Loan and Lease Credit Exposure Mix
Refer to the “Loan and Lease Credit Exposure Mix” section of our 2022 Annual Report on Form 10-K for a brief description of each portfolio segment.
The table below provides the composition of our total loan and lease portfolio:
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Table 6 - Loan and Lease Portfolio Composition |
| | | | | | | | | | | | | | | | | | | |
(dollar amounts in millions) | At March 31, 2023 | | At December 31, 2022 | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 47,049 | | | 40 | % | | $ | 45,127 | | | 38 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Commercial real estate | 16,377 | | | 13 | | | 16,634 | | | 14 | | | | | | | | | | | | | |
Lease financing | 5,244 | | | 4 | | | 5,252 | | | 4 | | | | | | | | | | | | | |
Total commercial | 68,670 | | | 57 | | | 67,013 | | | 56 | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | |
Residential mortgage | 22,472 | | | 19 | | | 22,226 | | | 19 | | | | | | | | | | | | | |
Automobile | 13,187 | | | 11 | | | 13,154 | | | 11 | | | | | | | | | | | | | |
Home equity | 10,166 | | | 8 | | | 10,375 | | | 9 | | | | | | | | | | | | | |
RV and marine | 5,404 | | | 4 | | | 5,376 | | | 4 | | | | | | | | | | | | | |
Other consumer | 1,280 | | | 1 | | | 1,379 | | | 1 | | | | | | | | | | | | | |
Total consumer | 52,509 | | | 43 | | | 52,510 | | | 44 | | | | | | | | | | | | | |
Total loans and leases | $ | 121,179 | | | 100 | % | | $ | 119,523 | | | 100 | % | | | | | | | | | | | | |
Our loan and lease portfolio is a managed mix of consumer and commercial credits. 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. Commercial lending by NAICS categories, specific limits for CRE project types, loans secured by residential real estate, large dollar exposures, and designated high risk loan categories 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 and is used to ensure a high quality, well diversified portfolio that is consistent with our overall objective of maintaining an aggregate moderate-to-low, through-the-cycle risk appetite. 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 2022 Annual Report on Form 10-K for our commercial credit underwriting and on-going credit management processes.
Consumer Credit
Refer to the “Consumer Credit” section of our 2022 Annual Report on Form 10-K for our consumer credit underwriting and on-going credit management processes.
The table below provides our total loan and lease portfolio by industry type:
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Table 7 - Loan and Lease Portfolio by Industry Type | |
| | | | | | | | | | | | | | | | | | | | |
(dollar amounts in millions) | At March 31, 2023 | | At December 31, 2022 | | | | | | | |
Commercial loans and leases: | | | | | | | | | | | | | | | | | | | | |
Real estate and rental and leasing | $ | 16,407 | | | 14 | % | | $ | 16,310 | | | 14 | % | | | | | | | | | | | | | |
Retail trade (1) | 11,164 | | | 9 | | | 9,894 | | | 8 | | | | | | | | | | | | | | |
Manufacturing | 8,019 | | | 7 | | | 7,809 | | | 7 | | | | | | | | | | | | | | |
Finance and insurance | 5,033 | | | 4 | | | 5,005 | | | 4 | | | | | | | | | | | | | | |
Health care and social assistance | 4,361 | | | 4 | | | 4,293 | | | 4 | | | | | | | | | | | | | | |
Wholesale Trade | 3,734 | | | 3 | | | 3,922 | | | 3 | | | | | | | | | | | | | | |
Transportation and warehousing | 3,279 | | | 3 | | | 3,246 | | | 3 | | | | | | | | | | | | | | |
Accommodation and food services | 3,261 | | | 3 | | | 3,335 | | | 3 | | | | | | | | | | | | | | |
Professional, scientific, and technical services | 2,054 | | | 2 | | | 1,899 | | | 2 | | | | | | | | | | | | | | |
Other Services | 1,919 | | | 2 | | | 2,097 | | | 2 | | | | | | | | | | | | | | |
Construction | 1,735 | | | 1 | | | 1,757 | | | 1 | | | | | | | | | | | | | | |
Utilities | 1,604 | | | 1 | | | 1,298 | | | 1 | | | | | | | | | | | | | | |
Admin./Support/Waste Mgmt. and Remediation Services | 1,421 | | | 1 | | | 1,370 | | | 1 | | | | | | | | | | | | | | |
Arts, entertainment, and recreation | 1,304 | | | 1 | | | 1,424 | | | 1 | | | | | | | | | | | | | | |
Information | 1,300 | | | 1 | | | 1,167 | | | 1 | | | | | | | | | | | | | | |
Public administration | 656 | | | 1 | | | 667 | | | 1 | | | | | | | | | | | | | | |
Educational services | 471 | | | — | | | 513 | | | — | | | | | | | | | | | | | | |
Agriculture, forestry, fishing, and hunting | 413 | | | — | | | 455 | | | — | | | | | | | | | | | | | | |
Mining, quarrying, and oil and gas extraction | 201 | | | — | | | 196 | | | — | | | | | | | | | | | | | | |
Management of companies and enterprises | 117 | | | — | | | 127 | | | — | | | | | | | | | | | | | | |
Unclassified/other | 217 | | | — | | | 229 | | | — | | | | | | | | | | | | | | |
Total commercial loans and leases by industry category | 68,670 | | | 57 | | | 67,013 | | | 56 | | | | | | | | | | | | | | |
Residential mortgage | 22,472 | | | 19 | | | 22,226 | | | 19 | | | | | | | | | | | | | | |
Automobile | 13,187 | | | 11 | | | 13,154 | | | 11 | | | | | | | | | | | | | | |
Home equity | 10,166 | | | 8 | | | 10,375 | | | 9 | | | | | | | | | | | | | | |
RV and marine | 5,404 | | | 4 | | | 5,376 | | | 4 | | | | | | | | | | | | | | |
Other consumer loans | 1,280 | | | 1 | | | 1,379 | | | 1 | | | | | | | | | | | | | | |
Total loans and leases | $ | 121,179 | | | 100 | % | | $ | 119,523 | | | 100 | % | | | | | | | | | | | | | |
(1) Amounts include $2.4 billion and $2.3 billion of auto dealer services loans at March 31, 2023 and December 31, 2022, respectively.
Credit Quality
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, 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.
Credit quality performance in the 2023 first quarter reflected NCOs of $57 million, or 0.19% of average total loans and leases, annualized, an increase of $38 million, compared to $19 million, or 0.07%, in the year-ago quarter. The increase was driven by a $39 million increase in Commercial NCOs to $29 million in the 2023 first quarter, reflecting realized net credit losses in the current period, compared to net credit recoveries in the prior year period. NPAs decreased from December 31, 2022 by $16 million, or 3%, largely driven by a decrease in commercial and industrial NALs.
14 Huntington Bancshares Incorporated
NPAs and NALs
(This section should be read in conjunction with Note 4 “Loans and Leases” and Note 5 “Allowance for Credit Losses” of the Notes to Consolidated Financial Statements and “Credit Quality” section appearing in Huntington’s 2022 Annual Report on Form 10-K.) NPAs and NALs
Commercial loans and leases are placed on nonaccrual status at 90-days past due, or earlier if repayment of principal and interest is in doubt. Of the $373 million of commercial related NALs at March 31, 2023, $218 million, or 58%, represent loans and leases that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management.
