Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUES OF ASSETS AND LIABILITIES

v3.3.0.814
FAIR VALUES OF ASSETS AND LIABILITIES
 9 Months Ended
Sep. 30, 2015
Fair Value Disclosures [Abstract]  
FAIR VALUES OF ASSETS AND LIABILITIES
FAIR VALUES OF ASSETS AND LIABILITIES
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.
Mortgage loans held for investment
Initially, these mortgage loans were originated with the intent to sell and therefore classified as held for sale. In accordance with operating procedures, certain loans have been reclassified to loans held for investment. Mortgage loans held for investment are classified as Level 2 and the value is 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. 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. 81% 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 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. 19% of our positions are Level 3, and consist of 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 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 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 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.
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. The Private-label CMO securities were sold during the 2015 third quarter.
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.
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. 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 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.
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 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.
Short-term borrowings
Short-term borrowings classified as Level 2 consist primarily of U.S. treasury bond securities sold under agreement to repurchase. These securities are borrowed from other institutions and must be repaid by purchasing the securities in the open market.
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, 2015 and December 31, 2014 are summarized below:
 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
September 30, 2015
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Loans held for sale
$
—

 
$
393,473

 
$
—

 
$
—

 
$
393,473

Loans held for investment
—

 
34,019

 
—

 
—

 
34,019

Trading account securities:
 
 
 
 
 
 
 
 
 
Federal agencies: Other agencies
—

 
—

 
—

 
—

 
—

Municipal securities
—

 
5,932

 
—

 
—

 
5,932

Other securities
32,500

 
177

 
—

 
—

 
32,677

 
32,500

 
6,109

 
—

 
—

 
38,609

Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
14,095

 
—

 
—

 
—

 
14,095

Federal agencies: Mortgage-backed
—

 
6,764,213

 
—

 
—

 
6,764,213

Federal agencies: Other agencies
—

 
376,538

 
—

 
—

 
376,538

Municipal securities
—

 
377,535

 
1,950,556

 
—

 
2,328,091

Private-label CMO
—

 
—

 
—

 
—

 
—

Asset-backed securities
—

 
712,837

 
101,172

 
—

 
814,009

Corporate debt
—

 
449,089

 
—

 
—

 
449,089

Other securities
12,501

 
3,914

 
—

 
—

 
16,415

 
26,596

 
8,684,126

 
2,051,728

 
—

 
10,762,450

Automobile loans
—

 
—

 
2,563

 
—

 
2,563

MSRs
—

 
—

 
18,065

 
—

 
18,065

Derivative assets
—

 
520,802

 
8,339

 
(77,557
)
 
451,584

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities
—

 
316,452

 
555

 
(27,330
)
 
289,677

Short-term borrowings
—

 
511

 
—

 
—

 
511

 
Fair Value Measurements at Reporting Date Using
 
Netting Adjustments (1)
 
December 31, 2014
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Loans held for sale
$
—

 
$
354,888

 
$
—

 
$
—

 
$
354,888

Loans held for investment
—

 
40,027

 
—

 
—

 
40,027

Trading account securities:
 
 
 
 
 
 
 
 
 
Federal agencies: Other agencies
—

 
2,857

 
—

 
—

 
2,857

Municipal securities
—

 
5,098

 
—

 
—

 
5,098

Other securities
33,121

 
1,115

 
—

 
—

 
34,236

 
33,121

 
9,070

 
—

 
—

 
42,191

Available-for-sale and other securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
5,452

