Huntington Bancshares Incorporated Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

FAIR VALUES OF ASSETS AND LIABILITIES

FAIR VALUES OF ASSETS AND LIABILITIES

12 Months Ended

Dec. 31, 2020

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 for which the FVO was elected 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 certain consumer loans with deteriorated credit quality. These 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 determines the fair value of securities utilizing quoted market prices obtained for identical or similar assets, third-party pricing services, third-party valuation specialists and other observable inputs such as recent trade observations. AFS and trading securities classified as Level 1 use quoted market prices (unadjusted) in active markets for identical securities 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. Level 2 represents 82% of the positions in these portfolios, which consists of U.S. Government and agency debt securities, agency mortgage backed securities, private-label asset-backed securities, certain municipal securities and other securities. For Level 2 securities Huntington primarily uses prices obtained from third-party pricing services to determine the fair value of securities. Huntington independently evaluates and corroborates the fair value received from pricing services through various methods and techniques, including references to dealer or other market quotes, by reviewing valuations of comparable instruments, and by comparing the prices realized on the sale of similar securities. 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, which represent 18% of the positions. The Level 3 positions predominantly consist of direct purchase 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 direct purchase municipal securities are classified as Level 3 and require significant estimates to determine fair value which results in greater subjectivity. The fair value is determined by utilizing a discounted cash flow valuation technique employed by a third-party valuation specialist. The third-party specialist uses assumptions related to yield, prepayment speed, conditional default rates and loss severity based on certain factors such as,

credit worthiness of the counterparty, prevailing market rates, and analysis of similar securities. Huntington evaluates the fair values provided by the third-party specialist for reasonableness.

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 and the Visa® share swap. The determination of fair value of the interest rate locks 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, 2020 and 2019 are summarized below:


	Fair Value Measurements at Reporting Date Using						Netting Adjustments (1)		December 31, 2020
(dollar amounts in millions)	Level 1		Level 2		Level 3
Assets
Trading account securities:



Municipal securities	$	—	$	62	$	—	$	—	$	62


Available-for-sale securities:
U.S. Treasury securities	5		—		—		—		5
Residential CMOs	—		3,666		—		—		3,666
Residential MBS	—		7,935		—		—		7,935
Commercial MBS	—		1,163		—		—		1,163
Other agencies	—		62		—		—		62
Municipal securities	—		53		2,951		—		3,004
Private-label CMO	—		—		9		—		9
Asset-backed securities	—		182		10		—		192
Corporate debt	—		445		—		—		445
Other securities/sovereign debt	—		4		—		—		4
	5		13,510		2,970		—		16,485

Other securities	59		—		—		—		59
Loans held for sale	—		1,198		—		—		1,198
Loans held for investment	—		71		23		—		94
MSRs	—		—		210		—		210
Derivative assets	—		1,903		43		(889)		1,057
Liabilities

Derivative liabilities	—		1,031		2		(917)		116


	Fair Value Measurements at Reporting Date Using						Netting Adjustments (1)		December 31, 2019
(dollar amounts in millions)	Level 1		Level 2		Level 3
Assets
Trading account securities:


Federal agencies: Other agencies	$	—	$	4	$	—	$	—	$	4
Municipal securities	—		63		—		—		63
Other securities	30		2		—		—		32
	30		69		—		—		99
Available-for-sale securities:
U.S. Treasury securities	10		—		—		—		10
Residential CMOs	—		5,085		—		—		5,085
Residential MBS	—		4,222		—		—		4,222
Commercial MBS	—		976		—		—		976
Other agencies	—		165		—		—		165
Municipal securities	—		56		2,999		—		3,055
Private-label CMO	—		—		2		—		2
Asset-backed securities	—		531		48		—		579
Corporate debt	—		51		—		—		51
Other securities/sovereign debt	—		4		—		—		4
	10		11,090		3,049		—		14,149
Other securities	54		—		—		—		54
Loans held for sale	—		781		—		—		781
Loans held for investment	—		55		26		—		81
MSRs	—		—		7		—		7
Derivative assets	—		848		8		(404)		452
Liabilities
Derivative liabilities	—		519		2		(417)		104