The following table reflects period-end NALs and NPAs detail:
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Table 8 - Nonaccrual Loans and Leases and Nonperforming Assets |
| | | | | | | | | |
(dollar amounts in millions) | At March 31, 2023 | | At December 31, 2022 | | | | | | |
Nonaccrual loans and leases (NALs): | | | | | | | | | |
Commercial and industrial | $ | 273 | | | $ | 288 | | | | | | | |
Commercial real estate | 86 | | | 92 | | | | | | | |
Lease financing | 14 | | | 18 | | | | | | | |
Residential mortgage | 81 | | | 90 | | | | | | | |
Automobile | 4 | | | 4 | | | | | | | |
Home equity | 74 | | | 76 | | | | | | | |
RV and marine | 1 | | | 1 | | | | | | | |
| | | | | | | | | |
Total nonaccrual loans and leases | 533 | | | 569 | | | | | | | |
Other real estate, net: | | | | | | | | | |
Residential | 20 | | | 11 | | | | | | | |
| | | | | | | | | |
Total other real estate, net | 20 | | | 11 | | | | | | | |
Other NPAs (1) | 25 | | | 14 | | | | | | | |
Total nonperforming assets | $ | 578 | | | $ | 594 | | | | | | | |
| | | | | | | | | |
Nonaccrual loans and leases as a % of total loans and leases | 0.44 | % | | 0.48 | % | | | | | | |
NPA ratio (2) | 0.48 | | | 0.50 | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(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.
ACL
(This section should be read in conjunction with Note 5 “Allowance for Credit Losses” of the Notes to Unaudited Consolidated Financial Statements.) Our ACL 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.
We use statistically-based models that employ assumptions about current and future economic conditions throughout the contractual life of the loan. The process of estimating expected credit losses is based on three key parameters: PD, EAD, and 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.
Future economic conditions consider multiple macroeconomic scenarios provided to us by an independent third party and are reviewed through the appropriate committee governance channels described below. These macroeconomic scenarios contain certain variables that are influential to our modeling process, the most significant being unemployment rates and GDP. The probability weights assigned to each scenario are generally expected to be consistent from period to period and determined through our ACL process. 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 macroeconomic scenarios. Lifetime losses for most of our loans and leases are evaluated collectively based on similar risk characteristics, risk ratings, origination credit bureau scores, delinquency status, and remaining months within loan agreements, among other factors.
The baseline scenario used for the 2023 first quarter assumes a weaker pace of job growth will cause the unemployment rate to gradually increase to 4.0% by the end of 2024. The overnight federal funds rate is forecasted to increase to a peak rate of approximately 4.8% in the second quarter of 2023 as the Federal Reserve continues to address the elevated inflation levels. The expectation is that the Federal Reserve would then start to cut rates early in 2024, although monetary policy remains restrictive until the end of 2025. The federal funds rate returns to its neutral rate in early 2026. Inflation is forecasted to drop from an average of 8.0% in 2022, to 3.9% in 2023 and to 2.4% in 2024 as a result of the Federal Reserve’s actions, and as inflation pressures stemming from U.S supply chain stress, U.S labor market conditions, the housing market and global energy prices soften. The GDP forecast is relatively unchanged from the prior quarter, forecasted to be 2.6% by the end of 2024.
Management uses a probability-weighted approach that incorporates a baseline, an adverse and a more favorable economic scenario when formulating that quantitative estimate for the allowance The table below is intended to show how the forecasted path of unemployment and GDP in the baseline scenario has changed since the end of 2022:
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Table 9 - Forecasted Key Macroeconomic Variables |
Baseline scenario forecast | 2022 | | 2023 | | 2024 |
| Q4 | | Q2 | | Q4 | | Q2 | | Q4 |
| | | | | | | | | |
| | | | | | | | | |
Unemployment rate (1) | | | | | | | | | |
4Q 2022 | 3.7 | % | | 3.9 | % | | 4.1 | % | | 4.1 | % | | 3.9 | % |
1Q 2023 | N/A | | 3.4 | | | 3.7 | | | 3.9 | | | 4.0 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Gross Domestic Product (1) | | | | | | | | | |
4Q 2022 | (0.1) | % | | 0.4 | % | | 2.0 | % | | 2.3 | % | | 2.7 | % |
1Q 2023 | N/A | | 1.0 | | | 2.1 | | | 2.4 | | | 2.6 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1) Values reflect the baseline scenario forecast inputs for each period presented, not updated for subsequent actual amounts. |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Management continues to assess the uncertainty in the macroeconomic environment, including geopolitical instability and current inflation levels, considering multiple macroeconomic forecasts that reflected a range of possible outcomes. While we have incorporated estimates of economic uncertainty into our ACL, the ultimate impact of the current inflation levels and attempts to lower inflation through Federal Reserve rate actions will have on the economy remains unknown.
Management develops additional analytics to support adjustments to our modeled results. Our governance committees reviewed model results of each economic scenario for appropriate usage, concluding that the quantitative transactional reserve will continue to utilize scenario weighting. Given the uncertainty associated with key economic scenario assumptions, the March 31, 2023 ACL included a general reserve that consists of various risk profile components, including profiles to capture uncertainty not addressed within the quantitative transaction reserve.
16 Huntington Bancshares Incorporated
Our ACL methodology committee is responsible for developing the methodology, assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. 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 lending commitments, where appropriate. Losses related to the unfunded lending commitments are then recorded as AULC within other liabilities in the Unaudited 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.
The AULC is determined by applying the same quantitative reserve determination process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation. (See Note 1 “Significant Accounting Policies” of the Notes to Consolidated Financial Statements appearing in Huntington’s 2022 Annual Report on Form 10-K.)
Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. For further information, including the ALLL and AULC activity by portfolio segment, refer to Note 5 “Allowance for Credit Losses” of the Notes to the Unaudited Consolidated Financial Statements. The table below reflects the allocation of our ALLL among our various loan and lease categories and the reported ACL:
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Table 10 - Allocation of Allowance for Credit Losses |
| | | | | | | | | | | | | | | | | | | | | | | |
(dollar amounts in millions) | At March 31, 2023 | | At December 31, 2022 | | | | | | |
| Allocation of Allowance | | % of Total ALLL | | % of Total Loans and Leases (1) | | Allocation of Allowance | | % of Total ALLL | | % of Total Loans and Leases (1) | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 915 | | | 43 | % | | 40 | % | | $ | 890 | | | 42 | % | | 38 | % | | | | | | | | | | | | |
Commercial real estate | 492 | | | 23 | | | 13 | | | 482 | | | 23 | | | 14 | | | | | | | | | | | | | |
Lease financing | 50 | | | 2 | | | 4 | | | 52 | | | 2 | | | 4 | | | | | | | | | | | | | |
Total commercial | 1,457 | | | 68 | | | 57 | | | 1,424 | | | 67 | | | 56 | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | 176 | | | 8 | | | 19 | | | 187 | | | 8 | | | 19 | | | | | | | | | | | | | |
Automobile | 151 | | | 7 | | | 11 | | | 141 | | | 7 | | | 11 | | | | | | | | | | | | | |
Home equity | 118 | | | 6 | | | 8 | | | 105 | | | 5 | | | 9 | | | | | | | | | | | | | |
RV and marine | 144 | | | 7 | | | 4 | | | 143 | | | 7 | | | 4 | | | | | | | | | | | | | |
Other consumer | 96 | | | 4 | | | 1 | | | 121 | | | 6 | | | 1 | | | | | | | | | | | | | |
Total consumer | 685 | | | 32 | | | 43 | | | 697 | | | 33 | | | 44 | | | | | | | | | | | | | |
Total ALLL | 2,142 | | | 100 | % | | 100 | % | | 2,121 | | | 100 | % | | 100 | % | | | | | | | | | | | | |
AULC | 157 | | | | | | | 150 | | | | | | | | | | | | | | | | | |
Total ACL | $ | 2,299 | | | | | | | $ | 2,271 | | | | | | | | | | | | | | | | | |
Total ALLL as a % of |
Total loans and leases | 1.77% | | | | | | 1.77% | | | | | | | | | | | | | | | | |
Nonaccrual loans and leases | 402 | | | | | | 373 | | | | | | | | | | | | | | | | |
NPAs | 371 | | | | | | 357 | | | | | | | | | | | | | | | | |
Total ACL as % of |
Total loans and leases | 1.90% | | | | | | 1.90% | | | | | | | | | | | | | | | | |
Nonaccrual loans and leases | 431 | | | | | | 400 | | | | | | | | | | | | | | | | |
NPAs | 398 | | | | | | 382 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
(1)Percentages represent the percentage of each loan and lease category to total loans and leases.
