HUNTINGTON BANCSHARES INCORPORATED INTRODUCTION
We are a multi-state diversified regional bank holding company organized underMaryland law in 1966 and headquartered inColumbus, Ohio . Through the Bank, we have over 150 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, recreational vehicle and marine financing, equipment financing, investment management, trust services, brokerage services, insurance products and services, and other financial products and services. Our 839 full-service branches and private client group offices are located inOhio, Illinois ,Indiana ,Kentucky ,Michigan ,Pennsylvania , andWest Virginia . Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office inColumbus, Ohio . Our foreign banking activities, in total or with any individual country, are not significant. This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2019 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2019 Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, and other information contained in this report. EXECUTIVE OVERVIEW Summary of 2020 First Quarter Results Compared to 2019 First Quarter For the quarter, we reported net income of$48 million , or$0.03 per common share, compared with$358 million , or$0.32 per common share, in the year-ago quarter (see Table 1). Fully-taxable equivalent net interest income was$796 million , down$33 million , or 4%. This reflected a 25 basis point decrease in the FTE net interest margin to 3.14%, partially offset by the benefit from the$2.6 billion , or 3%, increase in average earning assets. The provision for credit losses increased$374 million year-over-year to$441 million in the 2020 first quarter. Net charge-offs increased$46 million to$117 million . The oil and gas portfolio accounted for approximately 27% of total commercial NCOs, while one large relationship in the coal industry accounted for an additional 45%. Consumer NCOs were down on a year-over-year basis, consistent with our expectations. NCOs represented an annualized 0.62% of average loans and leases in the current quarter, up from 0.38% in the year-ago quarter. Noninterest income was$361 million , up$42 million , or 13%, from the year ago quarter. Mortgage banking income increased$37 million , or 176%, and capital markets fees increased$11 million , or 50%. Partially offsetting these increases, other noninterest income decreased$8 million , or 21%, while gain on sale of loans and leases decreased$5 million , or 38%. Noninterest expense was$652 million , relatively flat from the year-ago quarter. Common Equity Tier 1 risk-based capital ratio was 9.47%, down from 9.84% a year ago. The regulatory Tier 1 risk-based capital ratio was 10.81% compared to 11.25% atMarch 31, 2019 . All capital ratios were impacted by year-over-year balance sheet growth. The capital impact of the repurchase of$504 million of common stock over the last four quarters, including$88 million repurchased during the 2020 first quarter, and cash dividends effectively offset earnings on a year-over-year basis. 6Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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Business Overview
General
Our general business objectives are:
•Consistent organic revenue and balance sheet growth.
•Invest in our businesses, particularly technology and risk management.
•Deliver positive operating leverage.
•Maintain aggregate moderate-to-low risk appetite.
•Disciplined capital management.
COVID-19
The COVID-19 pandemic has caused significant, unprecedented disruption around
the world that has affected daily living and negatively impacted the global
economy. The pandemic has resulted in temporary closures of many businesses and
the institution of social distancing and shelter in place requirements in many
states and communities, which has increased unemployment levels and caused
extreme volatility in the financial markets. While COVID-19 has negatively
impacted the economy, the Coronavirus Aid, Relief, and Economic Security Act
("CARES Act") provides for financial stimulus and government lending programs at
unprecedented levels. The benefits of these programs, as well as any potential
additional stimulus, to effectively support businesses and consumers within the
economy are uncertain.
Huntington was able to react quickly to these changes because of the commitment
and flexibility of its workforce coupled with a well-prepared business
continuity plan. To ensure the safety of our branch colleagues, while still
meeting the needs of our customers, we have moved to use of branches with
drive-thru only with in-person meetings by appointment. For other colleagues, we
have implemented a work-from-home approach with increased communication to keep
them informed, engaged and connected. Additional benefits, such as emergency
paid time off and other programs for those whose families have been directly
impacted by the virus, have been added.
For our customers, we have established a variety of relief programs which
include loan payment deferrals, fee waivers and the suspension of foreclosure
and repossessions. In addition to these measures, we are working with our
customers to originate business loans made available through the Small Business
Administration Paycheck Protection Program, a lending program established as
part of the relief to American consumers and businesses in the CARES Act. As of
April 16, 2020 , we have processed approximately 26,000 applications totaling
over $6.1 billion .
CARES Act
The CARES Act was passed by Congress and signed into law on March 27, 2020 . The
CARES Act includes an allocation of$349 billion for loans to be issued by financial institutions through theSmall Business Administration ("SBA"). This program is known as the Paycheck Protection Program ("PPP"). PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. The Paycheck Protection Program and Health Care Enhancement Act ("PPP / HCEA Act") was passed byCongress onApril 23, 2020 and signed into law onApril 24, 2020 . The PPP / HCEA Act authorizes additional funding under the CARES Act of$310 billion for PPP loans to be issued by financial institutions through the SBA. In addition, the FRB has implemented a liquidity facility available to financial institutions participating in the PPP ("PPPLF"). In conjunction with the PPP, the PPPLF will allow the Federal Reserve Banks to lend to member banks on a non-recourse basis with PPP loans as collateral. Additionally, the CARES Act provides for relief on existing and new SBA loans through Small Business Debt Relief. As part of the SBA Small Business Debt Relief, the SBA will automatically pay principal, interest and fees of certain SBA loans for a period of six months for both existing loans and new loans issued prior toSeptember 27, 2020 . AtMarch 31, 2020 , approximately 12,000 Huntington customers are eligible for this relief. The CARES Act also provides for Mortgage Payment Relief and a foreclosure moratorium. 2020 1Q Form
10-Q 7
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Federal Reserve Bank Actions The FRB has taken a range of actions to support the flow of credit to households and businesses. For example, onMarch 15, 2020 , the FRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings ofU.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The FRB has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as ofMarch 26, 2020 . The FRB has established, or has taken steps to establish, a range of facilities and programs to support theU.S. economy andU.S. marketplace participants in response to economic disruptions associated with COVID-19, including among others, main street lending facilities to purchase loan participations, under specified conditions, from banks lending to small and mediumU.S. businesses. We may participate in some or all of them, including as a lender, agent, or intermediary on behalf of clients or customers or in an advisory capacity. Economy As we entered 2020, the underlying economic fundamentals in our footprint were relatively healthy. The COVID-19 pandemic has altered those fundamentals for the foreseeable future and we believe the economy will be challenged for some time. DISCUSSION OF RESULTS OF OPERATIONS This section provides a review of financial performance from a consolidated perspective. Key Unaudited Condensed Consolidated Balance Sheet and Unaudited Condensed Statement of Income trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the " Business Segment Discussion ". 8Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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Table 1 - Selected Quarterly Income Statement Data
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
(amounts in millions, except per
share data) 2020 2019 2019 2019 2019
Interest income $ 975 $ 1,011 $ 1,052 $ 1,068 $ 1,070
Interest expense 185 231 253 256 248
Net interest income 790 780 799 812 822
Provision for credit losses 441 79 82 59 67
Net interest income after
provision for credit losses 349 701 717 753 755
Service charges on deposit
accounts 87 95 98 92 87
Card and payment processing
income 58 64 64 63 56
Trust and investment management
services 47 47 44 43 44
Mortgage banking income 58 58 54 34 21
Capital markets fees 33 31 36 34 22
Insurance income 23 24 20 23 21
Bank owned life insurance income 16 17 18 15 16
Gain on sale of loans and leases 8 16 13 13 13
Net (losses) gains on sales of
securities - (22 ) - (2 ) -
Other noninterest income 31 42 42 59 39
Total noninterest income 361 372 389 374 319
Personnel costs 395 426 406 428 394
Outside data processing and
other services 85 89 87 89 81
Equipment 41 42 41 40 40
Net occupancy 40 41 38 38 42
Professional services 11 14 16 12 12
Amortization of intangibles 11 12 12 12 13
Marketing 9 9 10 11 7
Deposit and other insurance
expense 9 10 8 8 8
Other noninterest expense 51 58 49 62 56
Total noninterest expense 652 701 667 700 653
Income before income taxes 58 372 439 427 421
Provision for income taxes 10 55 67 63 63
Net income 48 317 372 364 358
Dividends on preferred shares 18 19 18 18 19
Net income applicable to common
shares $ 30 $ 298 $ 354 $ 346 $ 339
Average common shares-basic 1,018 1,029 1,035 1,045 1,047
Average common shares-diluted 1,035 1,047 1,051 1,060 1,066
Net income per common
share-basic $ 0.03 $ 0.29 $ 0.34 $ 0.33 $ 0.32
Net income per common
share-diluted 0.03 0.28 0.34 0.33 0.32
Return on average total assets 0.17 % 1.15 % 1.37 % 1.36 % 1.35 %
Return on average common
shareholders' equity 1.1 11.1 13.4 13.5 13.8
Return on average tangible 1.8 14.3 17.3 17.7 18.3
common shareholders' equity (1)
Net interest margin (2) 3.14 3.12 3.20 3.31 3.39
Efficiency ratio (3) 55.4 58.4 54.7 57.6 55.8
Effective tax rate 17.0 14.8 15.4 14.6 15.0
Revenue-FTE
Net interest income $ 790 $ 780 $ 799 $ 812 $ 822
FTE adjustment 6 6 6 7 7
Net interest income (2) 796 786 805 819 829
Noninterest income 361 372 389 374 319
Total revenue (2) $ 1,157 $ 1,158 $ 1,194 $ 1,193 $ 1,148 (1) Net income excluding expense for amortization of intangibles for the period
divided by average tangible common shareholders' equity. Average tangible
common shareholders' equity equals average total common shareholders' equity
less average intangible assets and goodwill. Expense for amortization of
intangibles and average intangible assets are net of deferred tax liability,
and calculated assuming a 21% tax rate.
(2) On an FTE basis assuming a 21% tax rate.
(3) Noninterest expense less amortization of intangibles and goodwill impairment
divided by the sum of FTE net interest income and noninterest income
excluding securities gains.