(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, 2020, 2019, and 2018 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, 2020
					Available-for-sale securities
(dollar amounts in millions)	MSRs		Derivative instruments		Municipal securities		Private- label CMO		Asset- backed securities		Loans held for investment
Opening balance	$	7	$	6	$	2,999	$	2	$	48	$	26
Fair value election for serving assets previously measured using the amortized method	205		—		—				—		—
Transfers out of Level 3 (1)	—		(198)		—		—		—		—
Total gains/losses for the period:
Included in earnings	(104)		233		(2)		—		—		—
Included in OCI	—		—		65		—		—		—
Purchases/originations	102		—		623		7		28		—

Repayments	—		—		—		—		—		(3)

Settlements	—		—		(734)		—		(66)		—
Closing balance	$	210	$	41	$	2,951	$	9	$	10	$	23
Change in unrealized gains or losses for the period included in earnings for assets held at end of the reporting date	$	(104)	$	34	$	—	$	—	$	—	$	—
Change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period	$	—	$	—	$	68	$	—	$	—	$	—


	Level 3 Fair Value Measurements Year Ended December 31, 2019
					Available-for-sale securities						Loans held for investment
(dollar amounts in millions)	MSRs		Derivative instruments		Municipal securities		Private- label CMO		Asset- backed securities
Opening balance	$	10	$	2	$	3,165	$	—	$	—	$	30

Transfers out of Level 3 (1)	—		(62)		—		—		—		—
Total gains/losses for the period:
Included in earnings	(3)		66		(1)		—		—		1
Included in OCI	—		—		77		—		—		—
Purchases/originations	—		—		254		2		55		—

Repayments	—		—		—		—		—		(5)

Settlements	—		—		(496)		—		(7)		—
Closing balance	$	7	$	6	$	2,999	$	2	$	48	$	26
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)	$	3	$	—	$	—	$	—	$	—
Change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period	$	—	$	—	$	74	$	—	$	—	$	—


	Level 3 Fair Value Measurements Year Ended December 31, 2018
					Available-for-sale securities		Loans held for investment
(dollar amounts in millions)	MSRs		Derivative instruments		Municipal securities				Asset- backed securities
Opening balance	$	11	$	(1)	$	3,167	$	24		$	38

Transfers out of Level 3 (1)	—		(35)		—		—			—
Total gains/losses for the period:
Included in earnings	(1)		35		(3)		(2)			—
Included in OCI	—		—		(52)		11			—
Purchases/originations	—		—		658		—			—
Sales	—		—		—		(33)			—
Repayments	—		—		—		—			(8)
Settlements	—		3		(605)		—			—
Closing balance	$	10	$	2	$	3,165	$	—		$	30
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)	$	—	$	—	$	—		$	—
Change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period	$	—	$	—	$	(52)	$	—		$	—

(1) Transfers out of Level 3 represent the settlement value of the derivative instruments (i.e. interest rate lock agreements) that are 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, 2020, 2019, and 2018:


	Level 3 Fair Value Measurements Year Ended December 31, 2020
					Available-for-sale securities
(dollar amounts in millions)	MSRs		Derivative instruments		Municipal securities
Classification of gains and losses in earnings:
Mortgage banking income	$	(104)	$	233	$	—

Interest and fee income	—		—		(2)


Total	$	(104)	$	233	$	(2)


	Level 3 Fair Value Measurements Year Ended December 31, 2019
					Available-for-sale securities		Loans held for investment
(dollar amounts in millions)	MSRs		Derivative instruments		Municipal securities
Classification of gains and losses in earnings:
Mortgage banking income	$	(3)	$	66	$	—		$	—

