Quarterly report pursuant to Section 13 or 15(d)

Fair Values of Assets and Liabilities

v2.4.0.8
Fair Values of Assets and Liabilities
3 Months Ended
Jun. 30, 2014
Fair Values of Assets and Liabilities [Abstract]  
FAIR VALUES OF ASSETS AND LIABILITIES

14. Fair Values of assets and liabilities

 

Huntington follows the fair value accounting guidance under ASC 820 and ASC 825.

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level valuation hierarchy was established for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2, or 3 are recorded at fair value at the beginning of the reporting period.

 

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.

 

Mortgage loans held for sale

Huntington 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.

 

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. 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. 83% 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, municipal securities and other securities. For both Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including reference 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. 16% of our positions are Level 3, and consist of non-agency ALT-A asset-backed securities, private-label CMO securities, CDO-preferred CDO 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 Alt-A, private label CMO and 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 Alt-A and private label CMO securities portfolios are subjected to a monthly review of the projected cash flows, while the cash flows of the CDO-preferred securities portfolio are reviewed quarterly. These reviews are supported with analysis from independent third parties, and are used as a basis for impairment analysis.

 

Alt-A mortgage-backed and private-label CMO securities are collateralized by first-lien residential mortgage loans. The securities valuation methodology incorporates values obtained from a third party pricing specialist using a discounted cash flow approach and a proprietary pricing model and includes assumptions management believes market participants would use to value the securities under current market conditions. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, house price depreciation / appreciation rates that are based upon macroeconomic forecasts and discount rates that are implied by market prices for similar securities with similar collateral structures.

 

CDO-preferred securities are CDOs backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. We engage a third party pricing specialist with direct industry experience in CDO-preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. The PD of each issuer and the market discount rate are the most significant inputs in determining fair value. Management evaluates the PD assumptions provided by the third party pricing specialist by comparing the current PD to the assumptions used the previous quarter, actual defaults and deferrals in the current period, and trend data on certain financial ratios of the issuers. Huntington also evaluates the assumptions related to discount rates. Relying on cash flows is necessary because there was a lack of observable transactions in the market and many of the original sponsors or dealers for these securities are no longer able to provide a fair value that is compliant with ASC 820.

 

Huntington utilizes the same processes to determine the fair value of investment securities classified as held-to-maturity for impairment evaluation purposes.

 

Automobile loans

Effective January 1, 2010, Huntington consolidated an automobile loan securitization that previously had been accounted for as an off-balance sheet transaction. As a result, Huntington elected to account for these automobile loan receivables at fair value per guidance supplied in ASC 825. The automobile loan receivables are classified as Level 3. The key assumptions used to determine the fair value of the automobile loan receivables included projections of expected losses and prepayment of the underlying loans in the portfolio and a market assumption of interest rate spreads. Certain interest rates are available from similarly traded securities while other interest rates are developed internally based on similar asset-backed security transactions in the market. During the first quarter of 2014 Huntington cancelled the 2009 and 2006 Automobile Trust. Huntington continues to report the associated automobile loan receivables at fair value due to its 2010 election.

 

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 our month-end interest rate curve and prepayment assumptions. The model, which is operated and maintained by a third party, 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 service 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.

 

Derivatives

Derivatives classified as Level 1 consist of exchange traded options and forward commitments to deliver mortgage-backed securities which are valued using quoted prices. Asset and liability conversion swaps and options, and interest rate caps are classified as Level 2. These derivative positions are valued using a discounted cash flow method that incorporates current market interest rates. Derivatives classified as Level 3 consist primarily 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 June 30, 2014 and December 31, 2013 are summarized below:

Fair Value Measurements at Reporting Date Using   Netting     Balance at
(dollar amounts in thousands)   Level 1     Level 2     Level 3   Adjustments (1)   June 30, 2014
Assets                            
Loans held for sale $ ---   $ 316,182   $ ---   $ ---   $ 316,182
                               