2020 1Q Form 10-Q 9
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Net Interest Income / Average Balance Sheet
The following tables detail the change in our average balance sheet and the net
interest margin:
Table 2 - Consolidated Average Balance Sheet and Net Interest Margin Analysis
Average Balances
Three Months Ended Change
March 31, December 31, September
30,
2019 2019 2019 2019 Amount Percent
Assets:
Interest-bearing deposits in
Federal Reserve Bank $ 680 $ 672 $ 514 $ 518 $ 501 $ 179 36 %
Interest-bearing deposits in
banks 150 176 149 135 109 41 38
Securities:
Trading account securities 95 109 137 161 138 (43 ) (31 )
Available-for-sale
securities:
Taxable 11,671 11,221 11,096 10,501 10,752 919 9
Tax-exempt 2,753 2,791 2,820 2,970 3,048 (295 ) (10 )
Total available-for-sale
securities 14,424 14,012 13,916 13,471 13,800 624 5
Held-to-maturity
securities-taxable 9,428 8,592 8,566 8,771 8,653 775 9
Other securities 445 448 437 466 536 (91 ) (17 )
Total securities 24,392 23,161 23,056 22,869 23,127 1,265 5
Loans held for sale 865 950 877 734 700 165 24
Loans and leases: (3)
Commercial:
Commercial and industrial 30,849 30,373 30,632 30,644 30,546 303 1
Commercial real estate:
Construction 1,165 1,181 1,165 1,168 1,174 (9 ) (1 )
Commercial 5,566 5,625 5,762 5,732 5,686 (120 ) (2 )
Commercial real estate 6,731 6,806 6,927 6,900 6,860 (129 ) (2 )
Total commercial 37,580 37,179 37,559 37,544 37,406 174 -
Consumer:
Automobile 12,924 12,607 12,181 12,219 12,361 563 5
Home equity 9,026 9,192 9,353 9,482 9,641 (615 ) (6 )
Residential mortgage 11,391 11,330 11,214 11,010 10,787 604 6
RV and marine 3,590 3,564 3,528 3,413 3,296 294 9
Other consumer 1,185 1,231 1,261 1,264 1,284 (99 ) (8 )
Total consumer 38,116 37,924 37,537 37,388 37,369 747 2
Total loans and leases 75,696 75,103 75,096 74,932 74,775 921 1
Allowance for loan and lease
losses (1,239 ) (787 ) (799 ) (778 ) (780 ) (459 ) (59 )
Net loans and leases 74,457 74,316 74,297 74,154 73,995 462 1
Total earning assets 101,783 100,062 99,692 99,188 99,212 2,571 3
Cash and due from banks 914 864 817 835 853 61 7
Intangible assets 2,217 2,228 2,240 2,252 2,265 (48 ) (2 )
All other assets 6,472 6,346 6,216 5,982 5,961 511 9
Total assets $ 110,147 $ 108,713 $ 108,166 $ 107,479 $ 107,511 $ 2,636 2 %
Liabilities and Shareholders'
Equity:
Interest-bearing deposits:
Demand
deposits-interest-bearing $ 21,202 $ 20,140 19,796
24,697 24,560 24,266 23,305 22,935 1,762 8 Savings and other domestic deposits
9,632 9,552 9,681 10,105 10,338 (706 ) (7 ) Core certificates of deposit (4)
3,943 4,795 5,666 5,860 6,052 (2,109 ) (35 )
Other domestic time deposits
of $250,000 or more 321 313 315 310 335 (14 ) (4 )
Brokered deposits and
negotiable CDs 2,884 2,589 2,599 2,685 3,404 (520 ) (15 )
Total interest-bearing
deposits 62,679 61,949 62,323 61,958 62,834 (155 ) -
Short-term borrowings 3,383 1,965 2,331 3,166 2,320 1,063 46
Long-term debt 10,076 9,886 9,536 8,914 8,979 1,097 12
Total interest-bearing
liabilities 76,138 73,800 74,190 74,038 74,133 2,005 3 Demand deposits-noninterest-bearing 20,054
20,643 19,926 19,760 19,938 116 1
All other liabilities 2,319 2,386 2,336 2,206 2,284 35 2
Shareholders' equity 11,636 11,884 11,714 11,475 11,156 480 4
Total liabilities and
shareholders' equity $ 110,147 $ 108,713 $ 108,166 $ 107,479 $ 107,511 $ 2,636 2 %
10 Huntington Bancshares Incorporated
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Table 2 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued)
Average Yield Rates (2)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
Fully-taxable equivalent basis
(1) 2020 2019 2019 2019 2019
Assets:
Interest-bearing deposits in
Federal Reserve Bank 1.08 % 1.66 % 2.19 % 2.38 % 2.40 %
Interest-bearing deposits in
banks 1.52 1.81 2.38 2.08 1.75
Securities:
Trading account securities 3.21 2.45 2.36 1.92 2.03
Available-for-sale securities:
Taxable 2.62 2.63 2.67 2.73 2.82
Tax-exempt 3.30 3.43 3.63 3.66 3.69
Total available-for-sale
securities 2.75 2.79 2.87 2.94 3.01
Held-to-maturity
securities-taxable 2.50 2.50 2.51 2.54 2.52
Other securities 2.07 2.57 3.15 3.44 4.51
Total securities 2.64 2.68 2.74 2.79 2.86
Loans held for sale 3.39 3.40 3.69 4.00 4.07
Loans and leases: (3)
Commercial:
Commercial and industrial 4.12 4.31 4.57 4.82 4.91
Commercial real estate:
Construction 4.75 5.07 5.50 5.59 5.58
Commercial 4.00 4.36 4.67 4.88 5.00
Commercial real estate 4.13 4.48 4.81 5.00 5.10
Total commercial 4.12 4.34 4.61 4.85 4.94
Consumer:
Automobile 4.05 4.15 4.09 4.02 3.95
Home equity 4.75 5.03 5.38 5.56 5.61
Residential mortgage 3.70 3.73 3.80 3.84 3.86
RV and marine 4.91 4.96 4.96 4.94 4.96
Other consumer 12.39 12.71 13.34 13.29 13.07
Total consumer 4.45 4.59 4.72 4.76 4.75
Total loans and leases 4.29 4.47 4.67 4.80 4.85
Total earning assets 3.88 4.03 4.21 4.35 4.40
Liabilities:
Interest-bearing deposits:
Demand deposits-interest-bearing 0.43 0.63 0.57 0.58 0.56
Money market deposits 0.81 0.99 1.20 1.15 1.04
Savings and other domestic
deposits 0.17 0.20 0.22 0.23 0.23
Core certificates of deposit (4) 1.91 2.09 2.17 2.15 2.11
Other domestic time deposits of
$250,000 or more 1.56 1.70 1.85 1.92 1.82
Brokered deposits and negotiable
CDs 1.22 1.67 2.21 2.39 2.38
Total interest-bearing deposits 0.68 0.87 0.98 0.97 0.94
Short-term borrowings 1.46 1.66 2.28 2.41 2.41
Long-term debt 2.70 3.50 3.59 3.91 3.98
Total interest-bearing
liabilities 0.98 1.24 1.36 1.39 1.35
Net interest rate spread 2.90 2.79 2.85 2.96 3.05
Impact of noninterest-bearing
funds on margin 0.24 0.33 0.35 0.35 0.34
Net interest margin 3.14 % 3.12 % 3.20 % 3.31 % 3.39 %
(1) FTE yields are calculated assuming a 21% tax rate.
(2) Loan and lease and deposit average yield rates include impact of applicable derivatives, non-deferrable fees, and amortized fees. (3) For purposes of this analysis, NALs are reflected in the average balances of
loans.
(4) Includes consumer certificates of deposit of
2020 1Q Form 10-Q 11
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2020 First Quarter versus 2019 First Quarter FTE net interest income for the 2020 first quarter decreased$33 million , or 4%, from the 2019 first quarter. This reflected a 25 basis point decrease in the NIM to 3.14%, partially offset by the benefit from the$2.6 billion , or 3%, increase in average earning assets. The NIM compression reflected a 52 basis point year-over-year decrease in average earning asset yields and a 10 basis point decrease in the benefit from noninterest-bearing funds, partially offset by a 37 basis point decrease in average interest-bearing liability costs. The decrease in earning asset yields was primarily driven by the impact of lower interest rates in the quarter on commercial and home equity loan yields. The decrease in average interest-bearing liability costs primarily reflects lower interest-bearing deposit costs (down 26 basis points) and lower long-term debt costs (down 128 basis points), both reflecting the impact of lower interest rates. Average earning assets for the 2020 first quarter increased$2.6 billion , or 3%, from the year-ago quarter, primarily reflecting a$1.3 billion , or 5%, increase in average total securities and a$0.9 billion , or 1%, increase in average total loans and leases. The increase in average total securities primarily reflected portfolio growth and the mark-to-market of the available-for-sale portfolio. Average residential mortgage loans increased$0.6 billion , or 6%, reflecting robust portfolio mortgage production over the past four quarters. Average automobile loans increased$0.6 billion , or 5%, driven by strong production over the past two quarters. Partially offsetting these increases, average home equity loans and lines of credit decreased$0.6 billion , or 6%, reflecting a shift in consumer preferences. Average total interest-bearing liabilities for the 2020 first quarter increased$2.0 billion , or 3%, from the year-ago quarter. Average total debt increased$2.2 billion , or 19%, to fund the increase in the size of our securities portfolio as part of our interest rate hedging strategy. Average total deposits remained flat, while average total core deposits increased$0.5 billion , or 1%. Average money market deposits increased$1.8 billion , or 8%, reflecting growth driven by promotional pricing and a continued shift in consumer product mix. Average total demand deposits increased$1.5 billion , or 4%, primarily driven by commercial interest-bearing demand deposit growth. Partially offsetting these increases, average core CDs decreased$2.1 billion , or 35%, reflecting the maturity of the balances related to the 2018 consumer deposit growth initiatives. Savings and other domestic deposits decreased$0.7 billion , or 7%, primarily reflecting a continued shift in consumer product mix. Average brokered deposits and negotiable CDs decreased$0.5 billion , or 15%, reflecting the maturity of brokered CDs in the 2019 first quarter. 2020 First Quarter versus 2019 Fourth Quarter Compared to the 2019 fourth quarter, FTE net interest income increased$10 million , or 1%, reflecting NIM expansion of 2 basis points and a 2% increase in average earning assets. The NIM expansion reflected a 26 basis point decrease in average interest-bearing liability costs partially offset by a 15 basis point decrease in average earning asset yields and a 9 basis point decrease in the benefit from noninterest-bearing funds. The decrease in average interest-bearing liability costs primarily reflects lower interest-bearing deposit costs (down 19 basis points) and lower long-term debt costs (down 80 basis points), both reflecting the impact of lower interest rates. Long-term debt costs in the 2020 first quarter also benefited from approximately$10 million (or 40 basis points) of derivative ineffectiveness. The decrease in earning asset yields was primarily driven by the impact of lower interest rates in the quarter on commercial and home equity loan yields. Compared to the 2019 fourth quarter, average earning assets increased$1.7 billion , or 2%, primarily reflecting a$1.2 billion , or 5%, increase in average total securities and a$0.6 billion , or 1%, increase in average total loans and leases. The increase in average total securities primarily reflected portfolio growth. Average C&I loans increased$0.5 billion , or 2%, reflecting growth in corporate banking, asset finance, and dealer floorplan. Average total interest-bearing liabilities increased$2.3 billion , or 3%. Average total debt increased$1.6 billion , or 14%, to fund the increase in the size of our securities portfolio as part of our interest rate hedging strategy. Average total demand deposits increased$0.5 billion , or 1%, primarily driven by commercial interest-bearing demand deposit growth. Average core CDs decreased$0.9 billion , or 18%, reflecting the maturity of balances related to the 2018 consumer deposit growth initiatives. 12Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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While not materially impacting average balances for 2020 first quarter, period-end loans increased$2.6 billion , or 3%, compared with year-end. This increase was driven by a$2.3 billion , or 7%, increase in commercial loans, primarily reflecting draws on commercial lines of credit in late March. Additionally, period-end deposits increased$4.5 billion , or 5%, compared to 2019 year-end. The increase was driven by a$3.3 billion , or 8% increase in demand deposits, primarily reflecting commercial deposit inflows in late March and seasonal government banking deposit inflows, and a$1.3 billion , or 51%, increase in brokered deposits. Provision for Credit Losses (This section should be read in conjunction with the " Credit Risk " section.) The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels appropriate to absorb our estimate of credit losses expected over the life of the loan and lease portfolio and the portfolio of unfunded loan commitments and letters of credit. The provision for credit losses for the 2020 first quarter was$441 million , which increased$374 million , or 558%, compared to the first quarter 2019. The increase from the 2019 first quarter provision for credit losses is attributed to the deteriorating economic outlook resulting from the COVID-19 pandemic, the increase in commercial charge-offs, and downgrades within the oil and gas portfolio. Noninterest Income The following table reflects noninterest income for each of the periods presented: Table 3 - Noninterest Income Three Months Ended
1Q20 vs. 1Q19 1Q20 vs. 4Q19
March 31, December 31, March 31, Change Change
(dollar amounts in millions) 2020 2019 2019 Amount Percent Amount Percent
Service charges on deposit
accounts $ 87 $ 95 $ 87 $ - - % $ (8 ) (8 )%
Card and payment processing
income 58 64 56 2 4 (6 ) (9 )
Trust and investment
management services 47 47 44 3 7 - -
Mortgage banking income 58 58 21 37 176 - -
Capital markets fees 33 31 22 11 50 2 6
Insurance income 23 24 21 2 10 (1 ) (4 )
Bank owned life insurance
income 16 17 16 - - (1 ) (6 )
Gain on sale of loans and
leases 8 16 13 (5 ) (38 ) (8 ) (50 )
Net (losses) gains on sales
of securities - (22 ) - - - 22 100
Other noninterest income 31 42 39 (8 ) (21 ) (11 ) (26 )
Total noninterest income $ 361 $ 372 $ 319 $ 42 13 % $ (11 ) (3 )%
2020 First Quarter versus 2019 First Quarter
Total noninterest income for the 2020 first quarter increased $42 million , or
13%, from the year-ago quarter. Mortgage banking income increased $37 million ,
or 176%, primarily reflecting an 86% increase in salable mortgage originations,
higher secondary marketing spreads, and a $7 million increase in income from net
MSR risk management. Capital markets fees increased $11 million , or 50%, driven
by an increase in interest rate derivatives activity and $6 million of
unfavorable commodities derivatives mark-to-market adjustments in the year-ago
quarter. Other noninterest income decreased $8 million , or 21%, primarily due to
lower fixed income brokerage income and negative mark-to-market changes on
mutual funds and derivative liabilities, thus partially offsetting the
aforementioned increases. Gain on sale of loans and leases decreased $5 million ,
or 38%, primarily due to lower SBA loan sales.