At both March 31, 2023 and December 31, 2022, the ACL was $2.3 billion, or 1.90% of total loans and leases. The marginal absolute increase in the total ACL was driven by loan and lease growth.
NCOs
The table below reflects NCO detail for the three-month periods ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
Table 11 - Quarterly Net Charge-off Analysis |
| Three Months Ended |
| March 31, | | | | | | | | March 31, |
(dollar amounts in millions) | 2023 | | | | | | | | 2022 |
Net charge-offs (recoveries) by loan and lease type: |
Commercial: | | | | | | | | | |
Commercial and industrial | $ | 16 | | | | | | | | | $ | (23) | |
Commercial real estate | 18 | | | | | | | | | 8 | |
Lease financing | (5) | | | | | | | | | 5 | |
Total commercial | 29 | | | | | | | | | (10) | |
Consumer: | | | | | | | | | |
Residential mortgage | — | | | | | | | | | — | |
Automobile | 5 | | | | | | | | | — | |
Home equity | (1) | | | | | | | | | (1) | |
RV and marine | 2 | | | | | | | | | 3 | |
Other consumer | 22 | | | | | | | | | 27 | |
Total consumer | 28 | | | | | | | | | 29 | |
Total net charge-offs | $ | 57 | | | | | | | | | $ | 19 | |
| | | | | | | | | |
| |
| | | | | | | | | |
| | | | | | | | | |
Net charge-offs (recoveries) - annualized percentages: |
Commercial: | | | | | | | | | |
Commercial and industrial | 0.14 | % | | | | | | | | (0.22) | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Commercial real estate | 0.42 | | | | | | | | | 0.22 | |
Lease financing | (0.37) | | | | | | | | | 0.40 | |
Total commercial | 0.17 | | | | | | | | | (0.06) | |
Consumer: | | | | | | | | | |
Residential mortgage | 0.01 | | | | | | | | | — | |
Automobile | 0.14 | | | | | | | | | 0.01 | |
Home equity | (0.02) | | | | | | | | | (0.03) | |
RV and marine | 0.18 | | | | | | | | | 0.20 | |
Other consumer | 6.37 | | | | | | | | | 8.46 | |
Total consumer | 0.21 | | | | | | | | | 0.23 | |
Net charge-offs as a % of average loans and leases | 0.19 | % | | | | | | | | 0.07 | % |
NCOs were an annualized 0.19% of average loans and leases in the current quarter, up from 0.07% in the 2022 first quarter. NCOs for the commercial portfolios were higher, with annualized net charge-offs of 0.17% in the current quarter, compared to net recoveries of 0.06% in the year-ago quarter, reflecting the continued normalization of net charge-offs. Consumer charge-offs were modestly lower in the quarter, compared to the year-ago quarter.
18 Huntington Bancshares Incorporated
Market Risk
(This section should be read in conjunction with the “Market Risk” section appearing in Huntington’s 2022 Annual Report on 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.
We measure 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. Our models incorporate market-based assumptions that include the impact of changing interest rates on prepayment rates of assets and runoff rates of deposits. The models also include our projections of the future volume and pricing of various business lines.
In measuring the financial risks associated with interest rate sensitivity in our balance sheet, we compare 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 immediate 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. In both shock and ramp scenarios with falling rates, we presume that market rates will not go below 0%. The scenarios are inclusive of all executed 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.
We use two approaches to model interest rate risk: Net interest income at risk (NII at risk) and economic value of equity at risk modeling sensitivity analysis (EVE at Risk).
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Table 12 - Net Interest Income at Risk |
| | | | | | | | | |
| Net Interest Income at Risk (%) |
Basis point change scenario | -200 | | -100 | | | | +100 | | +200 |
| | | | | | | | | |
At March 31, 2023 | -6.1 | | | -2.9 | | | | | 2.8 | | | 5.5 | |
At December 31, 2022 | -4.1 | | | -2.0 | | | | | 2.0 | | | 4.0 | |
NII at Risk is used by management to measure the risk and impact to earnings over the next 12 months, using a variety of interest rate scenarios. The NII at Risk results included in the table above reflect the analysis used monthly by management. It models gradual “ramp” -200, -100, +100 and +200 basis point parallel shift scenarios, implied by the forward yield curve over the next twelve months.
The NII at Risk shows that the balance sheet is asset sensitive at both March 31, 2023, and December 31, 2022. The change in sensitivity is primarily driven by changes in the funding mix and hedging activity, including entering into pay-fixed swaps and terminating receive-fixed swaps.
| | | | | | | | | | | | | | | | | | | | | | | | | |
Table 13 - Economic Value of Equity at Risk |
| | | | | | | | | |
| Economic Value of Equity at Risk (%) |
Basis point change scenario | -200 | | -100 | | | | +100 | | +200 |
| | | | | | | | | |
At March 31, 2023 | -0.9 | | | 0.9 | | | | | -3.2 | | | -8.4 | |
At December 31, 2022 | 9.0 | | | 5.9 | | | | | -8.0 | | | -17.3 | |
EVE at Risk provides a sensitivity analysis on shareholder’s equity for longer-term interest rate risk in the banking book. The EVE results included in the table above reflect the analysis used monthly by management. It models immediate -200, -100, +100 and +200 basis point parallel “shock” scenarios.
The change in sensitivity from December 31, 2022 was driven primarily by deposit runoff rate changes, changes in the yield curve and hedging throughout the period.
As of March 31, 2023, Huntington had outstanding LIBOR-based instruments that mature after June 30, 2023, including, loan and lease exposures totaling approximately $16 billion, notional derivative exposure totaling approximately $32 billion, securities of approximately $1 billion, and long-term debt of $347 million. To address the discontinuance of LIBOR in its current form, we established a LIBOR transition team and project plan under the oversight of the CRO and CFO, providing periodic updates to the ROC. Contract remediation efforts coordinated by the LIBOR transition team are scheduled for completion by June 2023. Source systems have been updated to support alternative reference rates. At this time alternative reference rates are predominantly SOFR based. As such, we have developed a SOFR-enabled interest rate risk monitoring framework and a strategy for managing interest rate risk during the transition from LIBOR to SOFR. We continue to monitor market developments and legislative and regulatory updates.
Use of Derivatives to Manage Interest Rate Risk
An integral component of our interest rate risk management strategy is the 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, caps and floors, collars, forward contracts, and forward starting interest rate swaps.
