Huntington Bancshares Inc (HBAN) — Q1 2020 Earnings Call Transcript

Thanks Cheryl. Welcome. I'm Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we'll be reviewing can be found on the Investor Relations section of our website, www.huntington.com. The call is being recorded and will be available for replay starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; Zach Wasserman, Chief Financial Officer; and Rich Pohle, Chief Credit Officer. As noted on Slide 2, today's discussion, including the Q&A period, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and the material filed with the SEC, including our most recent forms 10-K, 10-Q, and 8-K filings. Let me now turn it over to Steve, where he'll start on Slide 3.

Thanks Mark, and thank you to everyone for joining the call today. Before we begin, I'd like to express my sympathies to those of you who've lost family members or friends who've been directly impacted by the virus. We’ll open the day with an overview of how we've reacted to the onset of the pandemic, both the challenges it has created as well as the opportunities. The pandemic has caused unprecedented disruption around the world. Extreme market volatility is all through the global economic landscape, and the virus has changed the way we live our daily lives. Changed how business is conducted in the short term, and probably the long term as well. For Huntington, I believe our purpose and our deeply rooted culture are extraordinary assets. Our purpose of looking out for people has guided our planning and responses to the pandemic. From the beginning, we recognized that the pandemic is first and foremost a public health crisis. Therefore, our priority has always been the safety and well-being of our colleagues and our customers. Many of our colleagues are on the frontlines with our customers every day, and it has challenged us to serve our customers in new ways. To ensure their safety in our branches, we moved early to a drive-through-only model, allowing in-person meetings by appointment only. We’ve closed all in-store branches and traditional branches that did not have a drive-through. For most other colleagues, we implemented a work-from-home policy, and now have more than 80% of our colleagues working remotely. This was possible because of the commitment and flexibility of our colleagues and because of the tremendous work by our technology teams to keep everyone connected and productive. We've benefited from the diligent work performed by our business continuity planning teams over the years. We've also increased our communication with colleagues, not only to keep them informed but also to keep them engaged and in a position to help our customers. Finally, we added new benefits for our colleagues, such as emergency paid time off and other programs for those whose families were directly impacted by the virus. And we took actions to enhance the mental and physical well-being of our colleagues. It was clear immediately that our customers would face financial hardships because of the pandemic. We took swift action early and publicly announced a variety of relief program measures that included loan payment deferrals, fee waivers, and the suspension of foreclosures and repossessions. These measures addressed our customers' critical short-term needs, but we believe they also demonstrated our purpose in action, showing our customers that we are there for them now and we’ll continue to support them in the future. We believe it's in our mutual best interest to work with our customers during tough times. Relationships are strengthened in these moments. Thousands of colleagues from across the bank mobilized to help small business and commercial customers access the SBA paycheck protection program. And over the last three weeks, we've redeployed and trained over 700 colleagues to support the heavy volume of SBA applications. I'm pleased to say that we processed almost 26,000 applications in record time, with loan volume of more than $6.1 billion. We were able to process almost every one of these applications into the SBA E-Tran before it closed when funding was exhausted on April 16. We entered 2020 with a relatively healthy economic backdrop across our footprint, and the prospects for the national economy appear to be picking up. However, the pandemic has altered that trajectory for the foreseeable future, and we believe the economy will be challenged for some time. We’ve tried to assess what is in store for the economy now. We've informed our thinking with multiple potential economic scenarios. The best-case scenario is characterized by a deep V-shaped recovery with a trough in the second quarter, followed by relatively strong recovery later this year. A more likely scenario could be described as a long U-shaped recovery in which the trough extends later into the year, and the economy does not recover back to pre-COVID activity levels until well into 2022. Over the course of the last two months, the economic outlook has progressively deteriorated. It appears that the reopening of the economy will be more protracted than initially expected. And a U-shaped recovery is the increasingly likely scenario. So given this highly uncertain environment and rapidly evolving outlook, we do not believe we can provide any meaningful expectations for the full year at this time. Therefore, we have withdrawn our formal 2020 full-year guidance. Our visibility is generally limited to the next few months. The range of potential outcomes on the key metrics is quite wide. Instead, Zach will provide some near-term expectations later in the presentation. Our conservative view on the economic outlook also informs our thinking on how we manage capital liquidity and credit. Zach and Rich will discuss our current metrics on these items later, but I'd like to discuss generally how we're thinking about risk management. As we've previously discussed over the past decade, we've fundamentally changed Huntington's enterprise risk management. We believe it's now a strength for the company as compared to a clear weakness during the prior cycle. Slide 10 in the presentation details several of the key improvements we've implemented, but they all began with the establishment of our aggregate moderate-to-low risk appetite in 2009 and the alignment of our credit strategy and policy with that appetite. We also centralized credit underwriting and portfolio management, implemented credit concentration limits, and materially repositioned the balance sheet over time. We implemented a deep relationship focus across the bank, focusing on primary bank relationships and exiting loan relationships that did not meet appropriate returns on our hurdles. In subsequent years, we took actions such as tightening our consumer lending standards to focus on super-prime customers across all our consumer lending products and tightened our underwriting on commercial real estate. We established conservative standards and policies for leverage lending as well. We pointed out over time that the only comparison of potential loss for this sector is that of the Federal Reserve's DFAST stress test. As shown on Slide 11, our modeled cumulative loan losses in the Fed’s severely adverse scenario are consistently among the best in the peer group. As we assess the current environment with respect to credit impact, we've tried to be conservative, and you can see this in the level of provisioning and our allowance for credit losses. We're taking a similar conservative approach to capital. Our capital ratios are strong. We intend to maintain high capital ratios as a source of strength to support our customers' needs and to be positioned to take advantage of growth opportunities. With that, let me turn it over to Zach.