2020 1Q Form 10-Q 13
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2020 First Quarter versus 2019 Fourth Quarter Compared to the 2019 fourth quarter, total noninterest income decreased$11 million , or 3%. Other noninterest income decreased$11 million , or 26%, primarily as a result of negative mark-to-market on mutual funds and derivative liabilities as well as lower income on terminated leases. Service charges on deposit accounts decreased$8 million , or 8%, primarily reflecting seasonality. Gain on sale of loans and leases decreased$8 million , or 50%, primarily due to seasonality of SBA loan sales and lower technology lease sales. Cards and payment processing income decreased$6 million , or 9%, primarily reflecting seasonality and lower card usage late in the 2020 first quarter. Partially offsetting these decreases, net gains on sale of securities were less than$1 million in the 2020 first quarter compared to$22 million of net losses in the prior quarter related to the$2 billion portfolio repositioning completed in the 2019 fourth quarter. Noninterest Expense The following table reflects noninterest expense for each of the periods presented: Table 4 - Noninterest Expense Three Months Ended
1Q20 vs. 1Q19 1Q20 vs. 4Q19
March 31, December 31, March 31, Change Change
(dollar amounts in millions) 2020 2019 2019 Amount Percent Amount Percent
Personnel costs $ 395 $ 426 $ 394 $ 1 - % $ (31 ) (7 )%
Outside data processing and
other services 85 89 81 4 5 (4 ) (4 )
Equipment 41 42 40 1 3 (1 ) (2 )
Net occupancy 40 41 42 (2 ) (5 ) (1 ) (2 )
Professional services 11 14 12 (1 ) (8 ) (3 ) (21 )
Amortization of intangibles 11 12 13 (2 ) (15 ) (1 ) (8 )
Marketing 9 9 7 2 29 - -
Deposit and other insurance
expense 9 10 8 1 13 (1 ) (10 )
Other noninterest expense 51 58 56 (5 ) (9 ) (7 ) (12 )
Total noninterest expense $ 652 $ 701 $ 653 $ (1 ) - % $ (49 ) (7 )%
Number of employees (average
full-time equivalent) 15,386 15,495 15,738 (352 ) (2 )% (109 ) (1 )%
2020 First Quarter versus 2019 First Quarter Total noninterest expense for the 2020 first quarter decreased$1 million , or less than 1%, from the year-ago quarter. 2020 First Quarter versus 2019 Fourth Quarter Total noninterest expense decreased$49 million , or 7%, from the 2019 fourth quarter. Personnel costs decreased$31 million , or 7%, primarily reflecting the$15 million of expense related to position reductions completed in the 2019 fourth quarter as well as lower incentive compensation and medical expenses. Other noninterest expense decreased$7 million , or 12%, primarily as a result of a$4 million final true-up in the 2019 fourth quarter of the earn out related to theHutchinson, Shockey, Erley & Co. acquisition and reduced travel and business development expense. Provision for Income Taxes The provision for income taxes in the 2020 first quarter was$10 million . This compared with a provision for income taxes of$63 million in the 2019 first quarter and$55 million in the 2019 fourth quarter. All periods included the benefits from tax-exempt income, tax-advantaged investments, general business credits, investments in qualified affordable housing projects, and capital losses. The effective tax rates for the 2020 first quarter, 2019 first quarter, and 2019 fourth quarter were 17.0%, 15.0%, and 14.8%, respectively. The variance between the 2020 first quarter compared to the 2019 first quarter and the 2019 fourth quarter provision for income taxes and effective tax rates relates primarily to lower pre-tax income and the impact of stock-based compensation. The net federal deferred tax liability was$236 million and the net state deferred tax asset was$35 million atMarch 31, 2020 . 14Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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We file income tax returns with theIRS and various state and city jurisdictions. Federal income tax audits have been completed for tax years through 2009. Certain proposed adjustments resulting from theIRS examination of our 2010 through 2011 tax returns have been settled, subject to final approval by theJoint Committee on Taxation of theU.S. Congress . While the statute of limitations remains open for tax years 2012 through 2018, theIRS has advised that tax years 2012 through 2014 will not be audited and is currently examining the federal income tax returns for 2015 through 2017. Various state and other jurisdictions remain open to examination, includingOhio ,Kentucky ,Indiana ,Michigan ,Pennsylvania ,West Virginia , andIllinois . RISKMANAGEMENT AND CAPITAL We use a multi-faceted approach to risk governance. It begins with the Board of Directors defining our risk appetite as aggregate moderate-to-low. Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. Controls include, among others, effective segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment process. We believe that our primary risk exposures are credit, market, liquidity, operational and compliance. More information on risk can be found in the Risk Factors section included in Item 1A of our 2019 Form 10-K and subsequent filings with theSEC . The MD&A included in our 2019 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements , Notes to Unaudited Condensed Consolidated Financial Statements , and other information contained in this report. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2019 Form 10-K. Credit Risk Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have credit risk associated with our investment securities portfolios (see Note 3 " InvestmentSecurities and Other Securities " of the Notes to the Unaudited Condensed Consolidated Financial Statements). We engage with other financial counterparties for a variety of purposes including investing, asset and liability management, mortgage banking, and trading activities. A variety of derivative financial instruments, principally interest rate swaps, caps, floors, and collars, are used in asset and liability management activities to protect against the risk of adverse price or interest rate movements. Huntington also uses derivatives, principally loan sale commitments, in hedging its mortgage loan interest rate lock commitments and its mortgage loans held for sale. While there is credit risk associated with derivative activity, we believe this exposure is minimal. We continue to focus on the identification, monitoring, and management of all aspects of our credit risk. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we use quantitative measurement capabilities utilizing external data sources, enhanced modeling technology, and internal stress testing processes. Our continued expansion of portfolio management resources demonstrates our commitment to maintaining an aggregate moderate-to-low risk profile. In our efforts to continue to identify risk mitigation techniques, we have focused on product design features, origination policies, and solutions for delinquent or stressed borrowers. Currently, we are in the process of assessing the impact of COVID-19 on our loan portfolio, as we would with any natural disaster or significant economic decline. Huntington responded to our customers immediately with offers of payment deferrals, suspended repossessions and foreclosures, and eliminating late fees. We believe that these decisions are an appropriate response to the widespread impact to the economic conditions across both commercial and consumer borrowers. The longer term impact of our response is dependent upon a significant number of variables, including the duration of the shelter in place orders, definition of essential businesses, and economy re-opening strategies implemented by the various federal, state, and local governments. Increased unemployment and decreased consumer confidence will lead to an increased risk of delinquencies, defaults, and foreclosures in our consumer portfolio. Increased credit deterioration will lead to elevated default rates in our COVID-19 highly impacted industries. The economic decline was rapidly evolving at the end of the quarter and 2020 1Q Form 10-Q 15
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while we can expect to see a negative impact in upcoming quarters, it is too early to quantify the impact. Huntington will comply with all aspects of the CARES Act, will continue to provide PPP loans as the funding is available, and will work with customers that request assistance or have been negatively impacted. Loan and Lease Credit Exposure Mix Refer to the "Loan and Lease Credit Exposure Mix" section of our 2019 Form 10-K for a brief description of each portfolio segment. The table below provides the composition of our total loan and lease portfolio: Table 5 - Loan and Lease Portfolio Composition (dollar amounts in March 31, December 31, September 30, June 30, March 31, millions) 2020 2019 2019 2019 2019 Commercial: Commercial and industrial$ 32,959 42 %$ 30,664 41 %$ 30,394 41 %$ 30,608 41 %$ 30,972 41 % Commercial real estate: Construction 1,180 2 1,123 1 1,157 2 1,146 1 1,152 2 Commercial 5,793 7 5,551 7 5,698 8 5,742 8 5,643 8 Commercial real estate 6,973 9 6,674 8 6,855 10 6,888 9 6,795 10 Total commercial 39,932 51 37,338 49 37,249 51 37,496 50 37,767 51 Consumer: Automobile 12,907 17 12,797 17 12,292 15 12,173 16 12,272 16 Home equity 9,010 11 9,093 12 9,300 12 9,419 12 9,551 13 Residential mortgage 11,398 15 11,376 15 11,247 15 11,182 15 10,885 14 RV and marine 3,643 5 3,563 5 3,553 5 3,492 5 3,344 4 Other consumer 1,145 1 1,237 2 1,251 2 1,271 2 1,260 2 Total consumer 38,103 49 38,066 51 37,643 49 37,537 50 37,312 49 Total loans and leases$ 78,035 100 %$ 75,404 100 %$ 74,892
100 %
Our loan portfolio is composed of a managed mix of consumer and commercial credits. At the corporate level, we manage the overall credit exposure and portfolio composition via a credit concentration policy. The policy designates specific loan types, collateral types, and loan structures to be formally tracked and assigned maximum exposure limits as a percentage of capital. C&I lending by NAICS categories, specific limits for CRE project types, loans secured by residential real estate, large dollar exposures, and designated high risk loan definitions represent examples of specifically tracked components of our concentration management process. There are no identified concentrations that exceed the assigned exposure limit. Our concentration management policy is approved by the ROC of the Board of Directors and is one of the strategies used to ensure a high quality, well diversified portfolio that is consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile. Changes to existing concentration limits, incorporating specific information relating to the potential impact on the overall portfolio composition and performance metrics, require the approval of the ROC prior to implementation. Commercial Credit Refer to the "Commercial Credit" section of our 2019 Form 10-K for our commercial credit underwriting and on-going credit management processes. Consumer Credit Refer to the "Consumer Credit" section of our 2019 Form 10-K for our consumer credit underwriting and on-going credit management processes. 16Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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The table below provides our total loan and lease portfolio segregated by industry type. The changes in the industry composition fromDecember 31, 2019 are consistent with the portfolio growth metrics. Table 6 - Loan and Lease Portfolio by Industry Type (dollar amounts in March 31, December 31, September 30, June 30, March 31, millions) 2020 2019 2019 2019 2019 Commercial loans and leases: Real estate and rental and leasing$ 6,991 9 %$ 6,662 9 %$ 6,826 9 %$ 6,983 9 %$ 6,955 9 % Retail trade (1) 5,886 8 5,239 7 5,031 7 5,161 7 5,266 7 Manufacturing 5,846 7 5,248 7
5,141 7 5,329 7 5,338 7 Finance and insurance 3,670 5 3,307 4 3,308 4 3,473 5 3,457 5 Health care and social assistance
2,815 4 2,498 3 2,604 3 2,497 3 2,575 3 Wholesale trade
2,555 3 2,437 3 2,449 3 2,604 3 2,725 4 Accommodation and food services
2,081 3 2,072 3 2,008 3 1,868 2 1,782 2 Mining, quarrying, and oil and gas extraction
1,162 1 1,304 2 1,375 2 1,310 2 1,306 2
Professional, scientific,
and technical services 1,615 2 1,360 2 1,242 2 1,336 2 1,401 2
Other services 1,358 2 1,310 2 1,347 2 1,360 2 1,243 2
Transportation and
warehousing 1,211 2 1,207 2 1,324 2 1,240 2 1,323 2
Construction 962 1 900 1 973 1 892 1 973 1
Information 728 1 649 1 619 1 527 1 522 1
Arts, entertainment, and
recreation 694 1 690 1 654 1 617 1 585 1
Admin./Support/Waste Mgmt.