Trading account securities:                            
  U.S. Treasury securities   ---     ---     ---     ---     ---
  Federal agencies: Mortgage-backed   ---     ---     ---     ---     ---
  Federal agencies: Other agencies   ---     ---     ---     ---     ---
  Municipal securities   ---     8,598     ---     ---     8,598
  Other securities   36,446     5,497     ---     ---     41,943
      36,446     14,095     ---     ---     50,541
                               
Available-for-sale and other securities:                            
  U.S. Treasury securities   50,709     ---     ---     ---     50,709
  Federal agencies: Mortgage-backed   ---     4,747,866     ---     ---     4,747,866
  Federal agencies: Other agencies   ---     139,626     ---     ---     139,626
  Municipal securities   ---     486,966     1,206,455     ---     1,693,421
  Private-label CMO   ---     14,166     31,633     ---     45,799
  Asset-backed securities   ---     873,537     106,461     ---     979,998
  Covered bonds   ---     ---           ---     ---
  Corporate debt   ---     480,465     ---     ---     480,465
  Other securities   18,277     3,816     ---     ---     22,093
      68,986     6,746,442     1,344,549     ---     8,159,977
                               
Automobile loans   ---     ---     25,498     ---     25,498
                               
MSRs   ---     ---     26,747     ---     26,747
                               
Derivative assets   30,180     250,809     6,779     (61,839)     225,929
                               
Liabilities                            
Derivative liabilities   35,561     114,347     583     (27,651)     122,840
                               
Short-term borrowings   ---     ---     ---     ---     ---
                               
Fair Value Measurements at Reporting Date Using   Netting     Balance at
(dollar amounts in thousands)   Level 1     Level 2     Level 3   Adjustments (1)   December 31, 2013
Assets                            
Mortgage loans held for sale $ ---   $ 278,928   $ ---   $ ---   $ 278,928
                               
Trading account securities:                            
  U.S. Treasury securities   ---     ---     ---     ---     ---
  Federal agencies: Mortgage-backed   ---     ---     ---     ---     ---
  Federal agencies: Other agencies   ---     834     ---     ---     834
  Municipal securities   ---     2,180     ---     ---     2,180
  Other securities   32,081     478     ---     ---     32,559
      32,081     3,492     ---     ---     35,573
                               
Available-for-sale and other securities:                            
  U.S. Treasury securities   51,604     ---     ---     ---     51,604
  Federal agencies: Mortgage-backed   ---     3,566,221     ---     ---     3,566,221
  Federal agencies: Other agencies   ---     319,888     ---     ---     319,888
  Municipal securities   ---     491,455     654,537     ---     1,145,992
  Private-label CMO   ---     16,964     32,140     ---     49,104
  Asset-backed securities   ---     983,621     107,419     ---     1,091,040
  Covered bonds   ---     285,874     ---     ---     285,874
  Corporate debt   ---     457,240     ---     ---     457,240
  Other securities   16,971     3,828     ---     ---     20,799
      68,575     6,125,091     794,096     ---     6,987,762
                               
Automobile loans   ---     ---     52,286     ---     52,286
                               
MSRs   ---     ---     34,236     ---     34,236
                               
Derivative assets   36,774     219,045     3,066     (58,856)     200,029
                               
Liabilities                            
Derivative liabilities   22,787     124,123     676     (18,312)     129,274
                               
Short-term borrowings   ---     1,089     ---     ---     1,089
                               

(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 six-month periods ended June 30, 2014 and 2013, 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 June 30, 2014
                Available-for-sale securities    
                        Asset-    
            Derivative   Municipal   Private-   backed   Automobile
(dollar amounts in thousands)     MSRs   instruments   securities   label CMO   securities   loans
Opening balance   $ 30,628 $ 3,700 $ 734,378 $ 31,897 $ 109,969 $ 37,268
Transfers into Level 3     ---   ---   ---   ---   ---   ---
Transfers out of Level 3     ---   ---   ---   ---   ---   ---
Total gains/losses for the period:                          
  Included in earnings     (3,881)   2,957   ---   7   15   (201)
  Included in OCI     ---   ---   (14,061)   249   2,887   ---
Purchases     ---   ---   501,094   ---   ---   ---
Sales     ---   ---   ---   ---   ---   ---
Repayments     ---   ---   ---   ---   ---   (11,569)
Issues     ---   ---   ---   ---   ---   ---
Settlements     ---   (461)   (14,956)   (520)   (6,410)   ---
Closing balance   $ 26,747 $ 6,196 $ 1,206,455 $ 31,633 $ 106,461 $ 25,498
                             