Thanks Steve, and good morning everyone. Slide 4 provides the highlights for the 2020 first quarter. Clearly, results were significantly impacted by the COVID-19 pandemic. While our underlying earnings momentum was strong, first-quarter results included a provision for credit losses of $441 million, over 3.5 times net charge-offs recognized during the quarter. This was driven by the severely weakened economic outlook compared to the fourth quarter of 2019. Rich will go into more detail regarding the drivers of the increase in our provision shortly, but now let's turn to Slide 5 to review our pretax pre-provisioned earnings. Year-over-year pretax pre-provision earnings growth was 2%. We believe this is strong performance in light of the challenges of the interest rate environment and the rapid decline in short-term rates year-to-date. Total revenue increased 1% versus the year-ago quarter as growth in fee income more than offset modest pressure on spread revenues, specifically robust mortgage banking income growth of 176% and 50% growth in capital markets fees drove the $42 million or 13% year-over-year growth in non-interest income. FTE net interest income decreased $33 million or 4% year-over-year as 25 basis points of NIM compression overwhelmed 3% growth in average earning assets. On a linked quarter basis, the NIM expanded two basis points, as we continue to be pleased with the results of our hedging program and our diligent efforts to reduce our deposit costs. I would like to call your attention to two slides in the appendix that provide important additional information regarding our efforts in these two areas to support the margin. Slide 28 summarizes the hedging actions we've taken to reduce the unfavorable impacts of interest rate volatility and lower interest rate environments. We continuously monitor and prudently refine our interest rate risk management as the interest rate environment, balance sheet mix, and other factors necessitate. Slide 29 provides an update on the reduction in deposit costs as CDs and money market promotional rates repriced lower and we actively managed commercial deposit costs. The slide illustrates the downward trajectory of our total interest-bearing deposit costs by month since July 2019, including a 21 basis point decline from February to March. We expect this downward trend to continue given the deposit repricing opportunities that remain in 2020. Total expenses were essentially unchanged from the year-ago quarter. This expense discipline reflects the actions we took in the 2019 fourth quarter to reduce our overhead expense run rate, including the reduction of 200 positions and the closure of 30 in-store branches, as well as actions we took during Q1 to quickly react to the current environment, balanced against the impact of continued investment in our technology capabilities. During the quarter, we began the first steps of a multipart expense management plan for 2020, which provided some benefit in the quarter by reducing the most immediately flexible expense lines. I will provide more details on this later. Finally, I would like to note that the normal slides detailing comparisons for our net interest income and interest margin, fee income, and non-interest expense can be found in the appendix. Turning to Slide 6, average earning assets increased to $2.6 billion or 3% compared to the year-ago quarter. Average total securities increased 5% from the year-ago quarter, reflecting portfolio growth and the mark-to-market on our available-for-sale securities. We are no longer reinvesting securities cash flows and are using this liquidity to fund loan growth. Average loans and leases increased $900 million or 1% year-over-year, primarily driven by the consumer portfolio. Consumer loan growth remained focused on the residential mortgage portfolio, reflecting the robust originations of the past four quarters. Average commercial and industrial loans increased 1% from the year-ago quarter as commercial activity was restrained by economic uncertainty during the first two months of the quarter. However, on a linked quarter basis, you saw end-of-period CNI loans grow 7%, reflecting significant drawdown activity on credit lines. During March, we saw $2.5 billion of commercial credit lines. While we've seen draw activity continue in the first weeks of April with another $700 million drawn through April 15, the pace has started to slow significantly. It is uncertain how long customers will retain these funds as extra liquidity and a backstop against ongoing disruption in the credit markets. We continue to actively manage our commercial real estate portfolio around current levels, with average CRE loans reflecting a 2% year-over-year decrease. Turning now to Slide 7, average core deposits increased 1% year-over-year. Note that this growth rate was negatively impacted by the June 2019 sale of the Wisconsin retail branch network, which included approximately $725 million or almost 1% of core deposits. While on a linked quarter basis, end-of-period total deposits increased 5%, reflecting the aforementioned draws of commercial lines that were subsequently maintained on the balance sheet in various commercial deposit products. Importantly, the amount of commercial deposit inflows over the past several weeks has essentially matched the amount of commercial line draws, allowing us to maintain excess liquidity to meet future customer lending needs. We continue to see a migration in deposit balances from CDs and savings into money market accounts, reflecting shifting customer preferences and a shift in the focus of our promotional pricing. Average money market deposits increased 8% year-over-year, while savings decreased by 7% and core CDs decreased by 35%. We expect this dynamic to continue through 2020. Average interest-bearing DDA deposits increased 7% year-over-year, while non-interest-bearing DDA increased by 1%. I showed on Slide 36 in the appendix, we are very pleased that our consumer non-interest-bearing deposits increased 5% year-over-year. This growth highlights our continued focus on new customer acquisition and relationship deepening. Slide 8 illustrates the continued strength of our capital ratios; the common equity tier one ratio or CET1 ended the quarter at 9.47%, down 37 basis points year-over-year. The tangible common equity ratio or TCE ended the quarter at 7.52%, down five basis points from a year ago. During the first quarter, through mid-March, we repurchased 7.1 million common shares at an average cost of $12.38 per share or a total of $88 million. When the COVID-19 pandemic first started to impact the U.S., we paused our buyback for the remainder of the first quarter. We do not currently intend to repurchase any shares for the balance of 2020. This morning, we announced the Board declared the second quarter cash dividend of $0.15 per common share, unchanged from the prior quarter. We expect to sustain the dividend at this level. During periods of macro stress and market volatility, managing liquidity is paramount. Our position of strength and liquidity draws its foundation from our deposit base and the depth of our relationships with our customers. A ratio of loans to deposits stable at 90%. In addition, we have considerable additional sources of liquidity, including our portfolio of liquid securities and borrowing capacity at the Federal Home Loan Bank and Federal Reserve discount window. Slide 9 highlights our relative capital strength. Over the past few years, we have maintained our capital position and are now in the top third of regional banking peers on total risk-based capital. Our dividend yield is also in the high end of the peer group. Let me now turn it over to Rich to cover credit, including CECL.