and Remediation Services 693 1 731 1 687 1 681 1 690 1
Utilities 629 1 546 1 419 1 445 1 428 1
Educational services 465 - 463 - 467 1 481 1 478 1
Public administration 259 - 261 - 254 - 247 - 249 -
Agriculture, forestry,
fishing and hunting 141 - 154 - 172 - 174 - 171 -
Management of companies
and enterprises 104 - 105 - 112 - 103 - 113 -
Unclassified/Other 67 - 195 - 237 1 168 - 187 -
Total commercial loans and
leases by industry
category 39,932 51 37,338 49 37,249 51 37,496 50 37,767 51
Automobile 12,907 17 12,797 17 12,292 15 12,173 16 12,272 16
Home equity 9,010 11 9,093 12 9,300 12 9,419 12 9,551 13 Residential mortgage 11,398 15 11,376 15 11,247 15 11,182 15 10,885 14 RV and marine
3,643 5 3,563 5
3,553 5 3,492 5 3,344 4
Other consumer loans 1,145 1 1,237 2 1,251 2 1,271 2 1,260 2
Total loans and leases
(1) Amounts include
2019,
Credit Quality
(This section should be read in conjunction with Note 4 " Loans / Leases " and
Note 5 " Allowance for Credit Losses " of the Notes to Unaudited Condensed
Consolidated Financial Statements.)
We believe the most meaningful way to assess overall credit quality performance
is through an analysis of specific performance ratios. This approach forms the
basis of the discussion in the sections immediately following: NPAs, NALs, TDRs,
ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and
migration patterns, product segmentation, and origination trends in the analysis
of our credit quality performance.
2020 1Q Form 10-Q 17
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Credit quality performance in the 2020 first quarter reflected total NCOs as a percent of average loans, annualized, of 0.62%, an increase from 0.39% in the prior quarter. Total NCOs were$117 million , an increase of$44 million from the prior quarter. The increase was centered within the oil and gas portfolio and a$38 million coal-related commercial credit. Consumer NCOs have remained consistent with the prior quarter. NPAs increased from the prior quarter by$88 million , driven predominately by additions from the oil and gas portfolio. NPAs to total loans and leases increased to 0.75%. NPAs, NALs, AND TDRs (This section should be read in conjunction with Note 4 " Loans / Leases " and Note 5 " Allowance for Credit Losses " of the Notes to Unaudited Condensed Consolidated Financial Statements and "Credit Quality" section of our 2019 Form 10-K.) NPAs and NALs Commercial loans are placed on nonaccrual status at 90-days past due, or earlier if repayment of principal and interest is in doubt. Of the$426 million of commercial related NALs atMarch 31, 2020 ,$329 million , or 77%, represented loans that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, first lien loans secured by residential mortgage collateral are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile, RV and marine, and other consumer loans are generally fully charged-off at 120-days past due. When loans are placed on nonaccrual, accrued interest income is reversed with current year accruals charged to interest income and prior year amounts generally charged-off as a credit loss. When, in our judgment, the borrower's ability to make required interest and principal payments has resumed and collectability is no longer in doubt, the loan or lease could be returned to accrual status. The following table reflects period-end NALs and NPAs detail for each of the last five quarters: Table 7 - Nonaccrual Loans and Leases and Nonperforming Assets (dollar amounts in March 31, December 31, September 30, June 30, March 31, millions) 2020 2019 2019 2019 2019 Nonaccrual loans and leases (NALs): Commercial and industrial$ 396 $ 323 $ 291
$ 281 $ 271 Commercial real estate 30 10 12 17 9 Automobile 6 4 5 4 4 Home equity 58 59 60 60 64 Residential mortgage 66 71 69 62 68 RV and marine 2 1 1 1 1 Other consumer - - - - - Total nonaccrual loans and leases 558 468 438 425 417 Other real estate, net: Residential 8 9 10 10 14 Commercial 2 2 2 4 4 Total other real estate, net 10 11 12 14 18 Other NPAs (1) 18 19 32 21 26
Total nonperforming assets
Nonaccrual loans and leases as a % of total loans and leases 0.72 % 0.62 % 0.58 % 0.57 % 0.56 % NPA ratio (2) 0.75 0.66 0.64 0.61 0.61
(1) Other nonperforming assets include certain impaired investment securities
and/or nonaccrual loans held-for-sale.
(2) Nonperforming assets divided by the sum of loans and leases, other real
estate owned, and other NPAs.
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2020 First Quarter versus 2019 Fourth Quarter. Total NPAs increased by$88 million , or 18%, compared withDecember 31, 2019 , driven by$242 million new NPAs in the C&I portfolio, including a$139 million increase related to oil and gas. This increase was partially offset by charge-offs and payments in the C&I portfolio. TDR Loans (This section should be read in conjunction with Note 4 " Loans / Leases " of the Notes to Unaudited Condensed Consolidated Financial Statements and TDR Loans section of our 2019 Form 10-K.) OnMarch 22, 2020 , the federal bank regulatory agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that, in consultation with the FASB staff, the federal bank regulatory agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. Section 4013 of the CARES Act also addresses COVID-19 related modifications and specifies that COVID-19 related modifications on loans that were current as ofDecember 31, 2019 are not TDRs. Over the past five quarters, over 79% of the total TDR balance remains accruing as borrowers continue to make their monthly payments, resulting in no identified credit losses. As ofMarch 31, 2020 , over 80% of the$446 million of accruing TDRs secured by residential real estate (residential mortgage and home equity in Table 8) are current on their required payments, with over 61% of the accruing pool having had no delinquency in the past 12 months. There is limited migration from the accruing to non-accruing components, and virtually all of the charge-offs come from the non-accruing TDR balances. The table below presents our accruing and nonaccruing TDRs at period-end for each of the past five quarters: Table 8 - Accruing and Nonaccruing Troubled Debt Restructured Loans (dollar amounts in March 31, December 31, September 30, June 30, March 31, millions) 2020 2019 2019 2019 2019 TDRs-accruing: Commercial and industrial$ 219 $ 213 $ 225$ 245 $ 270 Commercial real estate 37 37 40 48 60 Automobile 42 40 39 37 37 Home equity 219 226 233 241 247 Residential mortgage 227 223 221 221 219 RV and marine 3 3 3 2 2 Other consumer 11 11 10 10 9 Total TDRs-accruing 758 753 771 804 844 TDRs-nonaccruing: Commercial and industrial 119 109 84 88 86 Commercial real estate 4 6 6 6 6 Automobile 2 2 3 3 3 Home equity 25 26 26 26 28 Residential mortgage 42 42 44 43 43 RV and marine 2 1 1 1 1 Other consumer - - - - - Total TDRs-nonaccruing 194 186 164 167 167 Total TDRs$ 952 $ 939 $ 935$ 971 $ 1,011 Overall TDRs increased slightly in the quarter. Payment deferrals and forbearance plans entered into towards the end of the quarter as a result of the COVID-19 pandemic were generally not considered TDRs. Huntington continues to proactively work with our borrowing relationships that require assistance. The resulting loan structures enable our borrowers to meet their commitments and Huntington to retain earning assets. The 2020 1Q Form
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accruing TDRs meet the well secured definition and have demonstrated a period of satisfactory payment performance. ACL (This section should be read in conjunction with Note 5 " Allowance for Credit Losses " of the Notes to Unaudited Condensed Consolidated Financial Statements.) Our total credit reserve is comprised of two different components, both of which in our judgment are appropriate to absorb lifetime expected credit losses in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. EffectiveJanuary 1, 2020 , Huntington adopted ASU 2016-13 Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments. Upon adoption of ASU 2016-13, Huntington implemented new credit loss models within our loan and lease portfolio. These models incorporate historical loss experience, as well as current and future economic conditions over a reasonable and supportable period beyond the balance sheet date. We make various judgments combined with historical loss experience to generate a loss rate that is applied to the outstanding loan or receivable balance to produce a reserve for expected credit losses. We use a combination of statistically-based models that consume current and future economic conditions throughout the contractual life of the loan. The process of estimating expected credit losses is based on several key parameters: Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD). Beyond the reasonable and supportable period (two to three years), the economic variables revert to a historical equilibrium at a pace dependent on the state of the economy reflected within the economic scenario. These three parameters are utilized to estimate the cumulative credit losses over the remaining expected life of the loan. We also consider the likelihood a previously charged-off account will be recovered. This calculation is dependent on how long ago the account was charged-off and future economic conditions, which estimate the likelihood and magnitude of recovery. Our models are developed using internal historical loss experience covering the full economic cycle and consider the impact of account characteristics on expected losses. Future economic conditions consider multiple macroeconomic scenarios provided to us by an independent third party and are reviewed through the appropriate committee governance channels discussed below. These macroeconomic scenarios contain certain geographic based variables that are influential to our modeling process, including GDP, unemployment rates, interest rates, and housing prices. The probability weights assigned to each scenario are generally expected to be consistent from period to period. Any changes in probability weights must be supported by appropriate documentation and approval of senior management. Additionally, we consider whether to adjust the modeled estimates to address possible limitations within the models or factors not captured within the economic scenarios. Lifetime losses for most of our loans and receivables are evaluated collectively based on similar risk characteristics, risk ratings, origination credit bureau scores, delinquency status, remaining months within loan agreement, among others. During the first two months of the quarter, we experienced relatively stable economic conditions in comparison to those used to develop our Day 1 CECL estimate which would have translated to a relatively flat allowance estimate. However, in the last month of the quarter, deterioration of the estimated global macroeconomic outlook as a result of COVID-19 impacts, along with instability within the oil and gas sector led to a significant build in ACL levels and an associated increase in provision for credit losses. Subsequent to the completion of our quarter-end estimation process, we received an updated macroeconomic outlook provided by our independent third party. It reflects a more significant deterioration in GDP and unemployment than when we completed our estimation process for the first quarter. If those forecasts were to hold or worsen, we would expect to further increase our ACL in future periods. Our ACL development methodology committee is responsible for governance of the methodology, assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. A separate executive level committee is responsible for the governance process around the appropriateness of scenarios used as part of the reasonable and supportable forecast period. The ALLL represents the estimate of lifetime expected losses in the loan and lease portfolio at the reported date. The loss modeling process uses an EAD concept to calculate total expected losses on both funded balances and unfunded commitments, where 20Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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appropriate. Losses related to the unfunded commitments are then recorded as AULC within other liabilities in the Unaudited Condensed Consolidated Balance Sheet. A liability for expected credit losses for off-balance sheet credit exposures is recognized if Huntington has a present contractual obligation to extend the credit and the obligation is not unconditionally cancelable. Huntington adopted ASC Topic 326 using the modified retrospective method for all financial assets in scope of the standard. Results for reporting periods beginning afterJanuary 1, 2020 are presented under ASC Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon adoption, Huntington recorded an increase to the ACL of$393 million and a corresponding decrease to retained earnings of approximately$306 million , net of tax of$87 million . The overall increase to the ACL atJanuary 1, 2020 was comprised of a$180 million increase in the commercial ALLL, a$211 million increase in the consumer ALLL, and a$2 million increase to the AULC. The increase in the commercial portfolio was largely attributable to adjustments to cover heightened risks of future deterioration in the oil and gas and leveraged lending portfolios. The increase in the consumer portfolio was largely attributable to the longer asset duration associated with many of these products. The table below reflects the allocation of our ALLL among our various loan categories during each of the past five quarters: Table 9 - Allocation of Allowance for Credit Losses (1) (dollar amounts March 31, December 31, September 30, June 30, March 31, in millions) 2020 2019 2019 2019 2019 ALLL Commercial Commercial and industrial$ 837 42 %$ 469 41 %$ 441 41 %$ 455 41 %$ 437 41 % Commercial real estate 159 9 83 8 120 10 105 9 108 10 Total commercial 996 51 552 49 561 51 560 50 545 51 Consumer Automobile 148 17 57 17 54 15 53 16 53 16 Home equity 120 11 50 12 47 12 47 12 53 13 Residential mortgage 53 15 23 15 22 15 22 15 23 14 RV and marine 97 5 21 5 20 5 18 5 20 4 Other consumer 90 1 80 2 79 2 74 2 70 2 Total consumer 508 49 231 51 222 49 214 50 219 49 Total ALLL 1,504 100 % 783 100 % 783 100 % 774 100 % 764 100 % AULC 99 104 101 101 100 Total ACL$ 1,603 $ 887 $ 884 $ 875 $ 864 Total ALLL as a % of Total loans and leases 1.93% 1.04% 1.05% 1.03% 1.02% Nonaccrual loans and leases 270 167 179 182 183 NPAs 257 157 163 168 166 Total ACL as % of Total loans and leases 2.05% 1.18% 1.18% 1.17% 1.15% Nonaccrual loans and leases 287 190 202 206 207 NPAs 273 178 184 190 186
(1) Percentages represent the percentage of each loan and lease category to total
loans and leases.