Table 14 shows all swap, swaption, swaption collar and floor positions that are utilized for purposes of managing our exposures to the variability of interest rates. The interest rates variability may impact either the fair value of the assets and liabilities or impact the cash flows attributable to net interest margin. These positions are used to protect the fair value of asset and liabilities by converting the contractual interest rate on a specified amount of assets and liabilities (i.e., notional amounts) to another interest rate index. The positions are also used to hedge the variability in cash flows attributable to the contractually specified interest rate by converting the variable rate index into a fixed rate. The volume, maturity and mix of derivative positions 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 13 “Derivative Financial Instruments” of the Notes to Unaudited Consolidated Financial Statements. The following tables present additional information about the interest rate swaps, swaptions, swaption collars, and floors used in Huntington’s asset and liability management activities at March 31, 2023 and December 31, 2022.
20 Huntington Bancshares Incorporated
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Table 14 - Weighted-Average Maturity, Receive Rate and SOFR/LIBOR Reset Rate on Asset Liability Management Instruments |
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| | | Average Maturity (years) | | | | Weighted-Average Fixed Rate | | Weighted-Average Reset Rate |
(dollar amounts in millions) | Notional Value | | | Fair Value | | |
At March 31, 2023 | | | | | | | | | |
Asset conversion swaps | | | | | | | | | |
Securities (1): | | | | | | | | | |
Pay Fixed - Receive 1 month LIBOR | $ | 8,115 | | | 3.68 | | | $ | 710 | | | 0.93 | % | | 4.81 | % |
Pay Fixed - Receive SOFR | 2,866 | | | 4.45 | | | 90 | | | 2.54 | | | 2.17 | |
Pay Fixed - Receive SOFR - forward starting (2) | 980 | | | 9.17 | | | 3 | | | 2.85 | | | — | |
Loans: | | | | | | | | | |
Receive Fixed - Pay SOFR - forward starting (3) | 2,000 | | | 4.68 | | | (18) | | | 2.83 | | | — | |
Receive Fixed - Pay 1 month LIBOR | 3,275 | | | 0.66 | | | (65) | | | 1.62 | | | 4.74 | |
Receive Fixed - Pay SOFR | 9,750 | | | 3.65 | | | (233) | | | 2.74 | | | 4.28 | |
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Liability conversion swaps | | | | | | | | | |
Receive Fixed - Pay 1 month LIBOR | 1,430 | | | 1.60 | | | (47) | | | 2.01 | | | 4.71 | |
Receive Fixed - Pay SOFR | 6,299 | | | 4.66 | | | (111) | | | 3.16 | | | 3.41 | |
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Purchased swaption collars | | | | | | | | | |
Purchased Interest Rate Swaption Collars (4) | 2,800 | | | 0.11 | | | 27 | | | 3.18 / 4.27 | | — | |
Purchased floors | | | | | | | | | |
Purchased Floor Spread - SOFR (4) | 1,550 | | | 2.95 | | | 19 | | | 2.90 / 3.90 | | — | |
Purchased Floor Spread - SOFR forward starting (4) | 3,450 | | | 3.08 | | | 46 | | | 2.99 / 3.99 | | — | |
Basis swaps | | | | | | | | | |
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Pay SOFR- Receive Fed Fund (economic hedges) (5) | 174 | | | 3.33 | | | — | | | 4.83 | | | 4.83 | |
Pay Fed Fund - Receive SOFR (economic hedges) (5) | 1 | | | 12.56 | | | — | | | 4.87 | | | 4.83 | |
Purchased swaptions | | | | | | | | | |
Pay Fixed - Receive SOFR Swaptions (economic hedges) | 1,500 | | | 1.00 | | | 3 | | | 5.05 | | | — | |
Total swap portfolio (6) | $ | 44,190 | | | | | $ | 424 | | | | | |
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At December 31, 2022 | | | | | | | | | |
Asset conversion swaps | | | | | | | | | |
Securities (1): | | | | | | | | | |
Pay Fixed - Receive 1 month LIBOR | $ | 8,024 | | | 3.89 | | | $ | 834 | | | 0.93 | % | | 4.37 | % |
Pay Fixed - Receive SOFR | 366 | | | 7.02 | | | 49 | | | 1.46 | | | 3.82 | |
Pay Fixed - Receive 1 month LIBOR - forward starting (7) | 91 | | | 7.31 | | | 12 | | | 1.62 | | | — | |
Pay Fixed - Receive SOFR - forward starting (8) | 1,926 | | | 6.17 | | | 85 | | | 2.17 | | | — | |
Loans: | | | | | | | | | |
Receive Fixed - Pay SOFR - forward starting (9) | 2,950 | | | 4.91 | | | (109) | | | 2.64 | | | — | |
Receive Fixed - Pay 1 month LIBOR | 7,875 | | | 1.41 | | | (390) | | | 1.21 | | | 4.20 | |
Receive Fixed - Pay SOFR | 8,700 | | | 3.55 | | | (351) | | | 2.57 | | | 3.90 | |
Liability conversion swaps | | | | | | | | | |
Receive Fixed - Pay 1 month LIBOR | 1,430 | | | 1.85 | | | (60) | | | 2.01 | | | 4.25 | |
Receive Fixed - Pay SOFR | 6,299 | | | 4.91 | | | (201) | | | 3.16 | | | 3.36 | |
Purchased swaption collars | | | | | | | | | |
Purchased Interest Rate Swaption Collars (4) | 4,800 | | | 0.27 | | | (6) | | | 2.87 / 4.05 | | — | |
Basis swaps | | | | | | | | | |
Pay SOFR- Receive Fed Fund (economic hedges) (5) | 174 | | | 3.58 | | | — | | | 4.33 | | | 4.31 | |
Pay Fed Fund - Receive SOFR (economic hedges) (5) | 1 | | | 12.81 | | | — | | | 4.35 | | | 4.33 | |
Total swap portfolio (6) | $ | 42,636 | | | | | $ | (137) | | | | | |
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(1)Amounts include interest rate swaps as fair value hedges of fixed-rate investment securities using the portfolio layer method.
(2)Forward starting swaps effective starting from April 2023 to October 2027.
(3)Forward starting swaps effective starting from April 2023 to January 2025.
(4)The weighted average fixed rates for floor spread and swaption collars are the weighted average strike rates for the upper and lower bounds of the instruments.
(5)Swaps have variable pay and variable receive resets. Weighted Average Fixed Rate column represents pay rate reset.
(6)LIBOR swap instruments that have maturities beyond July 2023 will transition to a SOFR-based rate.
(7)Forward starting swaps effective starting from January 2023 to February 2023.
(8)Forward starting swaps effective starting from January 2023 to October 2027.
(9)Forward starting swaps effective starting from January 2023 to July 2024.
During the first quarter of 2023, we entered into $1.5 billion of interest rate swaptions with an average strike price of 5.05% to reduce the impact on capital from rising rates. These swaptions are economic hedges of interest rate risk attributable to our investment securities with the change in value of these instruments recorded in other noninterest income.
MSRs
At March 31, 2023, we had a total of $485 million of capitalized MSRs representing the right to service $32.5 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 and declines in credit quality. 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 or impairment. 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.
MSR assets are included in servicing rights and other intangible assets in the Unaudited 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 appearing in Huntington’s 2022 Annual Report on Form 10-K for our on-going liquidity risk management processes.)