Thanks, Zach. Before I provide details on the performance of the first quarter, I wanted to elaborate on the comments Steve touched on at the beginning of the call. Slide 10 details some of these decisions we have made and credit risk management enhancements we have implemented. In 2017, we heightened our underwriting standards for leverage lending. Since we drafted our leverage lending policy in 2015, we have used a conservative senior leverage multiple of 2.5 times to qualify as a leverage loan for our borrowers with less than $500 million of revenues. Also in 2017, we began leveraging the underwriting infrastructure and standards of our auto finance business, the RV and marine portfolio that was expanded through the FirstMerit acquisition. We call that our indirect auto and floorplan dealer – dealer floorplan portfolios are among the best-performing in defense. We've prepared for the eventual economic downturn; we adjusted our healthcare portfolio by curtailing new construction originations in the long-term care segment. Our healthcare construction portfolio is now down 60% from where it was in 2016. Over the past couple of years, we have continued to refine our credit underwriting, consistent with our aggregate moderate-to-low risk appetite. We have increased FICO score cuts across our HELOC and Herman Green books and held our commercial businesses to higher standards with respect to credit policy exceptions. So we enter the current credit environment with a portfolio that has been continually fine-tuned over the last several years. Slide 11 illustrates the relative rankings of modeled cumulative loan losses for Huntington and our peers and the Federal Reserve's severely adverse scenarios of the DFAST exercise. As Steve has mentioned over time, this is the only true comparison of credit risk across the sector that we know of, and it provides us independent validation of the credit risk management we have implemented. We like that our portfolio is evenly split between consumer and commercial businesses. It gives us nice diversification in periods of stress, and our DFAST numbers reflect as much. Still, the aforementioned steps have strengthened the quality of our loan portfolios. Turning now to the first quarter credit results and metrics. Slide 12 provides a walk of our allowance for credit losses or ACL, following the adoption of CECL on January 1, 2020, and the first quarter’s provision. The ACL increased to 2.05% of total loans, up from 1.18% at 2019 year-end. The increase was comprised of the $393 million day-one adjustment and a $323 million reserve build in day-two provisioning during the first quarter. As you recall, the day-one increase was a function of our 50% weighting in the consumer portfolio, which has a much longer weighted average life and therefore, a larger lifetime loss under CECL. For the quarter, our reserve build consisted of a $258 million increase due primarily to the ongoing economic uncertainty and a $65 million net increase in our specific reserves, almost exclusively against our oil and gas portfolio. The Q1 ACL now includes a 20% reserve against our oil and gas portfolio. For multiple data points, we used to size the adjustment we made in Q1, including the Moody's baseline scenario that showed unemployment rising to near 9% and GDP levels falling by 18% in Q2 and different levels of recovery in subsequent quarters. We also weighed the unprecedented level of government stimulus, both to consumers and businesses, and the potential support to the economy it will provide. These factors drove our Q1 provision. The more recent April economic models now show further deterioration with unemployment reaching 12.5% and GDP falling by 30% in Q2, and an improvement in Q3 that provides less of a net recovery than the March base case showed. We will continue to evaluate data points like these as we size our provision expense for the second quarter. Slide 13 shows our NPAs and TDRs and demonstrates the impact that our oil and gas portfolio has had on our overall level of NPAs. We have discussed for several quarters the challenges that we see with this portfolio and have been proactive in recognizing the earnings impact we anticipate as commodity prices continue to range below economical levels for this industry. Oil and gas NPAs represent just under half of our commercial NPAs and one-third of our overall NPAs. They are also a significant contributor to our Q1 NPA increase. Notably, over 90% from a dollar standpoint of these NPAs remain current with respect to principal and interest payments. Outside of our oil and gas portfolio, commercial NPAs were reduced in the first quarter by $65 million. Slide 14 demonstrates that we have a fairly modest exposure to some of the areas that have been hardest hit by COVID-19 to date. We have recently completed a deep dive since nearly all these portfolios and are comfortable with our team's assessment of the current situation. Our restaurant exposure is primarily national quick service brands that have maintained drive-up operations, and our sandwich and pizza chain customers have been opened for takeout service to offset the declines in-house people. Slide 15 details our leveraged lending portfolio. Our conservative definition uses 2.5 times senior leverage for borrowers with under $500 million of revenues to account for heightened risks in leveraging smaller companies. Our leveraged loan book represents under 4% of our total loans, and as a percentage of capital, it is at its lowest point in several years. We focus on borrowers that are weighted to our manufacturers as opposed to service and other asset-light borrowers. They tend to provide more collateral. Within the manufacturing segment of our leveraged lending book, there are no subsegments that account for more than 20%. We've deliberately avoided covenant-light term loan-B structures because to play in that market generally requires providing an under-structured parry pursue revolving credit commitment as well. That revolver is typically undrawn at closing but represents potential contingent risk in a down cycle. We hold regular reviews of this portfolio and underwriting follows a consistent corporate process with a designated leveraged lending credit executive responsible for its review. Slide 16 provides a snapshot of key credit quality metrics for the quarter. Net charge-offs represented an annualized 62 basis points of average loans and leases in the current quarter, up from 39 basis points in the prior quarter and up from 38 basis points in the year-ago quarter. The increase was centered on the oil and gas portfolio and one large coal-related commercial credit, which together made up approximately three-fourths of the total commercial net charge-offs. The oil and gas portfolio continues to be impacted by low commodity prices and limited capital markets activity. As I mentioned earlier, we have allocated significant reserves against this portfolio. Annualized net charge-offs, excluding oil and gas and coal-related losses, were 30 basis points, demonstrating that the balance of our portfolio performed well in Q1. Our remaining coal exposure is under $200 million, of which 20% carries an investment-grade guarantee. Non-performing asset ratio increased 9 basis points linked quarter and 14 basis points year-over-year to 75 basis points due to the oil and gas impact I described earlier. Consumer charge-offs were down to 35 basis points in Q1 as compared to 41 basis points a year ago, demonstrating our continued strong consumer portfolio. As always, we have provided additional granularity by portfolio in the analyst package in the slides. Let me turn it back over to Zach.