2020 First Quarter versus 2019 Fourth Quarter AtMarch 31, 2020 , the ALLL was$1,504 million , an increase of$721 million compared to theDecember 31, 2019 balance of$783 million . The ALLL to total loans and leases ratio increased 89 basis points to 1.93%. As referenced above, the implementation of CECL resulted in aJanuary 1 adoption impact of$391 million . The ALLL 2020 1Q Form 10-Q 21
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increased$330 million during the quarter primarily driven by the deteriorating economic outlook resulting from the COVID-19 pandemic. The ACL to total loans ratio was 2.05% atMarch 31, 2020 , and 1.18% atDecember 31, 2019 . This increase is reflective of the transition to the CECL lifetime loss methodology, the deteriorating economic outlook resulting from the COVID-19 pandemic and increased specific reserves, almost exclusively against the oil and gas portfolio. NCOs A loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency where that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs at the time of discharge. Commercial loans are either charged-off or written down to net realizable value by 90-days past due with the exception of administrative small ticket lease delinquencies. Automobile loans, RV and marine, and other consumer loans are generally fully charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due. The remaining balance is in delinquent status until a modification can be completed, or the loan goes through the foreclosure process. 22Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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Table 10 - Quarterly Net Charge-off Analysis
Three Months Ended
March 31, December 31, March 31,
(dollar amounts in millions) 2020 2019 2019
Net charge-offs (recoveries) by loan and lease type:
Commercial:
Commercial and industrial $ 84 $ 36 $ 31
Commercial real estate:
Construction - - -
Commercial (1 ) - 2
Commercial real estate (1 ) - 2
Total commercial 83 36 33
Consumer:
Automobile 7 9 10
Home equity 5 1 3
Residential mortgage 1 1 3
RV and marine 2 4 3
Other consumer 19 22 19
Total consumer 34 37 38
Total net charge-offs $ 117 $ 73 $ 71
Net charge-offs (recoveries) - annualized percentages:
Commercial:
Commercial and industrial 1.09 % 0.47 % 0.41 %
Commercial real estate:
Construction 0.08 (0.03 ) (0.11 )
Commercial (0.06 ) 0.01 0.12
Commercial real estate (0.03 ) - 0.08
Total commercial 0.89 0.38 0.35
Consumer:
Automobile 0.22 0.30 0.32
Home equity 0.19 0.02 0.12
Residential mortgage 0.02 0.04 0.10
RV and marine 0.27 0.39 0.39
Other consumer 6.45 7.26 6.29
Total consumer 0.35 0.39 0.41Net charge-offs as a % of average loans 0.62 % 0.39 % 0.38 %
In assessing NCO trends, it is helpful to understand the process of how
commercial loans are treated as they deteriorate over time. The ALLL is
established consistent with the level of risk associated with the commercial
portfolio's original underwriting. As a part of our normal portfolio management
process for commercial loans, loans within the portfolio are periodically
reviewed, and with improvement or deterioration in the risk rating, there is a
corresponding movement in allowance levels (assuming unchanged economic
outlook). For TDRs and loans with unique risk characteristics, a specific
reserve is established based on the discounted projected cash flows or
collateral value of the specific loan. Charge-offs, if necessary, are generally
recognized in a period after the specific ALLL is established. Consumer loans
are treated in much the same manner as commercial loans, with increasing reserve
factors applied based on the risk characteristics of the loan coupled with the
economic conditions forecasted over the life of the loan. Specific reserves are
not identified for consumer loans, except for TDRs. In summary, if loan quality
deteriorates, or the likelihood of worsening economic conditions increases, the
typical credit sequence would be periods of reserve building, followed by
periods of higher NCOs as the previously established ALLL is utilized.
Additionally, an increase in the ALLL either precedes or is in conjunction with
increases in NALs. When a commercial loan is classified as NAL, it is evaluated
for specific ALLL or charge-off. As a result, an increase in NALs does not
necessarily result in an increase in the ALLL or an expectation of higher future
NCOs.
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2020 First Quarter versus 2019 Fourth Quarter NCOs were an annualized 0.62% of average loans and leases in the current quarter, increasing from 0.39% in the 2019 fourth quarter, and above our average through-the-cycle target range of 0.35% - 0.55%. Annualized NCOs for the commercial portfolios were 0.89% in the current quarter compared to 0.38% in the 2019 fourth quarter. The increase in commercial NCOs was centered in our oil and gas portfolio and a$38 million coal-related commercial credit. Consumer charge-offs were slightly lower for the quarter, primarily driven by seasonality trends across the consumer portfolio, consistent with our expectations. Given the level of NCOs we have experienced on an overall portfolio basis, we would expect to see continued elevated NCOs. Market Risk (This section should be read in conjunction with the "Market Risk" section of our 2019 Form 10-K for our on-going market risk management processes.) Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. When the value of an instrument is tied to such external factors, the holder faces market risk. We are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price risk from trading securities, securities owned by our broker-dealer subsidiaries, foreign exchange positions, equity investments, and investments in securities backed by mortgage loans. Huntington measures market risk exposure via financial simulation models, which provide management with insights on the potential impact to net interest income and other key metrics as a result of changes in market interest rates. Models are used to simulate cash flows and accrual characteristics of the balance sheet based on assumptions regarding the slope or shape of the yield curve, the direction and volatility of interest rates, and the changing composition and characteristics of the balance sheet resulting from strategic objectives and customer behavior. Assumptions and models provide extensive information on forecasted balance sheet growth and composition, and the pricing and maturity characteristics of current and future business. In measuring the financial risks associated with interest rate sensitivity in Huntington's balance sheet, Huntington compares a set of alternative interest rate scenarios to the results of a base case scenario derived using market forward rates. The market forward reflects the market consensus regarding the future level and slope of the yield curve across a range of tenor points. The standard set of interest rate scenarios includes two types: "shock" scenarios which are instantaneous parallel rate shifts, and "ramp" scenarios where the parallel shift is applied gradually over the first 12 months of the forecast on a pro rata basis. Measures of Net Interest Income at Risk follow ramp scenarios, and measures of Economic Value of Equity follows shock scenarios. In both shock and ramp scenarios with falling rates, Huntington presumes that market rates cannot go below 0%. The scenarios are inclusive of all interest rate risk hedging activities. Forward starting hedges are included to the extent that they have been transacted and that they start within the measurement horizon. Table 11 - Net Interest Income at Risk Net Interest Income at Risk (%) Basis point change scenario -25 +100 +200 Board policy limits NA -2.0 % -4.0 % March 31, 2020 -0.5 % 1.5 % 2.4 % December 31, 2019 0.1 % 1.0 % 2.3 % The NII at Risk results included in the table above reflect the analysis used monthly by management. It models gradual -25, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months. With rates having fallen materially this quarter, the down 100 basis point scenario would result in market rates reaching floored values which can produce a distorted view of interest rate risk metrics. Management is now using the down 25 basis point scenario, which is more meaningful in the current market rate environment than the down 100 basis point scenario. Management does consider additional scenarios with forecasted negative market rates which would result in margin deterioration. 24Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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The increase in sensitivity was driven by the impact of lower forecast rates on
non-maturity deposits resulting in slower balance runoff, and higher securities
prepayments in the implied forward scenario, providing more opportunity for
higher reinvestment rates in up rate environments.
Our NII at Risk is within our Board of Directors' policy limits for the +100 and
+200 basis point scenarios. There is no Board policy limit for the down 25 basis
point scenario.
Table 12 - Economic Value of Equity at Risk
Economic Value of Equity at Risk (%)
Basis point change scenario -25 +100 +200
Board policy limits NA -6.0 % -12.0 %
March 31, 2020 -0.4 % -0.2 % -4.4 %
December 31, 2019 - % -3.1 % -9.1 %
The EVE results included in the table above reflect the analysis used monthly by
management. It models immediate -25, +100 and +200 basis point parallel shifts
in market interest rates.
With rates having fallen materially this quarter, the down 100 basis point
scenario would result in market rates reaching floored values which can produce
a distorted view of interest rate risk metrics. Management is now using the
down 25 basis point scenario, which is more meaningful in the current market
rate environment than the down 100 basis point scenario. Management does
consider additional scenarios with forecasted negative market rates which would
result in margin deterioration.
We are within our Board of Directors' policy limits for the +100 and +200 basis
point scenarios. There is no board policy limit for the down 25 basis point
scenario. The EVE depicts an asset sensitive balance sheet profile in the -25
basis point scenario and a liability sensitive profile due to additional
convexity in the +100 and +200 basis point scenarios. The change in sensitivity
was driven by lower interest rates slowing deposit runoff.
Use of Derivatives to Manage Interest Rate Risk
An integral component of our interest rate risk management strategy is use of
derivative instruments to minimize significant fluctuations in earnings caused
by changes in market interest rates. Examples of derivative instruments that we
may use as part of our interest rate risk management strategy include interest
rate swaps, interest rate floors, forward contracts, and forward starting
interest rate swaps.
Table 13 shows all swap and floor positions that are utilized for purposes of
managing our exposures to the variability of interest rates. These positions are
used to convert the contractual interest rate index of agreed-upon amounts of
assets and liabilities (i.e., notional amounts) to another interest rate index
or to hedge forecasted transactions for the variability in cash flows
attributable to the contractually specified interest rate. The volume, maturity
and mix of portfolio swaps change frequently as we adjust our broader interest
rate risk management objectives and the balance sheet positions to be hedged.
For further information, including the notional amount and fair values of these
derivatives, refer to Note 12 " Derivative Financial Instruments " of the
Notes to Unaudited Condensed Consolidated Financial Statements.