 
—

 
—

 
—

 
5,452

Federal agencies: Mortgage-backed
—

 
5,322,701

 
—

 
—

 
5,322,701

Federal agencies: Other agencies
—

 
351,543

 
—

 
—

 
351,543

Municipal securities
—

 
450,976

 
1,417,593

 
—

 
1,868,569

Private-label CMO
—

 
11,462

 
30,464

 
—

 
41,926

Asset-backed securities
—

 
873,260

 
82,738

 
—

 
955,998

Corporate debt
—

 
486,176

 
—

 
—

 
486,176

Other securities
17,430

 
3,316

 
—

 
—

 
20,746

 
22,882

 
7,499,434

 
1,530,795

 
—

 
9,053,111

Automobile loans
—

 
—

 
10,590

 
—

 
10,590

MSRs
—

 
—

 
22,786

 
—

 
22,786

Derivative assets
—

 
449,775

 
4,064

 
(101,197
)
 
352,642

Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities
—

 
335,524

 
704

 
(51,973
)
 
284,255

Short-term borrowings
—

 
2,295

 
—

 
—

 
2,295

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(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 nine-month periods ended September 30, 2015 and 2014, 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 September 30, 2015
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label
CMO
 
Asset-
backed
securities
 
Automobile
loans
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
Three Months Ended September 30, 2014
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label
CMO
 
Asset-
backed
securities
 
Automobile
loans
Opening balance
$
26,747

 
$
6,196

 
$
1,206,455

 
$
31,633

 
$
106,461

 
$
25,498

Transfers into Level 3
—

 
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

 
—

 
—

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
(1,309
)
 
(1,847
)
 
—

 
8

 
171

 
(253
)
Included in OCI
—

 
—

 
14,344

 
(137
)
 
5,826

 
—

Purchases/originations
—

 
—

 
224,615

 
—

 
—

 
—

Sales
—

 
—

 
—

 
—

 
(22,870
)
 
—

Repayments
—

 
—

 
—

 
—

 
—

 
(8,545
)
Issues
—

 
—

 
—

 
—

 
—

 
—

Settlements
—

 
(813
)
 
(190,619
)
 
(570
)
 
(1,004
)
 
—

Closing balance
$
25,438

 
$
3,536

 
$
1,254,795

 
$
30,934

 
$
88,584

 
$
16,700

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
$
(1,309
)
 
$
(1,847
)
 
$
14,344

 
$
(137
)
 
$
5,468

 
$
(253
)
 
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
 
Automobile
loans
Opening balance
$
22,786

 
$
3,360

 
$
1,417,593

 
$
30,464

 
$
82,738

 
$
10,590

Transfers into Level 3
—

 
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

 
—

 
—

Total gains/losses for the period:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
(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
)
 
Level 3 Fair Value Measurements
Nine Months Ended September 30, 2014
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label
CMO
 
Asset-
backed
securities
 
Automobile
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
(8,798
)
 
2,785

 
—

 
24

 
38

 
(705
)
Included in OCI
—

 
—

 
7,555

 
364

 
20,256

 
—

Purchases/originations
—

 
—

 
805,893

 
—

 
—

 
—

Sales
—

 
—

 
—

 
—

 
(22,700
)
 
—

Repayments
—

 
—

 
—

 
—

 
—

 
(34,881
)
Issues
—

 
—

 
—

 
—

 
—

 
—

Settlements
—

 
(1,639
)
 
(213,190
)
 
(1,594
)
 
(16,429
)
 
—

Closing balance
$
25,438

 
$
3,536

 
$
1,254,795

 
$
30,934

 
$
88,584

 
$
16,700

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
$
(8,798
)
 
$
2,785

 
$
7,555

 
$
364

 
$
19,554

 
$
(705
)

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 nine-month periods ended September 30, 2015 and 2014:
 
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
 
Automobile
loans
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
Three Months Ended September 30, 2014
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label CMO
 
Asset-
backed
securities
 
Automobile
loans
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(1,309
)
 
$
(1,847
)
 
$
—

 
$
—

 
$
—

 
$
—

Securities gains (losses)
—

 
—

 
—

 
—

 
170

 
—

Interest and fee income
—

 
—

 
—

 
8

 
1

 
(243
)
Noninterest income
—

 
—

 
—

 
—

 
—

 
(10
)
Total
$
(1,309
)
 