Thank you, Rich. As Steve mentioned earlier, we have withdrawn our 2020 full-year guidance. Historically, we have refrained from providing quarterly guidance as it implies a much shorter time horizon than we manage the company. That said, we want to provide you as much insight into key business trends as we can. So we will focus on where we can frame realistic expectations; therefore, Slide 17 provides comments on the second quarter. Starting with loans, the $3.2 billion of commercial line draws we saw in March and into early April will drive average commercial loans 4% to 5% higher over the near term, excluding any impact of the $6 billion of SBA PPP loans and any additional SBA PPP loans made in the next phase. We currently expect the majority of commercial line draws to remain outstanding for the next several months. The duration of the PPP loans is uncertain, but we expect a large majority of them to be forgiven and to come off the sheet quickly. We expect consumer loans to be flat to modestly lower. The auto portfolio, and to a lesser extent, the RV/marine portfolio is expected to reduce as vehicle sales activity declines. We expect the pre-existing trend of runoff in home equity to continue, and we expect the residential mortgage portfolio to be flat to modestly higher in the second quarter, as a robust level of refinancing activity acts as a governor on growth. We expect average core deposits to increase 2% to 3% linked quarter. Similar to our expectations for commercial loans, we expect the recent influx of commercial deposits, again excluding the impact of PPP, to remain on the balance sheet through the second quarter. We expect average consumer core deposits to be flat to slightly higher as slowing customer deposit acquisition is offset by similar reductions in attrition given altered branch traffic and consumer behaviors. On the other hand, we expect the bulk of the proceeds of the PPP program to steadily flow out of the bank over the next eight weeks, consistent with the intent of the program. We do not expect deposit growth to fully fund loan growth in the second quarter. Moving to the income statement, provisioning is a key driver of variability in the Q2 earnings outlook, but revenue and non-interest expenses also have a wider than normal range of possible outcomes. We've modeled various realistic scenarios for the revenue and expense outlook, some of which provide the opportunity for us to achieve our annual goal of positive operating leverage and some of which do not. We continue to believe that positive operating leverage is an important part of our long-term value creation model, but we will not allow a short-term view of this one metric to dictate our decisions. We constantly strive to find the right balance between short- and long-term results. Within these confines, we expect total revenue to decline 4% to 5% linked quarter as the larger average balance sheet is more than offset by moderate pressure on the organic NIM and the COVID-19 related declines in fee income. Customer activity-based fee income lines, including deposit service charges, card, and payment processing, are all expected to be pressured. Mortgage banking is expected to remain robust, but historically wide secondary marketing spreads are expected to gradually reduce. All combined, our current expectations for fee income to be down approximately 10% sequentially. We have a little more control and less visibility into the expense outlook for the second quarter. We expect non-interest expenses to increase between 5% and 6% on a sequential basis, driven primarily by the CECL increase in compensation-related expenses related to the annual ramp of long-term incentives and annual merit increases, partially offset by our expense reduction actions. On a year-over-year basis, expenses would be lower by 2%. We have begun a rigorous expense management plan. We entered 2020, like prior years, having constructed expense management contingency plans, and when the challenges facing 2020 became clear, we began implementing these plans. Our approach is focused on four categories of expenses: discretionary expenses, such as travel and sponsorships; investments, including marketing, the pacing and prioritization of digital and technology investments and planned business expansions; structural expenses, such as the size and composition of our branch network and corporate facilities infrastructure; and finally, organizational expenses, which include the size of the organization and compensation levels across the company. The actions we will take across these categories vary in terms of how quickly they can be implemented. The quickest expense levers we can pull are within discretionary spending. Our travel and entertainment spending has been reduced dramatically as a result of the lockdown and social distancing measures. We are also curtailing non-essential consulting and outside services expenses. In the investment category, given the macro environment depressing customer acquisition activities, we are prudently reducing near-term marketing expenses. We're also scrutinizing all pre-existing business expansion plans and have delayed some initiatives; however, we are maintaining our digital and mobile technology investments. While less immediate impact, the decisions regarding structural and organizational expenses will provide opportunities to reduce our future expense trajectory. We will not be providing details at this time regarding the ultimate scale or timing of our expense actions, but know that we are taking decisive action. Finally, the most uncertain item in the earnings outlook is credit provisioning. We currently expect net charge-offs in the second quarter to be near the high end of our average through-the-cycle target range of 35 to 55 basis points. This is reflective of the ongoing pressure in the oil and gas portfolio, as well as broader economic considerations. Fundamentally, our credit remains sound. However, the economic outlook has continued to deteriorate since quarter-end and remains highly uncertain. This will result in elevated provisioning and additional reserve building in the second quarter and most likely for the next several quarters. It is much too early to estimate the ultimate size of the additional reserve build, but you should expect us to remain conservative in our approach to credit risk management. I will now turn it over to Mark so we can get to your questions.