2020 1Q Form 10-Q 25
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The following table presents additional information about the interest rate swaps and floors used in Huntington's asset and liability management activities atMarch 31, 2020 andDecember 31, 2019 . Table 13 - Weighted-Average Maturity, Receive Rate and LIBOR Reset Rate on Qualifying Hedging Instruments March 31, 2020 Average Notional Maturity Weighted-Average Weighted-Average (dollar amounts in millions) Value (years) Fair Value Receive Rate LIBOR Reset Rate Asset conversion swaps Receive Fixed - 1 month LIBOR$ 5,975 2.65$ 269 1.82 % 0.97 % Receive Fixed - 1 month LIBOR - forward starting (a) 1,300 4.11 49 1.45 - Liability conversion swaps Receive Fixed - 1 month LIBOR 5,750 2.72 337 2.29 1.00 Receive Fixed - 3 month LIBOR 2,290 0.59 21 1.80 1.20 Total swap portfolio at March 31, 2020$ 15,315 $ 676 March 31, 2020 Average Notional Maturity Weighted-Average Weighted-Average (dollar amounts in millions) Value (years) Fair Value Floor Strike LIBOR Reset Rate Interest rate floors Purchased Interest Rate Floors - 1 month LIBOR$ 8,200 0.98$ 127 1.84 % 1.26 % Floor Spread - 1 month LIBOR 400 2.49 10 2.50 / 1.50 0.92 Floor Spread - 1 month LIBOR - forward starting (b) 3,500 4.06 86 1.68 / 0.79 - Total floors portfolio at March 31, 2020$ 12,100 $ 223 December 31, 2019 Average Notional Maturity Weighted-Average Weighted-Average (dollar amounts in millions) Value (years) Fair Value Receive Rate LIBOR Reset Rate Asset conversion swaps Receive Fixed - 1 month LIBOR$ 5,387 2.87$ 51 1.89 % 1.73% Receive Fixed - 1 month LIBOR - forward starting (c) 3,250 4.02 (28 ) 1.32 - Liability conversion swaps Receive Fixed - 1 month LIBOR 5,250 2.97 146 2.37 1.72 Receive Fixed - 3 month LIBOR 2,290 0.84 5 1.80 1.94 Total swap portfolio at December 31, 2019$ 16,177 $ 174 December 31, 2019 Average Notional Maturity Weighted-Average Weighted-Average (dollar amounts in millions) Value (years) Fair Value Floor Strike LIBOR Reset Rate Interest rate floors Purchased Interest Rate Floors - 1 month LIBOR$ 9,200 1.45$ 36 1.84 % 1.54 % Floor Spread - 1 month LIBOR 400 2.74 8 2.50 / 1.50 1.79 Floor Spread - 1 month LIBOR - forward starting (d) 150 4.34 2 1.75 / 1.00 - Total floors portfolio at December 31, 2019$ 9,750 $ 46 (a) Forward starting swaps will become effective fromJune 2020 toApril 2021 . (b) Forward starting floors will become effective fromMay 2020 toJune 2021 . (c) Forward starting swaps will become effective fromJanuary 2020 toJune 2021 . (d) Forward starting floors will become effective fromMarch 2021 toJune 2021 . 26Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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MSRs
(This section should be read in conjunction with Note 6 " Mortgage Loan Sales and Servicing Rights " of Notes to the Unaudited Condensed Consolidated Financial Statements .) OnJanuary 1, 2020 , Huntington made an irrevocable election to subsequently measure all classes of residential MSRs at fair value in order to eliminate any potential measurement mismatch between our economic hedges and the MSRs. The impact of the irrevocable election was not material. AtMarch 31, 2020 , we had a total of$165 million of capitalized MSRs representing the right to service$23 billion in mortgage loans. MSR fair values are sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We also employ hedging strategies to reduce the risk of MSR fair value changes. However, volatile changes in interest rates can diminish the effectiveness of these economic hedges. We report changes in the MSR value net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in fair value of the MSR are recognized in mortgage banking income. MSR assets are included in servicing rights and other intangible assets in the Unaudited Condensed Consolidated Financial Statements. Price Risk Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer subsidiaries, foreign exchange positions, derivative instruments, and equity investments. We have established loss limits on the trading portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of marketable equity securities that can be held. Liquidity Risk (This section should be read in conjunction with the "Liquidity Risk" section of our 2019 Form 10-K for our on-going liquidity risk management processes.) During the 2020 first quarter, Huntington heightened its overall liquidity risk management process, including additional communication, monitoring, and reporting, given changes in the economic environment as a result of COVID-19. Overnight funding markets continue to demonstrate ample liquidity with the ability to obtain short-term funding. We continue to closely monitor wholesale funding markets and all government sponsored programs in relation to Huntington's liquidity position. Our primary source of liquidity is our core deposit base. Core deposits comprised approximately 95% of total deposits atMarch 31, 2020 . We also have available unused wholesale sources of liquidity, including advances from the FHLB, issuance through dealers in the capital markets, and access to certificates of deposit issued through brokers. Liquidity is further provided by unencumbered, or unpledged, investment securities that totaled$10.7 billion as ofMarch 31, 2020 . Subsequent to quarter end, additional securities were pledged to further increase Huntington's borrowing capacity at the FHLB. Bank Liquidity and Sources of Funding Our primary sources of funding for the Bank are retail and commercial core deposits. AtMarch 31, 2020 , these core deposits funded 73% of total assets (106% of total loans). Other sources of liquidity include non-core deposits, FHLB advances, wholesale debt instruments, and securitizations. Demand deposit overdrafts that have been reclassified as loan balances were$17 million and$25 million atMarch 31, 2020 andDecember 31, 2019 , respectively. 2020 1Q Form
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The following table reflects deposit composition detail for each of the last
five quarters:
Table 14 - Deposit Composition
March 31, December 31, September 30, June 30, March 31,
(dollar amounts in millions) 2020 2019 2019 2019 2019 (1)
By Type:
Demand deposits-noninterest-bearing $ 21,039 24 % $ 20,247 25 % 19,976 24 19,085 24 19,906 24 Money market deposits
25,068 29 24,726 30 23,977 29 23,952 30 22,931 28 Savings and other domestic deposits 9,845 11 9,549 12
9,566 12 9,803 12 10,277 13 Core certificates of deposit (2) 3,599 4 4,356 5
5,443 7 5,703 7 6,007 7 Total core deposits:
82,666 95 79,461 97
79,515 97 77,926 97 79,157 96
Other domestic deposits of
276 - 313 - 326 - 316 - 313 1
Brokered deposits and negotiable
CDs 3,888 5 2,573 3 2,554 3 2,640 3 2,685 3
Total deposits $ 86,830 100 % $ 82,347 100 % $ 82,395 100 % $ 80,882 100 % $ 82,155 100 %
Total core deposits:
Commercial $ 38,064 46 % $ 34,957 44 % $ 35,247 44 % $ 33,371 43 % $ 33,546 42 %
Consumer 44,602 54 44,504 56 44,268 56 44,555 57 45,611 58
Total core deposits $ 82,666 100 % $ 79,461 100 % $ 79,515 100 % $ 77,926 100 % $ 79,157 100 %
(1)
(2) Includes consumer certificates of deposit of
The Bank maintains borrowing capacity at the FHLB and theFederal Reserve Bank Discount Window. The Bank does not consider borrowing capacity from the Federal Reserve Bank Discount Window as a primary source of liquidity. Total loans and securities pledged to the Federal Reserve Discount Window and the FHLB are$45.1 billion and$39.6 billion atMarch 31, 2020 andDecember 31, 2019 , respectively. Unused borrowing capacity from the FHLB totaled$19.1 billion and$14.3 billion atMarch 31, 2020 andDecember 31, 2019 , respectively. Subsequent to quarter end, Huntington has pledged additional unencumbered investment securities further increasing its borrowing capacity. To the extent we are unable to obtain sufficient liquidity through core deposits, we may meet our liquidity needs through sources of wholesale funding, asset securitization or sale. Sources of wholesale funding include other domestic deposits of$250,000 or more, brokered deposits and negotiable CDs, short-term borrowings, and long-term debt. AtMarch 31, 2020 , total wholesale funding was$16.8 billion , an increase from$15.3 billion atDecember 31, 2019 . The increase from year-end primarily relates to an increase in brokered deposits and negotiable CDs, and short-term borrowings, partially offset by a decrease in other domestic deposits of$250,000 or more, and other long-term debt. AtMarch 31, 2020 , we believe the Bank has sufficient liquidity to meet its cash flow obligations for the foreseeable future. Parent Company Liquidity The parent company's funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of nonbank subsidiaries, repurchases of our stock, and acquisitions. The parent company obtains funding to meet obligations from dividends and interest received from the Bank, interest and dividends received from direct subsidiaries, net taxes collected from subsidiaries included in the federal consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt securities. AtMarch 31, 2020 andDecember 31, 2019 , the parent company had$3.7 billion and$3.1 billion , respectively, in cash and cash equivalents. OnApril 22, 2020 , the Board of Directors declared a quarterly common stock cash dividend of$0.15 per common share. The dividend is payable onJuly 1, 2020 , to shareholders of record onJune 17, 2020 . Based on the 28Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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current quarterly dividend of$0.15 per common share, cash demands required for common stock dividends are estimated to be approximately$152 million per quarter. OnApril 22, 2020 , the Board of Directors declared a quarterly Series B, Series C, Series D, and Series E Preferred Stock dividend payable onJuly 15, 2020 to shareholders of record onJuly 1, 2020 . Cash demands required for Series B are expected to be less than$1 million per quarter. Cash demands required for Series C, Series D and Series E are expected to be approximately$2 million ,$9 million and$7 million per quarter, respectively. During the first three months of 2020, the Bank paid preferred and common dividends of$11 million and$60 million , respectively. To meet any additional liquidity needs, the parent company may issue debt or equity securities from time to time. Off-Balance Sheet Arrangements In the normal course of business, we enter into various off-balance sheet arrangements. These arrangements include commitments to extend credit, interest rate swaps and floors, financial guarantees contained in standby letters-of-credit issued by the Bank, and commitments by the Bank to sell mortgage loans. Operational Risk Operational risk is the risk of loss due to human error, inadequate or failed internal systems and controls, including the use of financial or other quantitative methodologies that may not adequately predict future results; violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk. We actively monitor cyberattacks such as attempts related to online deception and loss of sensitive customer data. We evaluate internal systems, processes and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses. Cybersecurity threats have increased, primarily through COVID-19 themed phishing campaigns. We are actively monitoring our email gateways for malicious phishing email campaigns. We have also increased our cybersecurity monitoring activities through the implementation of specific monitoring of remote connections by geography and volume of connections to detect anomalous remote logins, since a significant portion of our workforce is now working remotely. Our objective for managing cyber security risk is to avoid or minimize the impacts of external threat events or other efforts to penetrate our systems. We work to achieve this objective by hardening networks and systems against attack, and by diligently managing visibility and monitoring controls within our data and communications environment to recognize events and respond before the attacker has the opportunity to plan and execute on its own goals. To this end we employ a set of defense in-depth strategies, which include efforts to make us less attractive as a target and less vulnerable to threats, while investing in threat analytic capabilities for rapid detection and response. Potential concerns related to cyber security may be escalated to our board-level Technology Committee, as appropriate. As a complement to the overall cyber security risk management, we use a number of internal training methods, both formally through mandatory courses and informally through written communications and other updates. Internal policies and procedures have been implemented to encourage the reporting of potential phishing attacks or other security risks. We also use third-party services to test the effectiveness of our cyber security risk management framework, and any such third parties are required to comply with our policies regarding information security and confidentiality. To mitigate operational risks, we have an Operational Risk Committee, a Legal, Regulatory, and Compliance Committee, a Funds Movement Committee, and a Third Party Risk Management Committee. The responsibilities of these committees, among other duties, include establishing and maintaining management information systems to monitor material risks and to identify potential concerns, risks, or trends that may have a significant impact and ensuring that recommendations are developed to address the identified issues. In addition, we have aModel Risk Oversight Committee that is responsible for policies and procedures describing how model risk is evaluated and managed and the application of the governance process to implement these practices throughout the enterprise. These committees report any significant findings and recommendations to the Risk Management Committee. Potential concerns may be escalated to our ROC and the Audit Committee, as appropriate. Significant findings or 2020 1Q Form
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issues are escalated by the Third Party Risk Management Committee to the Technology Committee of the Board, as appropriate. The goal of this framework is to implement effective operational risk techniques and strategies; minimize operational, fraud, and legal losses; minimize the impact of inadequately designed models and enhance our overall performance. Compliance Risk Financial institutions are subject to many laws, rules, and regulations at both the federal and state levels. These broad-based laws, rules, and regulations include, but are not limited to, expectations relating to anti-money laundering, lending limits, client privacy, fair lending, prohibitions against unfair, deceptive or abusive acts or practices, protections for military members as they enter active duty, and community reinvestment. The volume and complexity of recent regulatory changes have increased our overall compliance risk. As such, we utilize various resources to help ensure expectations are met, including a team of compliance experts dedicated to ensuring our conformance with all applicable laws, rules, and regulations. Our colleagues receive training for several broad-based laws and regulations including, but not limited to, anti-money laundering and customer privacy. Additionally, colleagues engaged in lending activities receive training for laws and regulations related to flood disaster protection, equal credit opportunity, fair lending, and/or other courses related to the extension of credit. We set a high standard of expectation for adherence to compliance management and seek to continuously enhance our performance. Capital Both regulatory capital and shareholders' equity are managed at the Bank and on a consolidated basis. We have an active program for managing capital and maintain a comprehensive process for assessing the Company's overall capital adequacy. We believe our current levels of both regulatory capital and shareholders' equity are adequate. As disclosed in our 2019 Form 10-K, theU.S federal banking regulatory agencies permitted BHCs and banks to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, onMarch 31, 2020 , theU.S. federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows BHCs and banks to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. Huntington has elected to adopt the interim final rule, which is reflected in the regulatory capital data presented below. 30Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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The following table presents certain regulatory capital data at both the consolidated and Bank levels for each of the periods presented: Table 15 - Regulatory Capital Data (1)
Basel III
March 31, December 31, March 31,
(dollar amounts in millions) 2020 2019 2019
Total risk-weighted assets Consolidated $ 90,193 $ 87,512 $ 85,966
Bank 90,016 87,298 85,944
CET I risk-based capital Consolidated 8,538 8,647 8,462
Bank 9,887 9,747 9,150
Tier 1 risk-based capital Consolidated 9,746 9,854 9,670
Bank 10,760 10,621 10,028
Tier 2 risk-based capital Consolidated 1,746 1,559 1,600
Bank 1,481 1,243 1,449
Total risk-based capital Consolidated 11,492 11,413 11,270
Bank 12,241 11,864 11,477
CET I risk-based capital ratio Consolidated 9.47 % 9.88 % 9.84 %
Bank 10.98 11.17 10.65
Tier 1 risk-based capital ratio Consolidated 10.81 11.26 11.25
Bank 11.95 12.17 11.67
Total risk-based capital ratio Consolidated 12.74 13.04 13.11
Bank 13.60 13.59 13.35
Tier 1 leverage ratio Consolidated 9.01 9.26 9.16
Bank 9.98 10.01 9.51
(1) The
five-year transition to delay for two years the full impact of CECL on
regulatory capital, followed by a three-year transition period.