Liquidity risk is the possibility of us being unable to meet current and future financial obligations in a timely manner. The goal of liquidity management is to ensure adequate, stable, reliable, and cost-effective sources of funds to satisfy changes in loan and lease demand, unexpected levels of deposit withdrawals, investment opportunities, and other contractual obligations. We consider core earnings, strong capital ratios, and credit quality essential for maintaining high credit ratings, which allows us cost-effective access to market-based liquidity. We mitigate liquidity risk by maintaining liquid assets in the form of cash and cash equivalents and securities. In addition, we maintain a large, stable core deposit base and a diversified base of readily available wholesale funding sources, including advances from the FHLB through pledged borrowing capacity, issuance through dealers in the capital markets, and access to certificates of deposit issued through brokers. Liquidity risk is reviewed and managed continuously for the Bank and the parent company, as well as its subsidiaries. At March 31, 2023, management believes current sources of liquidity are sufficient to meet Huntington’s on and off-balance sheet obligations.
22 Huntington Bancshares Incorporated
We maintain a contingency funding plan that provides for liquidity stress testing, which assesses the potential erosion of funds in the event of an institution-specific event or systemic financial market crisis. Examples of institution specific events could include a downgrade in our public credit rating by a rating agency, a large charge to earnings, declines in profitability or other financial measures, declines in liquidity sources including reductions in deposit balances or access to contingent funding sources, or a significant merger or acquisition. Examples of systemic events unrelated to us that could have an effect on our access to liquidity would be terrorism or war, natural disasters, political events, seizure of a major financial institution, or the default or bankruptcy of a major, corporation, mutual fund, or hedge fund. Similarly, market speculation or rumors about us, or the banking industry in general, may adversely affect the cost and availability of normal funding sources. The contingency funding plan outlines the process for addressing a liquidity crisis and provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities and communication protocols for effectively managing liquidity through a problem period.
Our largest source of liquidity on a consolidated basis is core deposits, which provide stable and lower-cost funding. Core deposits were $140.4 billion at March 31, 2023 which comprised 97% of total deposits, compared to $142.1 billion, and 96% of total deposits, at December 31, 2022. The decrease in core deposits, compared to December 31, 2022, was primarily driven by a decrease in commercial core deposits driven by seasonality and shifts to off-balance sheet liquidity solutions we provide for our customers, partially offset by an increase in consumer core deposits. Our core deposits come from a base of primary bank customer relationships and we continue to focus on acquiring and deepening those relationships resulting in our granular and diversified deposit base.
The following table reflects deposit composition detail.
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Table 15 - Deposit Composition | |
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(dollar amounts in millions) | At March 31, 2023 | | At December 31, 2022 | | | | | | |
Total deposits by type: | | | | | | | | | | | | | | | | | | | |
Demand deposits—noninterest-bearing | $ | 36,789 | | | 25 | % | | $ | 38,242 | | | 26 | % | | | | | | | | | | | | |
Demand deposits—interest-bearing | 39,827 | | | 28 | | | 43,136 | | | 29 | | | | | | | | | | | | | |
Money market deposits | 37,276 | | | 26 | | | 36,082 | | | 24 | | | | | | | | | | | | | |
Savings and other domestic deposits | 19,546 | | | 13 | | | 20,357 | | | 14 | | | | | | | | | | | | | |
Core certificates of deposit (1) | 6,981 | | | 5 | | | 4,324 | | | 3 | | | | | | | | | | | | | |
Total core deposits: | 140,419 | | | 97 | | | 142,141 | | | 96 | | | | | | | | | | | | | |
Other domestic deposits of $250,000 or more | 282 | | | — | | | 220 | | | — | | | | | | | | | | | | | |
Negotiable CDs, brokered and other deposits | 4,577 | | | 3 | | | 5,553 | | | 4 | | | | | | | | | | | | | |
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Total deposits | $ | 145,278 | | | 100 | % | | $ | 147,914 | | | 100 | % | | | | | | | | | | | | |
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Total core deposits: | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 61,132 | | | 44 | % | | $ | 64,107 | | | 45 | % | | | | | | | | | | | | |
Consumer | 79,287 | | | 56 | | | 78,034 | | | 55 | | | | | | | | | | | | | |
Total core deposits | $ | 140,419 | | | 100 | % | | $ | 142,141 | | | 100 | % | | | | | | | | | | | | |
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Total deposits (insured/uninsured): | | | | | | | | | | | | | | | | | | | |
Insured deposits | $ | 100,186 | | | 69 | % | | $ | 100,631 | | | 68 | % | | | | | | | | | | | | |
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Uninsured deposits (2) | 45,092 | | | 31 | | | 47,283 | | | 32 | | | | | | | | | | | | | |
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Total deposits | $ | 145,278 | | | 100 | % | | $ | 147,914 | | | 100 | % | | | | | | | | | | | | |
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(1)Includes consumer certificates of deposit of $250,000 or more.
(2)Represents consolidated Huntington uninsured deposits, determined by adjusting the amounts reported in the Bank Call Report (FFIEC 031) by inter-company deposits, which are not customer facing and are therefore eliminated through consolidation. Bank Call Report uninsured deposit balances are reported gross at $52.8 billion, which includes $7.7 billion of inter-company deposits as of March 31, 2023, and $84.6 billion, which includes $37.3 billion of inter-company deposits as of December 31, 2022. Additionally, of the total uninsured deposits, $6.4 billion and $5.8 billion are secured by collateral, at March 31, 2023 and December 31, 2022, respectively.
Cash and cash equivalents were $10.4 billion and $6.7 billion at March 31, 2023 and December 31, 2022, respectively. The $3.7 billion increase in cash and cash equivalents is primarily due to an increase in interest-bearing deposits at the Federal Reserve Bank to support short-term liquidity.
Total securities were $42.4 billion at March 31, 2023, compared to $41.3 billion at December 31, 2022. The $1.0 billion increase in securities compared to December 31, 2022, was primarily due to unrealized gain on available for sale securities and an increase in FHLB stock during the period. At March 31, 2023, the duration of the securities portfolio was 4.7 years, or 3.7 years net of hedging. Securities are pledged to secure borrowing capacity with the FHLB and the Federal Reserve, discussed further in the Bank Liquidity and Sources of Funding section below. At March 31, 2023, securities with market value of $8.7 billion were unpledged.
Sources of wholesale funding include other domestic deposits of $250,000 or more, negotiable CDs, brokered and other deposits, short-term borrowings, and long-term debt. Our wholesale funding totaled $24.8 billion at March 31, 2023, compared to $17.5 billion at December 31, 2022. The increase from year-end is primarily due to an increase in FHLB borrowings.
Bank Liquidity and Sources of Funding
Our primary sources of funding for the Bank are consumer and commercial core deposits. At March 31, 2023, these core deposits funded 74% of total assets (116% of total loans and leases). To the extent we are unable to obtain sufficient liquidity through core deposits and cash and cash equivalents, we may meet our liquidity needs through sources of wholesale funding and asset securitization or sale.
The Bank maintains borrowing capacity at the FHLB and the Federal Reserve secured by pledged loans and securities. The Bank does not consider borrowing capacity at the Federal Reserve a primary source of funding, however, could be used as a potential source of liquidity in a stressed environment or during a market disruption. At March 31, 2023, the Bank’s available contingent borrowing capacity at the FHLB and Federal Reserve totaled $51.1 billion, compared to $53.5 billion at December 31, 2022. We continue to optimize borrowing capacity and early in the second quarter the Bank pledged incremental assets which, after receiving approval from the Federal Reserve, resulted in an increase in overall borrowing capacity of approximately $24 billion. The amount of available contingent borrowing capacity may fluctuate based on the level of borrowings outstanding and level of assets pledged.
