Quarterly report pursuant to Section 13 or 15(d)

ALLOWANCE FOR CREDIT LOSSES

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ALLOWANCE FOR CREDIT LOSSES
 9 Months Ended
Sep. 30, 2020
Credit Loss [Abstract]  
Allowance for Credit Losses ALLOWANCE FOR CREDIT LOSSES
On January 1, 2020, Huntington adopted ASU 2016-13 Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet exposures not accounted for as insurance and net investments in leases accounted for under ASC Topic 842. Additionally, ASC Topic 326 made changes to the accounting for AFS debt securities, including a requirement to present credit losses as an allowance rather than as a write-down on AFS debt securities that management does not intend to sell, or believes will not be required to sell.
Huntington adopted ASC Topic 326 using the modified retrospective method for all financial assets in scope of the standard. Results for reporting periods beginning after January 1, 2020 are presented under ASC Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon adoption, Huntington recorded an increase to the ACL of $393 million and a corresponding decrease to retained earnings of approximately $306 million, net of tax of $87 million. The overall increase to the ACL at adoption is comprised of a $180 million increase in the commercial ALLL, a $211 million increase in the consumer ALLL, and a $2 million increase to the AULC.
The allowance for credit losses is deducted from the amortized cost basis of a financial asset or a group of financial assets so that the balance sheet reflects the net amount Huntington expects to collect. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, fair value hedge accounting adjustments, and deferred fees and costs. Subsequent changes (favorable and unfavorable) in expected credit losses are recognized immediately in net income as a credit loss expense or a reversal of credit loss expense. Management estimates the allowance by projecting probability-of-default, loss-given-default and exposure-at-default depending on economic parameters for each month of the remaining contractual term. Those economic parameters are developed using available information relating to past events, current conditions, and reasonable and supportable forecasts. Huntington’s reasonable and supportable forecast period reverts to a historical norm based on inputs within approximately two to three years. The reversion period is dependent on the state of the economy at the beginning of the forecast. Historical credit experience provides the basis for the estimation of expected credit losses, with adjustments made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency levels and terms, as well as for changes in the micro- and macro-economic environments. The contractual terms of financial assets are adjusted for expected prepayments and any extensions outside of Huntington’s control.
Loans that are determined to have unique risk characteristics are evaluated on an individual basis by management. If a loan is determined to be collateral dependent, or meets the criteria to apply the collateral dependent practical expedient, expected credit losses are determined based on the fair value of the collateral at the reporting date, less costs to sell as appropriate.
Loans with unique risk characteristics that are not subject to collateral dependent accounting, are assessed using a discounted cash flows methodology.
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Management believes the products within each of the entity’s portfolio classes exhibit similar risk characteristics. Huntington has identified its portfolio classes as disclosed above.
Allowance for Credit Losses - HTM Securities
Nearly all of Huntington’s HTM debt securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. As such, there is currently zero loss expectation for this portfolio.
Allowance for Credit Losses - AFS Securities
For individual debt securities classified as AFS, Huntington assesses whether a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. Any impairment relating to credit losses would be recognized through an allowance for credit losses. At September 30, 2020, it was determined that no allowance was required. Any impairment due to factors other than a credit loss, such as changes in market interest rates, is recognized in other comprehensive income, net of applicable taxes. Impairment is determined on an individual security basis. Therefore, an AFS debt security cannot be combined with other securities to determine whether the collective securities are impaired.
Allowance for Loan and Lease Losses and Allowance for Credit Losses - Roll-forward
The following table presents ALLL and AULC activity by portfolio segment for the three-month and nine-month periods ended September 30, 2020 and 2019.
(dollar amounts in millions) Commercial Consumer Total
Three-month period ended September 30, 2020:
ALLL balance, beginning of period $ 1,169  $ 533  $ 1,702 
Loan charge-offs (101) (40) (141)
Recoveries of loans previously charged-off 12  16  28 
Provision for loan and lease losses 183  24  207 
ALLL balance, end of period $ 1,263  $ 533  $ 1,796 
AULC balance, beginning of period $ 81  $ 38  $ 119 
Provision (reduction in allowance) for unfunded loan commitments and letters of credit (27) (3) (30)
Unfunded commitment losses (7) —  (7)
AULC balance, end of period $ 47  $ 35  $ 82 
ACL balance, end of period $ 1,310  $ 568  $ 1,878 
Nine-month period ended September 30, 2020:
ALLL balance, beginning of period $ 552  $ 231  $ 783 
Cumulative-effect of change in accounting principle for financial instruments - credit losses (1) 180  211  391 
Loan charge-offs (272) (128) (400)
Recoveries of loans previously charged-off 20  43  63 
Provision for loan and lease losses 783  176  959 
ALLL balance, end of period $ 1,263  $ 533  $ 1,796 
AULC balance, beginning of period $ 102  $ 2  $ 104 
Cumulative-effect of change in accounting principle for financial instruments - credit losses (1) (38) 40  2 
Provision (reduction in allowance) for unfunded loan commitments and letters of credit (7) (7) (14)
Unfunded commitment losses (10) —  (10)
AULC balance, end of period $ 47  $ 35  $ 82 
ACL balance, end of period $ 1,310  $ 568  $ 1,878 
(1)Relates to day one impact of the CECL adjustment as a result of the implementation of ASU 2016-13.
(dollar amounts in millions) Commercial Consumer Total
Three-month period ended September 30, 2019:
ALLL balance, beginning of period $ 560  $ 214  $ 774 
Loan charge-offs (53) (49) (102)
Recoveries of loans previously charged-off 15  14  29 
Provision for loan and lease losses 39  43  82 
ALLL balance, end of period $ 561  $ 222  $ 783 
AULC balance, beginning of period $ 99  $ 2  $ 101 
Provision (reduction in allowance) for unfunded loan commitments and letters of credit —  —  — 
AULC balance, end of period $ 99  $ 2  $ 101 
ACL balance, end of period $ 660  $ 224  $ 884 
Nine-month period ended September 30, 2019:
ALLL balance, beginning of period $ 542  $ 230  $ 772 
Loan charge-offs (124) (145) (269)
Recoveries of loans previously charged-off 35  42  77 
Provision for loan and lease losses 108  95  203 
ALLL balance, end of period $ 561  $ 222  $ 783 
AULC balance, beginning of period $ 94  $ 2  $ 96 
Provision (reduction in allowance) for unfunded loan commitments and letters of credit 5  —  5 
AULC balance, end of period $ 99  $ 2  $ 101 
ACL balance, end of period $ 660  $ 224  $ 884 
At September 30, 2020, the ACL was $1.9 billion, an increase of $991 million from the December 31, 2019 balance of $887 million. Of the increase, $598 million relates primarily to the deterioration in the macroeconomic outlook resulting from the COVID-19 pandemic and increased reserves related to oil and gas, with the remaining $393 million related to transition to the CECL lifetime loss methodology. The majority of the increase was related to the commercial portfolio.
Huntington has elected to exclude accrued interest receivable from the measurement of its ACL given the well-defined non-accrual policies in place for all loan portfolios which results in timely reversal of outstanding interest through interest income. For certain loans on active deferral related to COVID-19, the collection of interest may be delayed for an extended period of time. The accrued interest on these active deferral loans is contemplated in establishing the ACL.