Thanks, Zach. Sherry, we will now take questions. We ask, as a courtesy to your peers, that each person ask only one question and one related follow-up. If that person has any additional questions, he or she can add themselves back into the queue. Thank you.

Hi. Good morning. Thank you.

Hi, Erika.

Hi. My first question is for Rich. I'm wondering if you could give us a sense of how your allowance was allocated by loan category, please.

Yes. By loan category, I mean we've got – the consumer was about $144 million, and commercial was $261 million to get to the 2.05% total allowance. That's the breakdown that we've got for that.

Got it.

I think, Erika, you have to – the challenge that we have with the allowance in this quarter is the models really weren't trained for this, right? And so we had the severe decline in the economic scenario and then the government stimulus that is forthcoming but really hasn't shown up yet at the end of the first quarter. So there's a lot of judgment that went into setting the provision this quarter or various economic models that came out throughout the month of March. We did look at a number of factors when we set the provisions. We believe that we've got the coverage ratio at the end of the quarter where we want them.

Got it. And my follow-up question is, I appreciate the detail on reserves relative to DFAST losses. When I look at the fed-run tests and even your company-run tests from 2018, it seems like there's a pretty significant contribution still from commercial real estate. And I'm wondering, as we think about how future charge-offs in this type of recession can play out for Huntington, what are sort of model biases in the stress test model, and I guess, I'm leading the question a little bit by referring to commercial real estate, that might distort how we're thinking about what can actually be incurred in terms of charge-offs. In other words, is what part of the stress test is very backward-looking in terms of historical losses in CRE? And what part of the stress tests, obviously, unemployment is one play, seems to be not severe enough?