At March 31, 2023, we believe the Bank has sufficient liquidity and capital resources to meet its cash flow obligations over the next 12 months and 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.
The parent company had $3.0 billion and $3.5 billion at March 31, 2023 and December 31, 2022 in cash and cash equivalents, respectively.
On April 19, 2023, our Board of Directors declared a quarterly common stock cash dividend of $0.155 per common share. The dividend is payable on July 3, 2023, to shareholders of record on June 19, 2023. Based on the current quarterly dividend of $0.155 per common share, cash demands required for common stock dividends are estimated to be approximately $224 million per quarter. Additionally, on April 19, 2023, our Board of Directors declared a quarterly Series B, Series E, Series F, Series G, Series H, and Series J Preferred Stock dividend payable on July 17, 2023 to shareholders of record on July 1, 2023. On March 29, 2023, our Board of Directors declared a quarterly dividend for the Series I Preferred Stock payable on June 1, 2023 to shareholders of record on May 15, 2023. Total cash demands required for preferred stock dividends are expected to be approximately $40 million per quarter.
During the first three months of 2023, the Bank paid preferred and common dividends to the parent company of $11 million and $189 million, respectively. To meet any additional liquidity needs, the parent company may issue debt or equity securities.
At March 31, 2023, we believe the Company has sufficient liquidity and capital resources to meet its cash flow obligations over the next 12 months and for the foreseeable future.
24 Huntington Bancshares Incorporated
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, caps and floors, swaption collars, 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, third-party performance failures, 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, failed business contingency plans and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with significant contracts, agreements, 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 cyberattacks and, to date, have not experienced any material losses. Cybersecurity threats have increased, primarily through phishing campaigns. We are actively monitoring our email gateways for malicious phishing email campaigns. We have also increased our cybersecurity and fraud 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 has the option to work 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 govern 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 a Model 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 remediation recommendations to the Risk Management Committee. Potential concerns may be escalated to our ROC and our Audit Committee, as appropriate. Significant findings or issues are escalated by the Third Party Risk Management Committee to the Technology Committee of the Board of Directors, as appropriate.
The goal of this framework is to implement effective operational risk-monitoring; 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 hold ourselves to a high standard for adherence to compliance management and seek to continuously enhance our performance.
Capital
We consider disciplined capital management as a key objective. 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 our overall capital adequacy. We believe our current levels of both regulatory capital and shareholders’ equity are adequate.
The following table presents certain regulatory capital data at both the consolidated and Bank levels for each of the periods presented:
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Table 16 - Regulatory Capital Data (1) | | | | | | | | | | | |
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(dollar amounts in millions) | | | At March 31, 2023 | | At December 31, 2022 | | | | | | |
Total risk-weighted assets | Consolidated | | $ | 142,331 | | | $ | 141,940 | | | | | | | |
| Bank | | 141,991 | | | 141,571 | | | | | | | |
CET1 risk-based capital | Consolidated | | 13,588 | | | 13,290 | | | | | | | |
| Bank | | 14,540 | | | 14,133 | | | | | | | |
Tier 1 risk-based capital | Consolidated | | 16,082 | | | 15,467 | | | | | | | |
| Bank | | 15,756 | | | 15,334 | | | | | | | |
Tier 2 risk-based capital | Consolidated | | 3,174 | | | 3,106 | | | | | | | |
| Bank | | 2,378 | | | 2,313 | | | | | | | |
Total risk-based capital | Consolidated | | 19,256 | | | 18,573 | | | | | | | |
| Bank | | 18,134 | | | 17,647 | | | | | | | |
CET1 risk-based capital ratio | Consolidated | | 9.55 | % | | 9.36 | % | | | | | | |
| Bank | | 10.24 | | | 9.98 | | | | | | | |
Tier 1 risk-based capital ratio | Consolidated | | 11.30 | | | 10.90 | | | | | | | |
| Bank | | 11.10 | | | 10.83 | | | | | | | |
Total risk-based capital ratio | Consolidated | | 13.53 | | | 13.09 | | | | | | | |
| Bank | | 12.77 | | | 12.47 | | | | | | | |
Tier 1 leverage ratio | Consolidated | | 8.79 | | | 8.60 | | | | | | | |
| Bank | | 8.63 | | | 8.54 | | | | | | | |
(1) Huntington elected to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period which began January 1, 2022 pursuant to a rule that allows bank holding companies 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. As of March 31, 2023 and December 31, 2022, we have phased in 50% and 25%, respectively, of the cumulative CECL deferral with the remaining impact to be recognized over the remainder of the three-year transition period.
At March 31, 2023, at both the consolidated and Bank level, we maintained Basel III capital ratios in excess of the well-capitalized standards established by the Federal Reserve. The increase in the consolidated CET1 risk-based capital ratio, compared to the prior year end, was primarily driven by current period earnings, partially offset by dividends and the CECL transitional amount.
26 Huntington Bancshares Incorporated
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 appetite 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 $18.8 billion at March 31, 2023, an increase of $1.0 billion or 6% when compared with December 31, 2022. The increase was primarily driven by earnings, net of dividends, improved AOCI, and the issuance of perpetual preferred stock.
Huntington is authorized to make capital distributions that are consistent with the requirements in the Federal Reserve’s capital rule, inclusive of the SCB requirement. Huntington’s SCB requirement associated with its 2022 Capital Plan is 3.3%, effective for the period of October 1, 2022 through September 30, 2023.
Share Repurchases
From time to time our 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.
On January 18, 2023, our Board authorized the repurchase of up to $1.0 billion of common shares within the eight quarter period ending December 31, 2024, subject to the Federal Reserve’s capital regulations. Purchases of common stock under the authorization may include open market purchases, privately negotiated transactions, and accelerated share repurchase programs. During the 2023 first quarter, Huntington repurchased no shares of common stock under the current repurchase authorization. As part of the 2023 capital plan and our current expectation that organic capital will be used for funding loan and lease growth, we do not expect to utilize the share repurchase program during 2023. 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: Commercial Banking, Consumer and Business Banking, Vehicle Finance, and Regional Banking and The Huntington Private Client Group (RBHPCG). The Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense.
To align with our strategic priorities, in the second quarter of 2023 we executed on our organizational realignment to consolidate three of our current major business segments, consisting of Consumer and Business Banking, Vehicle Finance, and RBHPCG, into one new major business segment called Consumer & Regional Banking. This will result in two major business segments, Consumer & Regional Banking and Commercial Banking, to be presented beginning with the second quarter of 2023 reporting.
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 from Treasury / Other. We utilize a full-allocation methodology, where all Treasury / Other expenses, except reported acquisition-related expenses, 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 modeled duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / 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 rates for comparable duration assets (or liabilities).