AtMarch 31, 2020 , we maintained Basel III capital ratios in excess of the well-capitalized standards established by the FRB. All capital ratios were impacted by period over period balance sheet growth. The capital impact of the repurchase of 36.7 million common shares over the last four quarters and cash dividends effectively offset earnings on a year-over-year basis. Shareholders' Equity We generate shareholders' equity primarily through the retention of earnings, net of dividends and share repurchases. Other potential sources of shareholders' equity include issuances of common and preferred stock. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, to meet both regulatory and market expectations, and to provide the flexibility needed for future growth and business opportunities. Shareholders' equity totaled$11.8 billion atMarch 31, 2020 , largely unchanged when compared withDecember 31, 2019 . OnJune 27, 2019 , Huntington announced proposed capital actions included in Huntington's 2019 capital plan. These actions include a 7% increase in the quarterly dividend per common share to$0.15 , starting in the third quarter of 2019, the repurchase of up to$513 million of common stock over the next four quarters (July 1, 2019 throughJune 30, 2020 ), and maintaining dividends on the outstanding classes of preferred stock and trust preferred securities. Any capital actions, including those contemplated above, are subject to approval by Huntington's Board of Directors. OnJuly 17, 2019 , the Board of Directors authorized the repurchase of up to$513 million of common shares over the four quarters through the 2020 second quarter. Purchases of common stock under the authorization may include open market purchases, privately negotiated transactions, and accelerated repurchase programs. 2020 1Q Form 10-Q 31
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Dividends
We consider disciplined capital management as a key objective, with dividends representing one component. Our strong capital ratios position us to take advantage of additional capital management opportunities. Share Repurchases From time to time the Board of Directors authorizes the Company to repurchase shares of our common stock. Although we announce when the Board of Directors authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Future stock repurchases may be private or open-market repurchases, including block transactions, accelerated or delayed block transactions, forward transactions, and similar transactions. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for employee benefit plans and acquisitions, market conditions (including the trading price of our stock), and regulatory and legal considerations. During the 2020 first quarter, Huntington repurchased a total of 7.1 million shares at a weighted average share price of$12.38 . As a result of deterioration of the economy due to the COVID-19 pandemic, we do not currently expect to repurchase shares for the balance of 2020. However, we may at our discretion resume share repurchases at any time while considering factors including, but not limited to, capital requirements and market conditions. BUSINESS SEGMENT DISCUSSION Overview Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. We have four major business segments: Consumer and Business Banking, Commercial Banking, Vehicle Finance, andRegional Banking and The Huntington Private Client Group (RBHPCG). TheTreasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense. Business segment results are determined based upon our management practices, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. Revenue Sharing Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to or providing service to customers. Results of operations for the business segments reflect these fee sharing allocations. Expense Allocation The management process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit costs (activity-based costs) to activities related to product origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to all four business segments fromTreasury / Other. We utilize a full-allocation methodology, where allTreasury / Other expenses, except reported Significant Items, if any, and a small amount of other residual unallocated expenses, are allocated to the four business segments. Funds Transfer Pricing (FTP) We use an active and centralized FTP methodology to attribute appropriate net interest income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in theTreasury / Other function where it can be centrally monitored and managed. TheTreasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment. The FTP rate is based on prevailing market interest 32Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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rates for comparable duration assets (or liabilities). During 2019, the Company updated and refined its FTP methodology primarily related to the allocation of deposit funding costs. Prior period amounts presented below have been restated to reflect the new methodology. Net Income by Business Segment Net income by business segment for the three-month periods endingMarch 31, 2020 andMarch 31, 2019 is presented in the following table: Table 16 - Net Income by Business Segment Three Months Ended March 31, (dollar amounts in millions) 2020 2019 Consumer and Business Banking$ 60 $ 182 Commercial Banking (86 ) 130 Vehicle Finance 11 40 RBHPCG 24 33 Treasury / Other 39 (27 ) Net income$ 48 $ 358 Treasury / Other TheTreasury / Other function includes revenue and expense related to assets, liabilities, and equity not directly assigned or allocated to one of the four business segments. Assets include investment securities and bank owned life insurance. Net interest income includes the impact of administering our investment securities portfolios, the net impact of derivatives used to hedge interest rate sensitivity as well as the financial impact associated with our FTP methodology, as described above. Noninterest income includes miscellaneous fee income not allocated to other business segments, such as bank owned life insurance income and securities and trading asset gains or losses. Noninterest expense includes certain corporate administrative, and other miscellaneous expenses not allocated to other business segments. The provision for income taxes for the business segments is calculated at a statutory 21% tax rate, although our overall effective tax rate is lower.
Consumer and Business Banking
Table 17 - Key Performance Indicators for Consumer and Business Banking
Three Months Ended March 31, Change
(dollar amounts in millions) 2020 2019 Amount Percent
Net interest income $ 364 $ 471 $ (107 ) (23 )%
Provision for credit losses 82 17 65 382
Noninterest income 212 174 38 22
Noninterest expense 418 398 20 5
Provision for income taxes 16 48 (32 ) (67 )
Net income $ 60 $ 182 $ (122 ) (67 )%
Number of employees (average
full-time equivalent) 7,769 8,129 (360 ) (4 )%
Total average assets $ 24,677 $ 25,573 $ (896 ) (4 )
Total average loans/leases 21,593 22,341 (748 ) (3 )
Total average deposits 51,296 50,897 399 1
Net interest margin 2.81 % 3.71 % (0.90 )% (24 )
NCOs $ 32 $ 32 $ - -
NCOs as a % of average loans and
leases 0.60 % 0.56 % 0.04 % 7
2020 First Three Months versus 2019 First Three Months
Consumer and Business Banking, including Home Lending, reported net income of
$60 million in the first three-month period of 2020, a decrease of $122 million ,
or 67%, compared to the year-ago period. Segment net
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interest income decreased$107 million , or 23%, due to decreased spread on deposits. The provision for credit losses increased$65 million , or 382% due to the deteriorating economic environment as a result of the COVID-19 pandemic. Noninterest income increased$38 million , or 22%, primarily due to increased mortgage banking income, card interchange income from higher transaction volumes, along with increased investment sales. Noninterest expense increased$20 million , or 5%, due to increased personnel, card processing, and allocated expenses, slightly offset by lower occupancy and equipment expense as a result of branch consolidations and divestitures, along with decreased operational losses. Home Lending, an operating unit of Consumer and Business Banking, reflects the result of the origination, sale, and servicing of mortgage loans less referral fees and net interest income for mortgage banking products distributed by the retail branch network and other business segments. Home Lending reported net income of$11 million in the first three-month period of 2020, compared with a net loss of$7 million in the year-ago period. Noninterest income increased$32 million , driven primarily by higher salable originations and higher salable spread. Noninterest expense increased$5 million due to higher originations.