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 $ (3,881) $ 2,957 $ (14,061) $ 249 $ 2,887 $ (201)
                             
                             
        Level 3 Fair Value Measurements
        Three Months Ended June 30, 2013
                Available-for-sale securities    
                        Asset-    
            Derivative   Municipal   Private-   backed   Automobile
(dollar amounts in thousands)     MSRs   instruments   securities   label CMO   securities   loans
Opening balance   $ 35,582 $ 9,006 $ 59,098 $ 45,546 $ 115,455 $ 116,039
Transfers into Level 3     ---   ---   ---   ---   ---   ---
Transfers out of Level 3     ---   ---   ---   ---   ---   ---
Total gains/losses for the period:                          
  Included in earnings     1,962   (11,676)   ---   29   (1,557)   (504)
  Included in OCI     ---   ---   537   (814)   7,897   ---
Purchases     ---   ---   ---   ---   ---   ---
Sales     ---   ---   ---   (10,254)   ---   ---
Repayments     ---   ---   ---   ---   ---   (24,395)
Issues     ---   ---   ---   ---   ---   ---
Settlements     ---   (1,556)   (1,535)   (1,581)   (1,934)   ---
Closing balance   $ 37,544 $ (4,226) $ 58,100 $ 32,926 $ 119,861 $ 91,140
                             
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 $ 1,962 $ (13,232) $ 537 $ (814) $ 7,897 $ (504)
                             

        Level 3 Fair Value Measurements
        Six Months Ended June 30, 2014
                Available-for-sale securities    
                        Asset-    
            Derivative   Municipal   Private-   backed   Automobile
(dollar amounts in thousands)     MSRs   instruments   securities   label CMO   securities   loans
Opening balance   $ 34,236 $ 2,390 $ 654,537 $ 32,140 $ 107,419 $ 52,286
Transfers into Level 3     ---   ---   ---   ---   ---   ---
Transfers out of Level 3     ---   ---   ---   ---   ---   ---
Total gains/losses for the period:                          
  Included in earnings     (7,489)   4,632   ---   17   37   (452)
  Included in OCI     ---   ---   (6,789)   500   14,429   ---
Purchases     ---   ---   581,278   ---   ---   ---
Sales     ---   ---   ---   ---   ---   ---
Repayments     ---   ---   ---   ---   ---   (26,336)
Issues     ---   ---   ---   ---   ---   ---
Settlements     ---   (826)   (22,571)   (1,024)   (15,424)   ---
Closing balance   $ 26,747 $ 6,196 $ 1,206,455 $ 31,633 $ 106,461 $ 25,498
                             
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 $ (7,489) $ 4,632 $ (6,789) $ 500 $ 14,430 $ (452)
                             
                             
        Level 3 Fair Value Measurements
        Six Months Ended June 30, 2013
                Available-for-sale securities    
                        Asset-    
            Derivative   Municipal   Private-   backed   Automobile
(dollar amounts in thousands)     MSRs   instruments   securities   label CMO   securities   loans
Opening balance   $ 35,202 $ 12,702 $ 61,228 $ 48,775 $ 110,037 $ 142,762
Transfers into Level 3     ---   ---   ---   ---   ---   ---
Transfers out of Level 3     ---   ---   ---   ---   ---   ---
Total gains/losses for the period:                          
  Included in earnings     2,342   (13,158)   ---   (240)   (2,296)   633
  Included in OCI     ---   ---   692   77   20,686   ---
Purchases     ---   ---   ---   ---   ---   ---
Sales     ---   ---   ---   (10,254)   ---   ---
Repayments     ---   ---   ---   ---   ---   (52,255)
Issues     ---   ---   ---   ---   ---   ---
Settlements     ---   (3,770)   (3,820)   (5,432)   (8,566)   ---
Closing balance   $ 37,544 $ (4,226) $ 58,100 $ 32,926 $ 119,861 $ 91,140
                             