$
(1,847
)
 
$
—

 
$
8

 
$
171

 
$
(253
)
 
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
 
Automobile
loans
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
)
 
Level 3 Fair Value Measurements
Nine Months Ended September 30, 2014
 
 
 
 
 
Available-for-sale securities
 
 
(dollar amounts in thousands)
MSRs
 
Derivative
instruments
 
Municipal
securities
 
Private-
label CMO
 
Asset-
backed
securities
 
Automobile
loans
Classification of gains and losses in earnings:
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking income
$
(8,798
)
 
$
2,785

 
$
—

 
$
—

 
$
—

 
$
—

Securities gains (losses)
—

 
—

 
—

 
—

 
170

 
—

Interest and fee income
—

 
—

 
—

 
24

 
38

 
(819
)
Noninterest income
—

 
—

 
—

 
—

 
—

 
114

Total
$
(8,798
)
 
$
2,785

 
$
—

 
$
24

 
$
208

 
$
(705
)

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, 2015
 
December 31, 2014
(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
$
393,473

 
$
377,707

 
$
15,766

 
$
354,888

 
$
340,070

 
$
14,818

Loans held for investment
34,019

 
34,774

 
(755
)
 
40,027

 
40,938

 
(911
)
Automobile loans
2,563

 
2,563

 
—

 
10,590

 
10,022

 
568

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, 2015 and 2014:
 
Net gains (losses) from
fair value changes
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollar amounts in thousands)
2015
 
2014
 
2015
 
2014
Assets
 
 
 
 
 
 
 
Loans held for sale
$
6,801

 
$
4,562

 
$
1,244

 
$
3,700

Automobile loans
(142
)
 
(253
)
 
(568
)
 
(706
)
 
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)
2015
 
2014
 
2015
 
2014
Assets
 
 
 
 
 
 
 
Automobile loans
$
37

 
$
323

 
$
108

 
$
861


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, 2015
 
Total
Gains/(Losses)
Nine Months Ended
September 30, 2015
MSRs
$
133,812

 
$
—

 
$
—

 
$
133,812

 
$
(12,472
)
 
$
(7,492
)
Impaired loans
52,837

 
—

 
—

 
52,837

 
(2,614
)
 
(6,964
)
Other real estate owned
24,910

 
—

 
—

 
24,910

 
356

 
3,619


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.
MSRs accounted for under the amortization method are subject to nonrecurring fair value measurement when the fair value is lower than the carrying amount.
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, 2015.
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, 2015 and December 31, 2014:
 
Quantitative Information about Level 3 Fair Value Measurements at September 30, 2015
(dollar amounts in thousands)
Fair Value at
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
MSRs
$
18,065

 
Discounted cash flow
 
Constant prepayment rate
 
6.0% - 24.0% (14.3%)

 
 
 
 
 
Spread over forward interest rate
swap rates
 
325 - 1,166 (599)

Derivative assets
8,339

 
Consensus Pricing
 
Net market price
 
-3.6% - 19.4% (2.1%)

Derivative liabilities
555

 
 
 
Estimated Pull through %
 
50.0% - 90.0% (76.0%)

Municipal securities
1,950,556

 
Discounted cash flow
 
Discount rate
 
0.3% - 4.7% (2.6%)

Asset-backed securities
101,172

 
Discounted cash flow
 
Discount rate
 
4.3% - 11.3% (5.8%)

 
 
 
 
 
Cumulative prepayment rate
 
0.0% - 100.0% (8.3%)

 
 
 
 
 
Cumulative default
 
1.7% - 100.0% (11.5%)

 
 
 
 
 
Loss given default
 
85% - 100% (96.4%)

 
 
 
 
 
Cure given deferral
 
0.0% - 75.0% (36.6%)

Automobile loans
2,563

 
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
52,837

 
Appraisal value
 
NA
 
NA

Other real estate owned
24,910

 
Appraisal value
 
NA
 
NA

 
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2014
(dollar amounts in thousands)
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
MSRs
$
22,786