Net Income by Business Segment
Net income by business segment for the three-month periods ending March 31, 2023 and March 31, 2022 is presented in the following table:
| | | | | | | | | | | |
Table 17 - Net Income by Business Segment |
| Three Months Ended March 31, |
(dollar amounts in millions) | 2023 | | 2022 |
Commercial Banking | $ | 318 | | | $ | 140 | |
Consumer and Business Banking | 430 | | | 181 | |
Vehicle Finance | 44 | | | 67 | |
RBHPCG | 83 | | | 19 | |
Treasury / Other | (273) | | | 53 | |
Net income attributable to Huntington | $ | 602 | | | $ | 460 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Banking | | | | | |
| | | | | | | | | | | | |
Table 18 - Key Performance Indicators for Commercial Banking | | | | | |
| Three Months Ended March 31, | | Change | | | | | |
(dollar amounts in millions) | 2023 | | 2022 | | Amount | | Percent | | | | | |
Net interest income | $ | 570 | | | $ | 418 | | | $ | 152 | | | 36 | % | | | | | |
Provision for credit losses | 40 | | | 131 | | | (91) | | | (69) | | | | | | |
Noninterest income | 157 | | | 141 | | | 16 | | | 11 | | | | | | |
Noninterest expense | 280 | | | 248 | | | 32 | | | 13 | | | | | | |
Provision for income taxes | 85 | | | 38 | | | 47 | | | 124 | | | | | | |
Income attributable to non-controlling interest | 4 | | | 2 | | | 2 | | | 100 | | | | | | |
Net income attributable to Huntington | $ | 318 | | | $ | 140 | | | $ | 178 | | | 127 | % | | | | | |
Number of employees (average FTE) | 2,254 | | | 2,026 | | | 228 | | | 11 | % | | | | | |
Total average assets | $ | 64,424 | | | $ | 56,989 | | | $ | 7,435 | | | 13 | | | | | | |
Total average loans/leases | 56,146 | | | 49,515 | | | 6,631 | | | 13 | | | | | | |
Total average deposits | 36,897 | | | 33,355 | | | 3,542 | | | 11 | | | | | | |
Net interest margin | 3.94 | % | | 3.24 | % | | 0.70 | % | | 22 | | | | | | |
NCOs | $ | 21 | | | $ | (11) | | | $ | 32 | | | NM | | | | | |
NCOs as a % of average loans and leases | 0.15 | % | | (0.09) | % | | 0.24 | % | | NM | | | | | |
28 Huntington Bancshares Incorporated
Commercial Banking reported net income of $318 million in the three-month period of 2023, compared to $140 million in the year-ago period. Segment net interest income increased $152 million, or 36%, primarily due to a 70 basis point increase in NIM, driven by the higher rate environment resulting in an increase in spreads and an increase in average loans and leases, partially offset by an increase in average deposits. The provision for credit losses decreased $91 million, primarily due to a large reserve build that was recorded in the prior year based on the increased geopolitical uncertainty at that time, partially offset by current quarter loan and lease growth. Noninterest income increased $16 million, or 11%, primarily due to an increase in capital markets fees, primarily due to higher advisory fees supported by the impact of the Capstone Partners acquisition, partially offset by lower leasing revenue. Noninterest expense increased $32 million, or 13%, primarily due to an increase in personnel costs reflecting the impact of the Capstone Partners acquisition and an increase in average FTE employees.
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Consumer and Business Banking | | | | | | |
| | | | | | | | | | | | | |
Table 19 - Key Performance Indicators for Consumer and Business Banking | | | | | | |
| Three Months Ended March 31, | | Change | | | | | | |
(dollar amounts in millions) | 2023 | | 2022 | | Amount | | Percent | | | | | | |
Net interest income | $ | 977 | | | $ | 459 | | | $ | 518 | | | 113 | % | | | | | | |
Provision (benefit) for credit losses | 26 | | | (109) | | | 135 | | | 124 | | | | | | | |
Noninterest income | 223 | | | 272 | | | (49) | | | (18) | | | | | | | |
Noninterest expense | 630 | | | 612 | | | 18 | | | 3 | | | | | | | |
Provision for income taxes | 114 | | | 47 | | | 67 | | | 143 | | | | | | | |
Net income attributable to Huntington | $ | 430 | | | $ | 181 | | | $ | 249 | | | 138 | % | | | | | | |
Number of employees (average FTE) | 10,494 | | | 9,600 | | | 894 | | | 9 | % | | | | | | |
Total average assets | $ | 38,077 | | | $ | 38,730 | | | $ | (653) | | | (2) | | | | | | | |
Total average loans/leases | 32,235 | | | 32,134 | | | 101 | | | — | | | | | | | |
Total average deposits | 93,210 | | | 94,464 | | | (1,254) | | | (1) | | | | | | | |
Net interest margin | 4.22 | % | | 1.95 | % | | 2.27 | % | | 116 | | | | | | | |
NCOs | $ | 27 | | | $ | 29 | | | $ | (2) | | | (7) | | | | | | | |
NCOs as a % of average loans and leases | 0.34 | % | | 0.36 | % | | (0.02) | % | | (6) | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Consumer and Business Banking reported net income of $430 million in the three-month period of 2023, an increase of $249 million, or 138%, compared to the year-ago period. Segment net interest income increased $518 million, or 113%, primarily due to a 227 basis point increase in NIM driven by the higher rate environment. The provision for credit losses increased $135 million, or 124%, primarily due to reserve releases in the three-month period of 2022 due to generally improving macro-economic environment at that time. Noninterest income decreased $49 million, or 18%, primarily due to a decrease in gain on sale of loans resulting from the strategic decision to retain the guaranteed portion of SBA loans at origination, lower mortgage banking income reflecting lower salable volume and spreads, and decreased service charges primarily reflecting impact from program changes. Noninterest expense increased $18 million, or 3%, primarily due to an increase in average FTE employees.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Vehicle Finance | | | | | |
| | | | | | | | | | | | |
Table 20 - Key Performance Indicators for Vehicle Finance | | | | | |
| Three Months Ended March 31, | | Change | | | | | |
(dollar amounts in millions) | 2023 | | 2022 | | Amount | | Percent | | | | | |
Net interest income | $ | 114 | | | $ | 120 | | | $ | (6) | | | (5) | % | | | | | |
Provision (benefit) for credit losses | 20 | | | (7) | | | 27 | | | NM | | | | | |
Noninterest income | 3 | | | 3 | | | — | | | — | | | | | | |
Noninterest expense | 41 | | | 45 | | | (4) | | | (9) | | | | | | |
Provision for income taxes | 12 | | | 18 | | | (6) | | | (33) | | | | | | |
Net income attributable to Huntington | $ | 44 | | | $ | 67 | | | $ | (23) | | | (34) | % | | | | | |
Number of employees (average FTE) | 271 | | | 270 | | | 1 | | | — | % | | | | | |
Total average assets | $ | 21,677 | | | $ | 20,932 | | | $ | 745 | | | 4 | | | | | | |
Total average loans/leases | 21,969 | | | 21,155 | | | 814 | | | 4 | | | | | | |
Total average deposits | 1,101 | | | 1,289 | | | (188) | | | (15) | | | | | | |
Net interest margin | 2.11 | % | | 2.29 | % | | (0.18) | % | | (8) | | | | | | |
NCOs | $ | 7 | | | $ | 2 | | | $ | 5 | | | NM | | | | | |
NCOs as a % of average loans and leases | 0.13 | % | | 0.04 | % | | 0.09 | % | | NM | | | | | |
Vehicle Finance reported net income of $44 million in the three-month period of 2023, a decrease of $23 million, or 34%, compared to the year-ago period. Segment net interest income decreased $6 million, or 5%, primarily due to an 18 basis point decrease in the NIM, partially offset by an increase in average earning assets. The provision for credit losses increased $27 million, as prior year continued to reflect reserve releases driven by the generally improving macroeconomic environment at that time.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Regional Banking and The Huntington Private Client Group | | | | | |
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Table 21 - Key Performance Indicators for Regional Banking and The Huntington Private Client Group | | | | | |
| Three Months Ended March 31, | | Change | | | | | |
(dollar amounts in millions) | 2023 | | 2022 | | Amount | | Percent | | | | | |
Net interest income | $ | 68 | | | $ | 49 | | | $ | 19 | | | 39 | % | | | | | |
Provision (benefit) for credit losses | (1) | | | 10 | | | (11) | | | (110) | | | | | | |
Noninterest income | 117 | | | 66 | | | 51 | | | 77 | | | | | | |
Noninterest expense | 81 | | | 81 | | | — | | | — | | | | | | |
Provision for income taxes | 22 | | | 5 | | | 17 | | | NM | | | | | |
Net income attributable to Huntington | $ | 83 | | | $ | 19 | | | $ | 64 | | | NM | | | | | |
Number of employees (average FTE) | 1,115 | | | 1,113 | | | 2 | | | — | % | | | | | |
Total average assets | $ | 10,063 | | | $ | 8,482 | | | $ | 1,581 | | | 19 | | | | | | |
Total average loans/leases | 9,778 | | | 8,178 | | | 1,600 | | | 20 | | | | | | |
Total average deposits | 9,231 | | | 9,520 | | | (289) | | | (3) | | | | | | |