Interest and fee income	—		—		(1)			1

Total	$	(3)	$	66	$	(1)		$	1


	Level 3 Fair Value Measurements Year Ended December 31, 2018
					Available-for-sale securities
(dollar amounts in millions)	MSRs		Derivative instruments		Municipal securities		Asset- backed securities
Classification of gains and losses in earnings:
Mortgage banking income (loss)	$	(1)	$	35	$	—	$	—
Securities gains (losses)	—		—		—		(2)
Interest and fee income	—		—		(3)		—

Total	$	(1)	$	35	$	(3)	$	(2)

Assets and liabilities under the fair value option

The following tables present the fair value and aggregate principal balance of certain assets and liabilities under the fair value option:


	December 31, 2020
	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	$	1,198	$	1,134	$	64	$	2	$	2	$	—
Loans held for investment	94		99		(5)		7		8		(1)


	December 31, 2019
	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	$	781	$	755	$	26	$	2	$	2	$	—
Loans held for investment	81		87		$	(6)	3		4		(1)

The following tables present the net gains from fair value changes for the years ended December 31, 2020, 2019, and 2018:


	Net gains (losses) from fair value changes Year Ended December 31,
(dollar amounts in millions)	2020		2019		2018
Assets
Loans held for sale (1)	$	38	$	7	$	5
Loans held for investment	1		1		—

(1)The net gains (losses) from fair value changes are included in Mortgage banking income on the Consolidated Statements of Income.

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. The amounts presented represent the fair value on the various measurement dates throughout the period. The gains(losses) represent the amounts recorded during the period regardless of whether the asset is still held at period end.

The amounts measured at fair value on a nonrecurring basis at December 31, 2020 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, 2020

Collateral-dependent loans	$	144	$	—	$	—	$	144	$	(43)

Loans held for sale	124		—		—		124		(63)

Huntington records nonrecurring adjustments of collateral-dependent loans held for investment. 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. Periodically, in cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized in the form of a charge-off.

Loans held for sale are measured at lower of cost or fair value less costs to sell. The fair value of loans held for sale is based on binding or non-binding bids for the respective loans or similar loans.

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, 2020 and 2019:


	Quantitative Information about Level 3 Fair Value Measurements at December 31, 2020 (1)
(dollar amounts in millions)	Fair Value		Valuation Technique	Significant Unobservable Input	Range					Weighted Average
Measured at fair value on a recurring basis:
MSRs	$	210	Discounted cash flow	Constant prepayment rate	8	%	-	24	%	17	%
				Spread over forward interest rate swap rates	4	%	-	11	%	5	%
Derivative assets	43		Consensus Pricing	Net market price	(4)	%	-	11	%	3	%
				Estimated Pull through %	1	%	-	100	%	88	%




Municipal securities	2,951		Discounted cash flow	Discount rate	—	%	-	1	%	1	%
Asset-backed securities	10			Cumulative default	—	%	-	39	%	4	%
				Loss given default	5	%	-	80	%	25	%





Measured at fair value on a nonrecurring basis:


Collateral-dependent loans	144		Appraisal value	NA						NA


	Quantitative Information about Level 3 Fair Value Measurements at December 31, 2019 (1)
(dollar amounts in millions)	Fair Value		Valuation Technique	Significant Unobservable Input	Range					Weighted Average
Measured at fair value on a recurring basis:
MSRs	$	7	Discounted cash flow	Constant prepayment rate	—	%	-	26	%	8	%
				Spread over forward interest rate swap rates	5	%	-	11	%	8	%
Derivative assets	8		Consensus Pricing	Net market price	(2)	%	-	11	%	2	%
				Estimated Pull through %	2	%	-	100	%	91	%




Municipal securities	2,999		Discounted cash flow	Discount rate	2	%	-	3	%	2	%
Asset-backed securities	48			Cumulative default	—	%	-	39	%	4	%
				Loss given default	5	%	-	80	%	24	%








Measured at fair value on a nonrecurring basis:
MSRs	206		Discounted cash flow	Constant prepayment rate	10	%		31	%	12	%
				Spread over forward interest rate swap rates	5	%		11	%	9	%
Impaired loans	26		Appraisal value	NA						NA

(1) Certain disclosures related to quantitative level 3 fair value measurements do not include those deemed to be immaterial.