 
Discounted cash flow
 
Constant prepayment rate
 
7% - 26% (16%)

 
 
 
 
 
Spread over forward interest rate
swap rates
 
228 - 900 (546)

Derivative assets
4,064

 
Consensus Pricing
 
Net market price
 
-5.09% - 17.46% (1.7%)

Derivative liabilities
704

 
 
 
Estimated Pull through %
 
38% - 91% (75%)

Municipal securities
1,417,593

 
Discounted cash flow
 
Discount rate
 
0.5% - 4.9% (2.5%)

Private-label CMO
30,464

 
Discounted cash flow
 
Discount rate
 
2.7% - 7.2% (6.0%)

 
 
 
 
 
Constant prepayment rate
 
13.6% - 32.6% (20.7%)

 
 
 
 
 
Probability of default
 
0.1% - 4.0% (0.7%)

 
 
 
 
 
Loss severity
 
0.0% - 64.0% (33.9%)

Asset-backed securities
82,738

 
Discounted cash flow
 
Discount rate
 
4.3% - 13.3% (7.3%)

 
 
 
 
 
Cumulative prepayment rate
 
0.0% - 100% (10.1%)

 
 
 
 
 
Cumulative default
 
1.9% - 100% (15.9%)

 
 
 
 
 
Loss given default
 
20% - 100% (94.4%)

 
 
 
 
 
Cure given deferral
 
0.0% - 75% (32.6%)

Automobile loans
10,590

 
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
52,911

 
Appraisal value
 
NA
 
NA

Other real estate owned
35,039

 
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, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
(dollar amounts in thousands)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash and short-term assets
$
1,090,163

 
$
1,090,163

 
$
1,285,124

 
$
1,285,124

Trading account securities
38,609

 
38,609

 
42,191

 
42,191

Loans held for sale
675,636

 
675,636

 
416,327

 
416,327

Available-for-sale and other securities
11,094,868

 
11,094,868

 
9,384,670

 
9,384,670

Held-to-maturity securities
3,157,688

 
3,191,907

 
3,379,905

 
3,382,715

Net loans and leases
49,063,971

 
47,374,526

 
47,050,530

 
45,110,406

Derivatives
451,584

 
451,584

 
352,642

 
352,642

Financial Liabilities
 
 
 
 
 
 
 
Deposits
54,244,711

 
54,831,170

 
51,732,151

 
52,454,804

Short-term borrowings
1,453,812

 
1,453,812

 
2,397,101

 
2,397,101

Long-term debt
6,359,445

 
6,265,129

 
4,335,962

 
4,286,304

Derivatives
289,677

 
289,677

 
284,255

 
284,255

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, 2015 and December 31, 2014:
 
Estimated Fair Value Measurements at Reporting Date Using
 
September 30, 2015
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Held-to-maturity securities
$
—

 
$
3,191,907

 
$
—

 
$
3,191,907

Net loans and leases
—

 
—

 
47,374,526

 
47,374,526

Financial Liabilities
 
 
 
 
 
 
 
Deposits
—

 
51,244,015

 
3,587,155

 
54,831,170

Short-term borrowings
—

 
—

 
1,453,812

 
1,453,812

Other long-term debt
—

 
—

 
6,265,129

 
6,265,129

 
Estimated Fair Value Measurements at Reporting Date Using
 
December 31, 2014
(dollar amounts in thousands)
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Held-to-maturity securities
$
—

 
$
3,382,715

 
$
—

 
$
3,382,715

Net loans and leases
—

 
—

 
45,110,406

 
45,110,406

Financial Liabilities
 
 
 
 
 
 
 
Deposits
—

 
48,183,798

 
4,271,006

 
52,454,804

Short-term borrowings
—

 
—

 
2,397,101

 
2,397,101

Other long-term debt
—

 
—

 
4,286,304

 
4,286,304


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.