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 $ 2,342 $ (16,928) $ 692 $ 77 $ 20,686 $ 633
                             

The table below summarizes 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 six-month periods ended June 30, 2014 and 2013:

        Level 3 Fair Value Measurements
        Three Months Ended June 30, 2014
                Available-for-sale securities    
                        Asset-    
            Derivative   Municipal   Private-   backed   Automobile
(dollar amounts in thousands)     MSRs   instruments   securities   label CMO   securities   loans
Classification of gains and losses in earnings:                    
                             
Mortgage banking income (loss)   $ (3,881) $ 2,957 $ --- $ --- $ --- $ ---
Securities gains (losses)     ---   ---   ---   ---   ---   ---
Interest and fee income     ---   ---   ---   7   15   (244)
Noninterest income     ---   ---   ---   ---   ---   43
Total   $ (3,881) $ 2,957 $ --- $ 7 $ 15 $ (201)
                             
        Level 3 Fair Value Measurements
        Three Months Ended June 30, 2013
                Available-for-sale securities    
                        Asset-    
            Derivative   Municipal   Private-   backed   Automobile
(dollar amounts in thousands)     MSRs   instruments   securities   label CMO   securities   loans
Classification of gains and losses in earnings:                    
                             
Mortgage banking income (loss)   $ 1,962 $ (11,676) $ --- $ --- $ --- $ ---
Securities gains (losses)     ---   ---   ---   ---   (1,020)   ---
Interest and fee income     ---   ---   ---   29   (537)   (1,165)
Noninterest income     ---   ---   ---   ---   ---   661
Total   $ 1,962 $ (11,676) $ --- $ 29 $ (1,557) $ (504)
                             

        Level 3 Fair Value Measurements
        Six Months Ended June 30, 2014
                Available-for-sale securities    
                        Asset-    
            Derivative   Municipal   Private-   backed   Automobile
(dollar amounts in thousands)     MSRs   instruments   securities   label CMO   securities   loans
Classification of gains and losses in earnings:                    
                             
Mortgage banking income (loss)   $ (7,489) $ 4,632 $ --- $ --- $ --- $ ---
Securities gains (losses)     ---   ---   ---   ---   ---   ---
Interest and fee income     ---   ---   ---   17   37   (576)
Noninterest income     ---   ---   ---   ---   ---   124
Total   $ (7,489) $ 4,632 $ --- $ 17 $ 37 $ (452)
                             
        Level 3 Fair Value Measurements
        Six Months Ended June 30, 2013
                Available-for-sale securities    
                        Asset-    
            Derivative   Municipal   Private-   backed   Automobile
(dollar amounts in thousands)     MSRs   instruments   securities   label CMO   securities   loans
Classification of gains and losses in earnings:                    
                             
Mortgage banking income (loss)   $ 2,342 $ (13,158)   --- $ --- $ --- $ ---
Securities gains (losses)     ---   ---   ---   (336)   (1,379)   ---
Interest and fee income     ---   ---   ---   96   (917)   (2,024)
Noninterest income     ---   ---   ---   ---   ---   2,657
Total   $ 2,342 $ (13,158) $ --- $ (240) $ (2,296) $ 633
                             

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:

 

      June 30, 2014     December 31, 2013
      Fair value     Aggregate           Fair value     Aggregate      
      carrying     unpaid           carrying     unpaid      
(dollar amounts in thousands)   amount     principal     Difference     amount     principal     Difference
Assets                                  
  Mortgage loans held for sale $ 316,182   $ 300,465   $ 15,717   $ 278,928   $ 276,945   $ 1,983
  Automobile loans   25,498     24,464     1,034     52,286     50,800     1,486
Liabilities                                  

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 six-month periods ended June 30, 2014 and 2013:

 