Net interest margin | 2.81 | % | | 2.03 | % | | 0.78 | % | | 38 | | | | | | |
NCOs | $ | 1 | | | $ | — | | | $ | 1 | | | NM | | | | | |
NCOs as a % of average loans and leases | 0.04 | % | | — | % | | 0.04 | % | | NM | | | | | |
Total assets under management (in billions)—eop | $ | 22.9 | | | $ | 24.2 | | | $ | (1.3) | | | (6) | | | | | | |
Total trust assets (in billions)—eop | 150.3 | | | 134.6 | | | 15.7 | | | 12 | | | | | | |
eop - End of Period
30 Huntington Bancshares Incorporated
RBHPCG reported net income of $83 million for the first three-month period of 2023, an increase of $64 million, compared to the year-ago period. Segment net interest income increased $19 million, or 39%, primarily due to an increase in average earnings assets and a 78 basis point increase in NIM, largely driven by the higher rate environment. Average loans and leases increased $1.6 billion, or 20%, due to growth in residential mortgages. Average deposits decreased $289 million, or 3%, primarily related to declines in core deposits. The provision for credit losses decreased $11 million, primarily due to a reserve build in the first quarter of 2022 based on increased geopolitical uncertainty at that time. Noninterest income increased $51 million, or 77%, primarily due to the sale of our RPS business which resulted in a $57 million gain including associated goodwill allocation.
Treasury / Other
The Treasury / Other function includes revenue and expense related to assets, liabilities, derivatives, 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, acquisition-related expenses, if any, 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.
Treasury / Other reported a net loss of $273 million in the three-month period of 2023, a decrease of $326 million, compared to the year-ago period, driven by a decrease in net interest income, partially offset by a decrease in provision for income tax. Segment net interest income decreased $420 million, primarily due to an increase in FTP credits on deposits allocated to the business segments.
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; deterioration in business and economic conditions, including persistent inflation, supply chain issues or labor shortages, instability in global economic conditions and geopolitical matters, as well as volatility in financial markets; the impact of pandemics, including the COVID-19 pandemic and related variants and mutations, and their impact on the global economy and financial market conditions and our business, results of operations, and financial condition; the impacts related to or resulting from recent bank failures and other volatility, including potential increased regulatory requirements and costs and potential impacts to macroeconomic conditions, which could affect the ability of depository institutions, including us, to attract and retain depositors and to borrow or raise capital; unexpected outflows of uninsured deposits which may require us to sell investment securities at a loss; rising interest rates which could negatively impact the value of our portfolio of investment securities; the loss of value of our investment portfolio which could negatively impact market perceptions of us and could lead to deposit withdrawals; the effects of social media on market perceptions of us and banks generally; cybersecurity risks; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve; volatility and disruptions in global capital and credit markets; movements in interest rates; transition away from 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 including those 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 the Dodd-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, and CFPB; and other factors that may affect the future results of Huntington.
All forward-looking statements speak only as of the date they are made and are based on information available at that time. Huntington does 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 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.
32 Huntington Bancshares Incorporated
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 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.
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 Statements included in our 2022 Annual Report on 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 critical accounting policies include the allowance for credit losses, fair value measurement, and goodwill. The policies, assumptions, and judgments related to fair value measurement and goodwill are described in the Critical Accounting Policies and Use of Significant Estimates section within the MD&A of Huntington’s 2022 Annual Report on Form 10-K. The following details the policies, assumption, and judgments related to the allowance for credit losses.
Allowance for Credit Losses
Our ACL at March 31, 2023 represents our current estimate of the lifetime credit losses expected from our loan and lease portfolio and our unfunded lending commitments. Management estimates the ACL 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.
One of the most significant judgments influencing the ACL estimate is the macroeconomic forecasts. Key external economic parameters that directly impact our loss modeling framework include forecasted unemployment rates and Gross Domestic Product. Changes in the economic forecasts could significantly affect the estimated credit losses, which could potentially lead to materially different allowance levels from one reporting period to the next.
Given the dynamic relationship between macroeconomic variables within our modeling framework, it is difficult to estimate the impact of a change in any one individual variable on the allowance. As a result, management uses a probability-weighted approach that incorporates a baseline, an adverse and a more favorable economic scenario when formulating the quantitative estimate.
However, to illustrate a hypothetical sensitivity analysis, management calculated a quantitative allowance using a 100% weighting applied to an adverse scenario. This scenario includes assumptions around inflation remaining elevated due to persistent shortages and concerns about a wage price spiral. Increased geopolitical tensions between China and Taiwan impact the supply chain for semiconductors. The threat of a wider conflict causes consumer confidence to fall. Additionally, the Russian invasion lasts longer than in the baseline scenario further impacting the supply chain. The combination of elevated inflation, increasing supply chain shortages, political tensions and the federal funds rate remaining elevated cause the stock market to fall. The economy falls into a recession in the second quarter of 2023. Under this scenario, as an example, the unemployment rate increases from baseline levels and remains elevated for a prolonged period, the rate is estimated at 7.1% and 7.3% at the end of 2023 and 2024, respectively. This forecast reflects unemployment rates that are approximately 3.4% and 3.3% higher than baseline scenario projections of 3.7% and 4.0%, respectively, for the same time periods.
To demonstrate the sensitivity to key economic parameters used in the calculation of our ACL at March 31, 2023, management calculated the difference between our quantitative ACL and this 100% adverse scenario. Excluding consideration of qualitative adjustments, this sensitivity analysis would result in a hypothetical increase in our ACL of approximately $1.1 billion at March 31, 2023. This hypothetical increase is reflective of the sensitivity of the rate of change in the unemployment variable on our models.
The resulting difference is not intended to represent an expected increase in allowance levels for a number of reasons including the following:
•Management uses a weighted approach applied to multiple economic scenarios for its allowance estimation process;
•The highly uncertain economic environment;
•The difficulty in predicting the inter-relationships between the economic parameters used in the various economic scenarios; and
•The sensitivity estimate does not account for any general reserve components and associated risk profile adjustments incorporated by management as part of its overall allowance framework.
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 geopolitical instability, risks of inflation including a near-term recession, or the emergence of a more contagious and severe COVID-19 variant, 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 geopolitical instability, risks of inflation, and the COVID-19 pandemic 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 4 “Loans and Leases” and Note 5 “Allowance for Credit Losses” of the Notes to Unaudited Consolidated Financial Statements.