Commercial Banking
Table 18 - Key Performance Indicators for Commercial Banking
Three Months Ended March 31, Change
(dollar amounts in millions) 2020 2019 Amount Percent
Net interest income $ 232 $ 273 $ (41 ) (15 )%
Provision for credit losses 298 43 255 593
Noninterest income 86 76 10 13
Noninterest expense 129 141 (12 ) (9 )
Provision for income taxes (23 ) 35 (58 ) (166 )
Net income $ (86 ) $ 130 $ (216 ) (166 )%
Number of employees (average
full-time equivalent) 1,273 1,314 (41 ) (3 )%
Total average assets $ 34,810 $ 33,056 $ 1,754 5
Total average loans/leases 27,238 27,079 159 1
Total average deposits 21,525 21,793 (268 ) (1 )
Net interest margin 3.15 % 3.71 % (0.56 )% (15 )
NCOs (Recoveries) $ 75 $ 27 $ 48 178
NCOs as a % of average loans and
leases 1.11 % 0.39 % 0.72 % 185
2020 First Three Months versus 2019 First Three Months Commercial Banking reported a net loss of$86 million in the first three-month period of 2020, a decrease of$216 million , or 166%, compared to the year-ago period. Provision for credit losses increased$255 million , or 593%, due to the deteriorating economic environment as a result of the COVID-19 pandemic, as well as an increase in specific reserves largely driven by the oil and gas portfolio and a$38 million coal-related commercial credit. Segment net interest income decreased$41 million , or 15%, primarily due to a 57 basis point decrease in net interest margin driven by a sharp decline in the value of deposits. Noninterest income increased$10 million , or 13%, largely driven by higher capital markets related revenue due to customer interest rate derivatives, increased underwriting activity and the lack of an unfavorable commodities derivative mark-to-market adjustment which occurred in the year ago quarter. Noninterest expense decreased$12 million , or 9%, primarily due to lower allocated overhead and personnel expense, which was driven by a reduction in incentives, as well as a 3% reduction in full-time equivalent employees. 34Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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Vehicle Finance
Table 19 - Key Performance Indicators for Vehicle Finance
Three Months Ended March 31, Change
(dollar amounts in millions) 2020 2019 Amount Percent
Net interest income $ 106 $ 95 $ 11 12 %
Provision for credit losses 60 9 51 567
Noninterest income 3 2 1 50
Noninterest expense 35 37 (2 ) (5 )
Provision for income taxes 3 11 (8 ) (73 )
Net income $ 11 $ 40 $ (29 ) (73 )%
Number of employees (average
full-time equivalent) 263 267 (4 ) (1 )%
Total average assets $ 20,215 $ 19,269 $ 946 5
Total average loans/leases 20,307 19,340 967 5
Total average deposits 366 306 60 20
Net interest margin 2.08 % 1.99 % 0.09 % 5
NCOs $ 10 $ 13 $ (3 ) (23 )
NCOs as a % of average loans and
leases 0.19 % 0.27 % (0.08 )% (30 )
2020 First Three Months versus 2019 First Three Months Vehicle Finance reported net income of$11 million in the first three-month period of 2020, a decrease of$29 million , or 73%, compared to the year-ago period. This decrease is primarily driven by a$51 million increase in the provision for loan losses due to the deteriorating economic environment as a result of the COVID-19 pandemic. Segment net interest income increased$11 million , or 12%, due to a 9 basis point increase in the net interest margin which is a result of maintaining our pricing discipline while optimizing loan production volumes combined with a decline in funding costs. This increase was also a result of a$1.0 billion , or 5%, increase in average loan balances reflecting strong indirect auto loan originations primarily in the later part of the third quarter of 2019 through most of the first quarter of 2020 as well as continued increases in indirect RV and marine, floor plan and other commercial loans. Noninterest income increased$1 million primarily as a result of fee sharing revenue on sales of interest rate derivative products, while noninterest expense decreased$2 million , or 5%, primarily reflecting lower allocated costs. 2020 1Q Form 10-Q 35
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Table 20 - Key Performance Indicators for
Three Months Ended March 31, Change
(dollar amounts in millions) 2020 2019 Amount Percent
Net interest income $ 43 $ 53 $ (10 ) (19 )%
Provision for credit losses 1 (2 ) 3 150
Noninterest income 50 51 (1 ) (2 )
Noninterest expense 62 64 (2 ) (3 )
Provision for income taxes 6 9 (3 ) (33 )
Net income $ 24 $ 33 $ (9 ) (27 )%
Number of employees (average
full-time equivalent) 1,025 1,053 (28 ) (3 )%
Total average assets $ 6,707 $ 6,218 $ 489 8
Total average loans/leases 6,415 5,914 501 8
Total average deposits 6,100 5,951 149 3
Net interest margin 2.69 % 3.49 % (0.80 )% (23 )
NCOs $ - $ - $ - -
NCOs as a % of average loans and
leases - % - % - % -
Total assets under management (in
billions)-eop $ 15.8 $ 16.4 $ (0.6 ) (4 )
Total trust assets (in billions)-eop 123.7 112.7 11.0 10
eop - End of Period.
2020 First Three Months versus 2019 First Three Months
RBHPCG reported net income of $24 million in the first three-month period of
2020, a decrease of $9 million , or 27%, compared to the year-ago period. Segment
net interest income decreased $10 million , or 19%, due to a 80 basis point
decrease in net interest margin, reflecting both lower deposit and loan spreads.
Average loans increased $0.5 billion , or 8%, primarily due to residential real
estate mortgage loans, while average deposits increased $0.1 billion .
Noninterest income decreased $1 million , or 2%, primarily due to lower revenue
sharing from other segments. Noninterest expense decreased $2 million , or 3%,
primarily due to lower sponsorship expense.
ADDITIONAL DISCLOSURES
Forward-Looking Statements
This report, including MD&A, contains certain forward-looking statements,
including, but not limited to, certain plans, expectations, goals, projections,
and statements, which are not historical facts and are subject to numerous
assumptions, risks, and uncertainties. Statements that do not describe
historical or current facts, including statements about beliefs and
expectations, are forward-looking statements. Forward-looking statements may be
identified by words such as expect, anticipate, believe, intend, estimate, plan,
target, goal, or similar expressions, or future or conditional verbs such as
will, may, might, should, would, could, or similar variations. The
forward-looking statements are intended to be subject to the safe harbor
provided by Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934, and the Private Securities Litigation Reform
Act of 1995.
While there is no assurance that any list of risks and uncertainties or risk
factors is complete, below are certain factors which could cause actual results
to differ materially from those contained or implied in the forward-looking
statements: changes in general economic, political, or industry conditions; the
magnitude and duration of the COVID19 pandemic and its impact on the global
economy and financial market conditions and our business, financial condition,
liquidity, and results of operations; uncertainty in U.S. fiscal and monetary
policy, including the interest rate policies of the Federal Reserve Board ;
volatility and disruptions in global capital and credit markets; movements in
interest rates; reform of LIBOR; competitive pressures on product pricing and
services; success, impact, and timing of our business strategies, including
market acceptance of any new products or services
36 Huntington Bancshares Incorporated
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implementing our "Fair Play" banking philosophy; the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to theDodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC,Federal Reserve ,FDIC , andCFPB ; and other factors that may affect our future results. All forward-looking statements speak only as of the date they are made and are based on information available at that time. We do not assume any obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements. Non-GAAP Financial Measures This document contains GAAP financial measures and non-GAAP financial measures where management believes it to be helpful in understanding our results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein. Fully-Taxable Equivalent Basis Interest income, yields, and ratios on an FTE basis are considered non-GAAP financial measures. Management believes net interest income on an FTE basis provides an insightful picture of the interest margin for comparison purposes. The FTE basis also allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The FTE basis assumes a federal statutory tax rate of 21 percent. We encourage readers to consider the Unaudited Condensed Consolidated Financial Statements and other financial information contained in this Form 10-Q in their entirety, and not to rely on any single financial measure. Non-Regulatory Capital Ratios In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including: • Tangible common equity to tangible assets,
• Tangible equity to tangible assets, and
• Tangible common equity to risk-weighted assets using Basel III definitions.
These non-regulatory capital ratios are viewed by management as useful
additional methods of reflecting the level of capital available to withstand
unexpected market conditions. Additionally, presentation of these ratios allows
readers to compare our capitalization to other financial services companies.
These ratios differ from capital ratios defined by banking regulators
principally in that the numerator excludes goodwill and other intangible assets,
the nature and extent of which varies among different financial services
companies. These ratios are not defined in GAAP or federal banking regulations.
As a result, these non-regulatory capital ratios disclosed by the Company are
considered non-GAAP financial measures.
Because there are no standardized definitions for these non-regulatory capital
ratios, the Company's calculation methods may differ from those used by other
financial services companies. Also, there may be limits in the usefulness of
these measures to investors. As a result, we encourage readers to consider the
Unaudited Condensed Consolidated Financial Statements and other financial
information contained in this Form 10-Q in their entirety, and not to rely on
any single financial measure.
Risk Factors
More information on risk can be found in Item 1A Risk Factors below and in the
Risk Factors section included in Item 1A of our 2019 Form 10-K. Additional
information regarding risk factors can also be found in the Risk Management and
Capital discussion of this report.
Critical Accounting Policies and Use of Significant Estimates
Our Consolidated Financial Statements are prepared in accordance with GAAP. The
preparation of financial statements in conformity with GAAP requires us to
establish accounting policies and make estimates that affect amounts reported in
our Consolidated Financial Statements. Note 1 of the Notes to Consolidated
Financial
2020 1Q Form 10-Q 37
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Statements included in ourDecember 31, 2019 Form 10-K, as supplemented by this report including this MD&A, describes the significant accounting policies we used in our Consolidated Financial Statements. An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on the Consolidated Financial Statements. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results substantially different from those estimates. Our most significant accounting estimates relate to our ACL, valuation of financial instruments, contingent liabilities, income taxes, and deferred tax assets/liabilities. These significant accounting estimates and their related application are discussed in ourDecember 31, 2019 Form 10-K. Allowance for Credit Losses Our ACL atMarch 31, 2020 represents our current estimate of the lifetime credit losses expected from our loan and lease portfolio and our unfunded loan commitments and letters of credit. Management estimates the allowance for credit losses by projecting probability of default, loss given default and exposure at default conditional on economic parameters, for the remaining contractual term. Internal factors that impact the quarterly allowance estimate include the level of outstanding balances, the portfolio performance and assigned risk ratings. Key external economic parameters that directly impact our loss modeling framework include forecasted footprint unemployment rates, interest rates, Consumer Confidence Index, FHFA House Pricing Index and Gross Domestic Product. We regularly review our ACL for appropriateness by performing on-going evaluations of the loan and lease portfolio. In doing so, we consider factors such as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We also evaluate the impact of changes in key economic parameters and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. There is no certainty that our ACL will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ from our reasonable and supportable forecast. Additionally, events adversely affecting specific customers, industries, or our markets such as the current COVID-19 pandemic, could severely impact our current expectations. If the credit quality of our customer base materially deteriorates or the risk profile of a market, industry, or group of customers changes materially, our net income and capital could be materially adversely affected which, in turn could have a material adverse effect on our financial condition and results of operations. The extent to which the current COVID-19 pandemic has and will continue to negatively impact our businesses, financial condition, liquidity and results will depend on future developments, which are highly uncertain and cannot be forecasted with precision at this time. For more information, see Note 5 " Allowance for Credit Losses " of the Notes to Unaudited Condensed Consolidated Financial Statements. Fair Value Measurement Certain assets and liabilities are measured at fair value on a recurring basis and include trading securities, available-for-sale securities, other securities, loans held for sale, loans held for investment, MSRs and derivative instruments. Assets and liabilities carried at fair value inherently include subjectivity and may require the use of significant assumptions, adjustments and judgment. A significant change in assumptions may result in a significant change in fair value, which in turn, may result in a higher degree of financial statement volatility. Significant adjustments and assumptions used in determining fair value include, but are not limited to, market liquidity and credit quality, where appropriate. Valuations of products using models or other techniques are sensitive to assumptions used for the significant inputs. A significant portion of our assets and liabilities that are reported at fair value are measured based on quoted market prices or observable market / independent inputs and are classified within levels 1 and 2. Instruments valued using internally developed valuation models and other valuation techniques that use significant unobservable inputs are classified within level 3 of the valuation hierarchy. At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. As necessary, assets or liabilities may be transferred within hierarchy levels due to changes in availability of 38Huntington Bancshares Incorporated --------------------------------------------------------------------------------
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observable market inputs at the measurement date. The fair values measured at each level of the fair value hierarchy, additional discussion regarding fair value measurements, and a brief description of how fair value is determined for categories that have unobservable inputs, can be found in Note 11 " Fair Values of Assets and Liabilities " of the Notes to Unaudited Condensed Consolidated Financial Statements.Goodwill The emergence of COVID-19 as a global pandemic during the 2020 first quarter has resulted in significant deterioration of the economic environment which has impacted expected earnings. As a result, management performed a qualitative assessment of the goodwill balance atMarch 31, 2020 . The result of this assessment indicated that it was probable that the fair value of each of our reporting units continues to exceed the respective carrying values and therefore management determined that a full goodwill test was not warranted.Goodwill assessments are highly sensitive to economic projections and the related assumptions and estimates used by management. In the event of a prolonged economic downturn or further deterioration in the economic outlook, continued assessments of our goodwill balance will likely be required in future periods. Any impairment charge would not affect Huntington's regulatory capital ratios, tangible common equity ratio or liquidity position. Recent Accounting Pronouncements and Developments Note 2 " Accounting Standards Update " of the Notes to Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2020 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to Unaudited Condensed Consolidated Financial Statements.
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