    Net gains (losses) from fair value changes  
      Three Months Ended       Six Months Ended  
    June 30,       June 30,  
(dollar amounts in thousands)   2014       2013       2014       2013  
                                 
Assets                              
  Mortgage loans held for sale $ (5,378)     $ (20,681)     $ 7,497     $ (25,344)  
  Automobile loans   (201)       (504)       (452)       632  
Liabilities                              

    Gains (losses) included  
    in fair value changes associated  
    with instrument specific credit risk  
      Three Months Ended       Six Months Ended  
      June 30,       June 30,  
(dollar amounts in thousands)   2014       2013       2014       2013  
Assets                              
  Automobile loans $ 251     $ 826     $ 573     $ 1,153  

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. At June 30, 2014, assets measured at fair value on a nonrecurring basis were as follows:

          Fair Value Measurements Using              
          Quoted Prices     Significant     Significant     Total     Total  
          In Active     Other     Other     Gains/(Losses)     Gains/(Losses)  
          Markets for     Observable     Unobservable     For the Three     For the Six  
    Fair Value at     Identical Assets     Inputs     Inputs     Months Ended     Months Ended  
(dollar amounts in thousands) June 30, 2014   (Level 1)     (Level 2)   (Level 3)   June 30, 2014     June 30, 2014  
Impaired loans $ 65,705   $ ---   $ ---   $ 65,705   $ (15,084)   $ (21,100)  
Other real estate owned   34,695     ---     ---     34,695     2,344     2,697  

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.

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 June 30, 2014 and December 31, 2013:

Quantitative Information about Level 3 Fair Value Measurements
            Significant    
  Fair Value at   Valuation   Unobservable   Range
(dollar amounts in thousands) June 30, 2014   Technique   Input   (Weighted Average)
MSRs $ 26,747   Discounted cash flow   Constant prepayment rate   7.0% - 35.0% (14.0%)
            Spread over forward interest rate swap rates   -129 - 4,221 (1,094)
                 
Derivative assets   6,779   Consensus Pricing   Net market price   -3.64% - 14.8% (2.3%)
Derivative liabilities   583       Estimated Pull through %   38.0% - 89.0% (76.0%)
                 
Municipal securities   1,206,455   Discounted cash flow   Discount rate   1.3% - 4.4% (2.6%)
                 
Private-label CMO   31,633   Discounted cash flow   Discount rate   2.6% - 7.5% (5.8%)
            Constant prepayment rate   13.3% - 32.6% (19.8%)
            Probability of default   0.1% - 4.0% (0.7%)
            Loss severity   8.0% - 64.0% (38.9%)
                 
Asset-backed securities   106,461   Discounted cash flow   Discount rate   3.5% - 13.7% (7.3%)
            Constant prepayment rate   5.7% - 5.7% (5.7%)
            Cumulative prepayment rate   0.0% - 100.0% (14.7%)
            Constant default   1.4% - 4.0% (2.8%)
            Cumulative default   2.3% - 100.0% (17.4%)
            Loss given default   20.0% - 100.0% (93.7%)
            Cure given deferral   0.0% - 75.0% (27.3%)
            Loss severity   49.0% - 69.0% (63.5%)
                 
Automobile loans   25,498   Discounted cash flow   Constant prepayment rate   77.8%
            Discount rate   0.2% - 5.0% (1.6%)
                 
Impaired loans   65,705   Appraisal value   NA   NA
                 
Other real estate owned   34,695   Appraisal value   NA   NA
                 

Quantitative Information about Level 3 Fair Value Measurements
  Fair Value at   Valuation   Significant   Range
(dollar amounts in thousands) December 31, 2013   Technique   Unobservable Input   (Weighted Average)
MSRs $ 34,236   Discounted cash flow   Constant prepayment rate   7% - 32% (12%)
            Spread over forward interest rate swap rates   -158 - 4,216 (1,069)
                 
Derivative assets   3,066   Consensus Pricing   Net market price   -5.25% - 13.53% (1.3%)
Derivative liabilities   676       Estimated Pull through %   50% - 89% (78%)
                 