So as it relates to – I think you hit the nail on the head; the DFAST numbers are backward-looking. So the fundamental change that has transpired over this company since the last downturn has been remarkable. And I would say that commercial real estate is probably the one area where we are so fundamentally different today than we were going back. I mean we had close to 5,000 customers on the commercial real estate side going into the last downturn. We have about 300 today. So there's a clear focus on Tier-1 sponsors, Tier-2 sponsors, institutional sponsors. And so we're really focused on knowing the developer in not only the projects that we're financing but the projects that might be financed somewhere else to make sure that we're not overextended there. We also – from a percentage of capital standpoint, we were over 200% of capital going into the last downturn. We're under 100% of capital today, and with very strict limits on various supplements within the commercial real estate space. So I think that's the biggest one. As it relates to some of the other things, clearly, unemployment is going to be a big driver of losses on the consumer side. I think the DFAST results there have been very consistent over time, and our consumer charge-offs in the DFAST scenarios have been at the top of our peer group. So I feel very good about where we stand in a lot of the consumer categories relative to the DFAST results from 2020.

Erika, I might add. This is Steve. The joblessness or unemployment levels in Ohio and Michigan were double digits when we made the changes to the consumer lending policies, and the models that we have used subsequently have that base in them. So I think 10.3% in Ohio and 14-and-a-fraction percent in Michigan. So that has driven us to a super-prime level of origination. We use our proprietary score, but the equivalent FICOs you've seen quarterly for 10 years, and we will attack the book. So we believe we've got a very sound consumer loan portfolio and the performance expectations around that will be, we believe, supported through this cycle, notwithstanding higher unemployment and somewhat higher losses. And we've been talking for several quarters about oil and gas as an outsized exposure for us in terms of risk of loss, clearly outside of our aggregate moderate-to-low appetite. And we've also shared that we expect to address that substantially early this year, having started to do that last year. So these oil and gas credits are all SNCCs. Our losses from what we can tell are coming – we're taking earlier than, certainly earlier than required, including the non-accrual decisions. And I think we're frankly going to be slightly ahead or ahead of others in the industry in that regard.

Thank you, Steve.

Good morning, guys. Thanks for taking the question. Great. I was hoping for maybe a little more detail on the overall modifications and deferrals. Definitely get the number of customers, but maybe if there are some dollars of total modifications in both the consumer and commercial portfolios?

I'm happy to answer that for you, Scott. It's Rich. Yes, on the consumer side, it's about $2 billion of deferrals that we've processed. We also have made some deferrals for some of the mortgages that we're servicing agent on. But for our book, it's about $2 billion. On the commercial side, it's about $6 billion, but I would say half of that is in our auto floorplan dealerships, and we're counting the curtailments in that number. And most of what we're doing in the auto floorplan space is more curtailment than payment deferral. Clearly, we need the cars to be on the lots a little bit longer than they have been historically, just given the current environment. So if you – digging into some of the other areas where we've provided deferrals on the commercial real estate and the hospitality space, and retail is one other area on the commercial side. And then in the franchise restaurant space, we've also been active with deferrals.

Okay. That's perfect. Thank you. And then just on sort of those latter points you made. Maybe if we exclude the floorplan because that makes plenty of sense logically, but in the remaining commercial deferrals, do you have a sense for how much of those deferrals you would say are kind of necessary or needed versus how much is customers sort of taking advantage of kind of insurance in this environment?

I would say that the commercial real estate deferrals are needed for the most part. The hotel occupancy rates, given where they are, I felt like I was the only one in the hotel I was at last night. So I think anecdotally that's a need. I think the cash crunch in commercial real estate is real. We generally did not have a high bar on proving that you needed it. Part of our looking out for customers is being there when they need us. And so our thought was if you're asking for a deferral, we're generally going to give it to you, but I haven't come back and scientifically determined who really needed it and who didn't. I would just point that commercial real estate is probably the area that needed it most.

Yes.

And of the $6 billion, the floorplan was – I mean $3 billion of the $6 billion, Scott. So – and many of the showrooms just frankly aren't open, so that's understandable there.

Yes.

We take a slightly different view on the consumer side, just to share with you. We actually – the fact that they've asked for deferrals, we take it as a good sign that they intend to stay in the residences or keep the car or other things. With the rapid increase in unemployment, these indications are actually positive from our perspective versus 2008 and 2009 when it was hard to communicate with customers. They tended to let houses go. I think the nature of this health crisis will be much more likely to protect the house than we would've seen in that prior cycle.

Yes. Okay.

The other thing I just point you to is at the time of the deferral, 98% of our consumer and even a higher number of our commercial customers were current. So it wasn't as though this was kind of the delinquent customers reaching out for our help. These are good customers that needed the assistance.

Yes. Okay. Thank you, guys, very much. I appreciate it.

Good morning.

Good morning, John.

I appreciate the color you just gave regarding the prior – the stress test and the changes in your business mix over time, and how that can impact your through-cycle losses. I was just wondering if you could maybe, therefore, help us think about what a fair through-cycle loss level would be, given your current mix and given what you're looking at now in terms of your assessment of the economic outlook? I know it's tough, but we want to try to get a better idea of what we're looking at. And then separately, I know on Slide 11, you point to the reserve being 42% of the 2018 to really adverse DFAST, but you also indicated that the April data is pointing to – or did point to worsening. What do you think the incremental reserve additions could go to here? Where do you think an appropriate relative percentage of DFAST is likely fair here? Thanks.

