272
)
 
99

Short-term borrowings

 

 

 

 

(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 years ended December 31, 2017, 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
Year Ended December 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)

 
(15
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(3
)
 
16

 
(2
)
 
(5
)
 
1

Included in OCI

 

 
(8
)
 
14

 

Purchases/originations

 

 
787

 

 

Sales

 

 

 
(60
)
 

Repayments

 

 

 

 
(11
)
Settlements

 

 
(408
)
 
(1
)
 

Closing balance
$
11

 
$
(1
)
 
$
3,167

 
$
24

 
$
38

Change in unrealized gains or losses for the period included in earnings for assets held at end of the reporting date
$
(3
)
 
$

 
$

 
$
(4
)
 
$

(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
Year Ended December 31, 2016
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in millions)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Asset-
backed
securities
 
Loans held for investment
Opening balance
$
18

 
$
6

 
$
2,095

 
$
100

 
$
2

Transfers into Level 3

 

 

 

 

Transfers out of Level 3 (1)

 
(7
)
 

 

 

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
Included in earnings
(4
)
 
(1
)
 
7

 
(2
)
 
(2
)
Included in OCI

 

 
(28
)
 
6

 

Purchases/originations

 

 
1,399

 

 
56

Sales

 

 
(37
)
 
(25
)
 

Repayments

 

 

 

 
(8
)
Settlements

 

 
(638
)
 
(3
)
 

Closing balance
$
14

 
$
(2
)
 
$
2,798

 
$
76

 
$
48

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
)
 
$
(1
)
 
$
(33
)
 
$
4

 
$

(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
Year Ended December 31, 2015
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in millions)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private
label CMO
 
Asset-
backed
securities
 
Loans held for investment
Balance, beginning of year
$
23

 
$
3

 
$
1,418

 
$
30

 
$
83

 
$
10

Transfers into Level 3

 

 

 

 

 

Transfers out of Level 3 (1)

 
(2
)
 

 

 

 

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

 

 

 
(3
)
 

Included in OCI

 

 
(4
)
 
2

 
25

 

Purchases/originations

 

 
1,002

 

 

 

Sales

 

 
(10
)
 
(30
)
 

 

Repayments

 

 

 

 

 
(8
)
Settlements

 

 
(311
)
 
(2
)
 
(5
)
 

Balance, end of year
$
18

 
$
6

 
$
2,095

 
$

 
$
100

 
$
2

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
)
 
$
5

 
$

 
$

 
$
(3
)
 
$

(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 years ended December 31, 2017, 2016, and 2015:
 
Level 3 Fair Value Measurements
Year Ended December 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
$
(3
)
 
$
16

 
$

 
$

 
$

Securities gains (losses)

 

 

 
(5
)
 

Interest and fee income

 

 
(2
)
 

 

Noninterest income

 

 

 

 
1

Total
$
(3
)
 
$
16

 
$
(2
)
 
$
(5
)
 
$
1

 
Level 3 Fair Value Measurements
Year Ended December 31, 2016
 
 
 
 
 
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
$
(4
)
 
$
(1
)
 
$

 
$

 
$

Securities gains (losses)

 

 
1

 
(2
)
 

Interest and fee income

 

 

 

 

Noninterest income

 

 
6

 

 
(2
)
Total
$
(4
)
 
$
(1
)
 
$
7

 
$
(2
)
 
$
(2
)
 
Level 3 Fair Value Measurements
Year Ended December 31, 2015
 
 
 
 
 
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 (loss)
$
(5
)
 
$
5

 
$

 
$

 
$

Securities gains (losses)

 

 

 
(3
)
 

Interest and fee income

 

 

 

 

Noninterest income

 

 

 

 

Total
$
(5
)
 
$
5

 
$

 
$
(3
)
 
$


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

 
$
400

 
$
13

 
$
1

 
$
1

 
$

Loans held for investment
93

 
102

 
(9
)
 
10

 
11

 
(1
)
 
December 31, 2016
 
Total Loans
 
Loans that are 90 or more days past due
(dollar amounts in millions)
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
 
Fair value
carrying
amount
 
Aggregate
unpaid
principal
 
Difference
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
438

 
$
434

 
$
4

 
$

 
$

 
$

Loans held for investment
82

 
92

 
$
(10
)
 
8

 
11

 
$
(3
)
The following tables present the net gains (losses) from fair value changes, including net gains (losses) associated with instrument specific credit risk for the years ended December 31, 2017, 2016, and 2015: 
 
Net gains (losses) from fair value
changes Year Ended December 31,
(dollar amounts in millions)
2017
 
2016
 
2015
Assets
 
 
 
 
 
Loans held for sale
$
8

 
$
7

 
$
(2
)
Loans held for investment

 

 
(1
)

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 year ended December 31, 2017, 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)
Year ended
December 31, 2017
MSRs
$
190

 
$

 
$

 
$
190

 
$
1

Impaired loans
36

 

 

 
36

 
(5
)
Other real estate owned
33

 

 

 
33

 
(2
)

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.
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 December 31, 2017.
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 December 31, 2017:
 
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 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 that are carried either at fair value or cost at December 31, 2017 and December 31, 2016:
 
December 31, 2017
 
December 31, 2016
 
Carrying
 
Fair
 
Carrying
 
Fair
(dollar amounts in millions)
Amount
 
Value
 
Amount
 
Value
Financial Assets:
 
 
 
 
 
 
 
Cash and short-term assets
$
1,567

 
$
1,567

 
$
1,443

 
$
1,443

Trading account securities
86

 
86

 
133

 
133

Loans held for sale
488

 
491

 
513

 
516

Available-for-sale and other securities
15,469

 
15,469

 
15,563

 
15,563

Held-to-maturity securities
9,091

 
8,971

 
7,807

 
7,787

Net loans and direct financing leases
69,426

 
69,146

 
66,324

 
66,295

Derivatives
132

 
132

 
238

 
238

Financial Liabilities:
 
 
 
 
 
 
 
Deposits
77,041

 
77,010

 
75,608

 
76,161

Short-term borrowings
5,056

 
5,056

 
3,693

 
3,693

Long-term debt
9,206

 
9,402

 
8,309

 
8,387

Derivatives
86

 
86

 
98

 
98

The following table presents the level in the fair value hierarchy for the estimated fair values of Huntington’s financial instruments at fair value at December 31, 2017 and December 31, 2016:
 
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

Loans held for sale

 
413

 
78

 
491

Available-for-sale and other securities
25

 
11,672

 
3,191

 
14,888

Held-to-maturity securities

 
8,971

 

 
8,971

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

 
Estimated Fair Value Measurements at Reporting Date Using
 
December 31, 2016
(dollar amounts in millions)
Level 1
 
Level 2
 
Level 3
 
Financial Assets:
 
 
 
 
 
 
 
Held-to-maturity securities
$

 
$
7,787

 
$

 
$
7,787

Net loans and direct financing leases

 

 
66,295

 
66,295

Financial Liabilities:
 
 
 
 
 
 
 
Deposits

 
72,319

 
3,842

 
76,161

Short-term borrowings
1

 

 
3,692

 
3,693

Long-term debt

 
7,980

 
407

 
8,387


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.
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 discount rates based on current interest rates offered for loans and leases for 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.