Municipal securities   654,537   Discounted cash flow   Discount rate   1.6% - 4.5% (2.4%)
                 
Private-label CMO   32,140   Discounted cash flow   Discount rate   2.9% - 8.3% (6.3%)
            Constant prepayment rate   12.0% - 31.6% (18.0%)
            Probability of default   0.1% - 4.0% (0.7%)
            Loss severity   8.0% - 64.0% (38.2%)
                 
Asset-backed securities   107,419   Discounted cash flow   Discount rate   3.7% - 15.5% (8.1%)
            Constant prepayment rate   5.7% - 5.7% (5.7%)
            Cumulative prepayment rate   0.0% - 100% (16.6%)
            Constant default   1.4% - 4.0% (2.8%)
            Cumulative default   0.5% - 100% (18.2%)
            Loss given default   20% - 100% (93.7%)
            Cure given deferral   0.0% - 75% (35.8%)
            Loss severity   49.0% - 69.0% (63.5%)
                 
Automobile loans   52,286   Discounted cash flow   Constant prepayment rate   79.2%
            Discount rate   0.3% - 5.0% (1.5%)
                 
Impaired loans   114,256   Appraisal value   NA   NA
                 
Other real estate owned   27,664   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 June 30, 2014 and December 31, 2013:

      June 30, 2014     December 31, 2013
      Carrying     Fair     Carrying     Fair
(dollar amounts in thousands)   Amount     Value     Amount     Value
Financial Assets                      
  Cash and short-term assets $ 1,288,087   $ 1,288,087   $ 1,058,175   $ 1,058,175
  Trading account securities   50,541     50,541     35,573     35,573
  Loans held for sale   317,862     317,862     326,212     326,212
  Available-for-sale and other securities   8,491,037     8,491,037     7,308,753     7,308,753
  Held-to-maturity securities   3,621,995     3,611,261     3,836,667     3,760,898
  Net loans and leases   45,444,674     43,551,863     42,472,630     40,976,014
  Derivatives   225,929     225,929     200,029     200,029
                         
Financial Liabilities                      
  Deposits   48,748,765     48,776,554     47,506,718     48,132,550
  Short-term borrowings   1,252,409     1,244,054     552,143     543,552
  Federal Home Loan Bank advances   2,883,173     2,883,407     1,808,293     1,808,558
  Other long-term debt   2,602,869     2,602,406     1,349,119     1,342,890
  Subordinated notes   983,310     966,561     1,100,860     1,073,116
  Derivatives   122,840     122,840     129,274     129,274

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 June 30, 2014 and December 31, 2013:

Estimated Fair Value Measurements at Reporting Date Using   Balance at
(dollar amounts in thousands)   Level 1     Level 2     Level 3     June 30, 2014
                         
Financial Assets                      
  Held-to-maturity securities $ ---   $ 3,611,261   $ ---   $ 3,611,261
  Net loans and leases   ---     ---     43,551,863     43,551,863
Financial Liabilities                      
  Deposits   ---     43,908,133     4,868,421     48,776,554
  Short-term borrowings   ---     ---     1,244,054     1,244,054
  Federal Home Loan Bank advances   ---     ---     2,883,407     2,883,407
  Other long-term debt   ---     ---     2,602,406     2,602,406
  Subordinated notes   ---     ---     966,561     966,561
                         
Estimated Fair Value Measurements at Reporting Date Using   Balance at
(dollar amounts in thousands)   Level 1     Level 2     Level 3     December 31, 2013
                         
Financial Assets                      
  Held-to-maturity securities $ ---   $ 3,760,898   $ ---   $ 3,760,898
  Net loans and leases   ---     ---     40,976,014     40,976,014
Financial Liabilities                      
  Deposits   ---     42,279,542     5,853,008     48,132,550
  Short-term borrowings   ---     ---     543,552     543,552
  Federal Home Loan Bank advances   ---     ---     1,808,558     1,808,558
  Other long-term debt   ---     ---     1,342,890     1,342,890
  Subordinated notes   ---     ---     1,073,116     1,073,116

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

Fixed-rate, 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.