Hey, John, I'm going to be challenged to answer both of your questions. And I think as it relates to through-the-cycle losses, the challenge that we all face is just the uncertainty that we're dealing with right now as to how long this is going to last and what the new behaviors are coming out of this. We feel good about the book going into it. On the consumer side, we have very good credit quality there. We have pointed out on the commercial side that we're going to have likely elevated charge-offs in oil and gas. Beyond that, it's really hard to come up with a forecast for charge-offs through the cycle here.

So John, we're hoping to get a better view this quarter if this return-to-work status changes. Right now, next week Ohio looks like it's going to implement on May 1. Michigan, following that, middle of May. And as these industries start spooling up again, we'll get a better sense of what the recovery might look like. But I think this is going to be dynamic, and best case would be to have a view of this quarter. I think it's more likely going to be third or fourth quarter before we really understand what the growth rates could be to come off what will be this very challenging moment of time and the sustainability of these businesses, and ultimately, how they're going to repay us.

Yes. So as it relates to what you might see in the second quarter, we're clearly going to probably snap that line at the end of the quarter. We'll take a look at all the new scenarios, and we'll look at the impact of the stimulus. Like I mentioned, a lot of that is just kind of reaching the businesses and customers now. There'll be a lot more data that we'll have at the end of the second quarter to decide what the provision expense would be for the quarter. It's going to be just really tough to estimate that right now.

Okay. That's helpful. Thanks for the color. And then you indicated, Zach, in your prepared remarks that you expect to sustain the dividend. Can you just give us your thought process around that? And does that incorporate the updated data that you see coming in now post the quarter? And just your thought process around the sustainability? Thanks.

Our intention is to maintain the dividend at the current level. We think that we've got the right capital levels to support that, and we'll continue to monitor it and model, but we think it's the appropriate and sustainable level for now.

Okay. Thank you.

Welcome. Thanks, John.

Good morning, everyone.

Hey, Steve.

So to start, just to follow up on Erika's and John's question around DFAST. I think what a lot of us are struggling with is that when we look at CECL, it's supposed to look at lifetime losses. The global economy is basically shut down. And I think we're trying to understand, if you look at that framework and you're coming up with a reserve that's only 40% of DFAST losses, it seems really low. And I think we're trying to get at isn't a large reserve build again coming? Like how do we reconcile the framework of what's going on in the economy and the size of the reserve versus your own internal stress tests?

Steve it’s Rich. I think DFAST and CECL are really two different exercises. You can try to link them together, but there are fundamental differences in the assumptions for each. The DFAST scenario, the severely adverse is a deep scenario that continues for an extended period of time, and it also assumes that you're continuing to make loans during that period. There are all sorts of dynamics that go into that. CECL, on the other hand, is you're looking at something that is reasonable, supportable over a period of time that eventually returns to the mean. And so you're running in a scenario that will have a two or three-year life, and then there's a reversion to the mean on that. And it's also assuming you don't make another loan. So while I think the CECL to DFAST comparison is a good data point, I also don't think you can necessarily draw too much from it, conclusion-wise.

Okay, that’s fair. And just for a follow-up, so if we look at Slide 14, the COVID-impacted sectors, I'm surprised you're not calling out some of your auto exposures, I think about floorplan or RV. Are you not expecting to see a material decline in revenues for these sectors, right particularly auto.

Yes. I mean we've talked about auto. We feel that there is going to be a short-term impact to auto. We don't necessarily think it's going to fall under the same category as hotels and some of the other areas where it could just be a protracted longer impact. I think, ultimately, people are going to get out and buy cars, probably at a reduced level. But we don't see the impact to auto and, to a lesser extent, RV, that we do with some of the other ones that we've got in here.

The floorplan, Steven, are to dealers that have multiple flags. In the 2008, 2009, 2010 cycle, we didn't have a delinquency. The strategy is consistent. These are very strong, typically multi-generation family dealerships that have enormous wealth created over that time, and dealers that we believe will be very supportive to the extent they need to. Part of our underwriting also looks at coverage ratio service and parts to fix charges, and most of these are really strong in that regard.

Just to piggyback on that – obviously, we did do a deep dive on the auto portfolio, even though it's not listed here. And from a liquidity standpoint, we feel the book is in very good shape.

We didn't have a charge-off in auto within, I don't know, two decades in what we've originated, and we certainly have a lot of conviction going forward in the quality of that book.

Fair enough, thanks for taking my questions.

Hey, thanks. I guess just a real quick question, in terms of the energy portfolio. I heard – if I heard correctly, it was a 20% reserve you have against this portfolio. There's other banks that we heard, like yesterday, has just over a 2% reserve in their energy portfolio. Can you just talk about the characteristics of your energy loans and how it might be different from some of the other banks that you would need such a materially higher reserve on this portfolio? Thanks.