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.

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 at December 31, 2020 and December 31, 2019:


	December 31, 2020
(dollar amounts in millions)	Amortized Cost		Lower of Cost or Market		Fair Value or Fair Value Option		Total Carrying Amount		Estimated Fair Value
Financial Assets
Cash and short-term assets	$	6,712	$	—	$	—	$	6,712	$	6,712
Trading account securities	—		—		62		62		62
Available-for-sale securities	—		—		16,485		16,485		16,485
Held-to-maturity securities	8,861		—		—		8,861		9,255
Other securities	359		—		59		418		418
Loans held for sale	—		77		1,198		1,275		1,275
Net loans and leases (1)	79,700		—		94		79,794		80,477
Derivative assets	—		—		1,057		1,057		1,057
Financial Liabilities
Deposits	98,948		—		—		98,948		99,021
Short-term borrowings	183		—		—		183		183
Long-term debt	8,352		—		—		8,352		8,568
Derivative liabilities	—		—		116		116		116


	December 31, 2019
(dollar amounts in millions)	Amortized Cost		Lower of Cost or Market		Fair Value or Fair Value Option		Total Carrying Amount		Estimated Fair Value
Financial Assets
Cash and short-term assets	$	1,272	$	—	$	—	$	1,272	$	1,272
Trading account securities	—		—		99		99		99
Available-for-sale securities	—		—		14,149		14,149		14,149
Held-to-maturity securities	9,070		—		—		9,070		9,186
Other securities	387		—		54		441		441
Loans held for sale	—		96		781		877		879
Net loans and leases (1)	74,540		—		81		74,621		75,177
Derivative assets	—		—		452		452		452
Financial Liabilities
Deposits	82,347		—		—		82,347		82,344
Short-term borrowings	2,606		—		—		2,606		2,606
Long-term debt	9,849		—		—		9,849		10,075
Derivative liabilities	—		—		104		104		104

(1)Includes collateral-dependent loans.

The following table presents the level in the fair value hierarchy for the estimated fair values at December 31, 2020 and December 31, 2019:


	Estimated Fair Value Measurements at Reporting Date Using						Netting	December 31, 2020
(dollar amounts in millions)	Level 1		Level 2		Level 3		Adjustments (1)
Financial Assets
Trading account securities	$	—	$	62	$	—		$	62
Available-for-sale securities	5		13,510		2,970			16,485
Held-to-maturity securities	—		9,255		—			9,255
Other securities (2)	59		—		—			59
Loans held for sale	—		1,198		77			1,275
Net loans and direct financing leases	—		71		80,406			80,477
Derivative assets	—		1,903		43		(889)	1,057
Financial Liabilities
Deposits	—		96,656		2,365			99,021
Short-term borrowings	—		183		—			183
Long-term debt	—		7,999		569			8,568
Derivative liabilities	—		1,031		2		(917)	116


	Estimated Fair Value Measurements at Reporting Date Using						Netting	December 31, 2019
(dollar amounts in millions)	Level 1		Level 2		Level 3		Adjustments (1)
Financial Assets
Trading account securities	$	30	$	69	$	—		$	99
Available-for-sale securities	10		11,090		3,049			14,149
Held-to-maturity securities	—		9,186		—			9,186
Other securities (2)	54		—		—			54
Loans held for sale	—		781		98			879
Net loans and direct financing leases	—		55		75,122			75,177
Derivative assets	—		848		8		(404)	452
Financial Liabilities
Deposits	—		76,790		5,554			82,344
Short-term borrowings	—		—		2,606			2,606
Long-term debt	—		9,439		636			10,075
Derivative liabilities	—		519		2		(417)	104

(2)Excludes securities without readily determinable fair values.

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, interest-bearing deposits at Federal Reserve Bank, 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 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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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