Ken, well, as we all know, these are all SNCCs. So there's good company in the credits that we're in. So I don't know that it's necessarily so much that our portfolio is any worse off than others. I think as Steve has mentioned, we've been very proactive in recognizing the risks that we see in this book, and we have taken losses in this book over the last five quarters that are pretty significant. And it's reasonable to assume that we're going to have further losses. So when you see the headlines around the big banks starting to form SPEs to take ownership of these credits rather than go through a liquidation process, I think it tells you where the industry is heading in terms of dealing with troubled situations here. So we looked at our book, and we feel that the long-term fundamentals, particularly for natural gas, are still not strong. And I think we've sized the reserve around this, taking into account where we see long-term prices, not so much on where they are today but longer term. And just the fact that there is a lack of capital markets activity in this space right now is completely different than what transpired in the last downturn. So we think it's appropriate to put higher levels of reserves here, and we'll continue to review it as we go through the spring borrowing base redeterminations and kind of size that reserve going forward.

And we think this is much more like the early mid-'80s where beginning with Penn Square in 1983, the industry got clobbered and stayed in a tough shape for four or five years. And so we're just trying to be realistic with that view as to what we think the likely outcomes are for this portfolio. And certainly, we've seen subsequent price deterioration as a result of OPEC and Russian issues on the oil side. There's some spillover that's benefited gas in the short term, but these are going to be longer-term workouts. You're going to see a lot of these companies combined. We do think the SPE is the way to go, as we did in the mid-80s. I happen to have direct experience with this in that time frame, and it leads me and, I think, us as a consequence to be clear-eyed about what to expect in the future. And perhaps a bit conservative relative to some others, but we'll see that over time.

Got it. Okay, that’s helpful. And then just my follow-up question. If I heard right, I think you said you expected elevated provisions for the next several quarters. Can you just talk more – it's more of a conceptual question. But as I guess – we would think that CECL should clearly front-end load a lot of the provision expense, but I get there's a lot of uncertainty out there. Can you just talk about that dynamic, which is how much can you really front-load for your reserve build versus like when we get to, say, the fourth quarter? Are you still maintaining a really high reserve even if – and provision expense even if the economy is not weakening at that point? It seems that provision should be a lot lower by fourth quarter, if I'm not mistaken.

The whole concept around CECL is that you are recognizing the losses today on the book that you have today, right? So in a perfect world, if you had perfect foresight into what the economic variables were and they didn't change, you wouldn't have to make any further adjustments. But clearly, we're in a very dynamic market where the economic assumptions that we have to use for the life of a loan are going to materially change over the next several quarters, and that's what's going to drive the additions, or down the road, hopefully, the release of reserves under the CECL methodology.

I think, Ken, it's – we're in a downdraft moment. But as we reopen in these different states, we'll start to get a floor and stabilization and the resiliency and recovery. And that could very well happen in the time frames you mentioned based on the fiscal stimulus. We'll be part of that, the banking industry, Huntington will as well. And for the sake of the country, it's great to see the industry in such good shape. So I think we've got a moment here, a quarter or so, a couple of quarters, where things are a bit uncertain, but I think the picture will clarify in the foreseeable future. And that clarity will give us the basis to have more confidence in projections and sharing those with you collectively. And I think it will lead us to a position where having been intentionally conservative will see a better day on the horizon where I hope there will be some reserve recovery.

Alright, great, thank you.

Thank you all. We've talked a lot today about the pandemic. We reviewed the resulting economic challenges. Perhaps most importantly, what we don't know yet. So I'd like to ask you to take a step back, and I'll offer you some perspective. Having been in this industry for four decades, I've seen uncertainty before. And while this pandemic and the elevated concern it brings are very different from any prior periods in my career, we will get through this as a country. The one thing we know from history is that Americans are resilient at the core. We as a nation, I believe, have much better days ahead. We're going to learn and adapt, as we have in the past, and build stronger, more nimble organizations as a result. This will be a time of change and innovation resulting in growth, and I believe Huntington is well-positioned to move forward. We will emerge stronger and better as a result of the hard work of our colleagues and their concern for our customers. Their commitment can be clearly seen in the way they quickly reoriented to new working arrangements, responded to customer needs, and, of course, helped the businesses in our local communities through the SBA PPP program. Their unwavering commitment to our purpose has been inspiring, and I'm proud of what our colleagues stand for and the ways they've looked out for our customers. As I reminded you frequently in the past, our colleagues, along with our Board, are among the largest shareholders of Huntington, collectively among the 10 largest. This is – the challenges we face today are exactly why we changed our compensation plans in 2010 to make sure we are aligned with long-term shareholders. Preparing for times like this is also why we took actions enumerated on Slide 10, amongst others, to position Huntington to outperform through this cycle. I remain confident about our long-term prospects as we manage through this challenging environment. With that, I want to thank you very much for your interest in Huntington. Have a great day. Thank you.