Greetings. Welcome to Huntington Bancshares First Quarter Earnings Call. At this time, all participant lines are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mark Mart, Director of Investor Relations.
Thanks, Sharon. Welcome. I'm Mark Mood, Director of Investor Relations for Huntington. Copies of the slides will be reviewing can be found on the Investor Relations section of our website, www.huntington.com. Call is being recorded will be available for replay starting about 1 hour from the close of the call.
Presenters today are Steve Steinauer, Chairman, President and CEO. Zach Wasserman, Chief Financial Officer and Rich Poley, Chief Credit Officer. As noted on Slide 2, Today's discussion, including the Q And 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 material filed with the SEC, including our most recent Forms 10K 10Q 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. When I open today 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 endemic has caused unprecedented disruption around the world. Extreme market volatility has altered the global economic landscape, and the virus has changed the way we live our daily lives.
Changed how businesses conducted in the short term, Probably the long term as well. For Huntington, I believe our purpose and our deeply rooted culture, are an extraordinary asset. Our purpose of looking out for people has guided our planning and responses to the pandemic. From the beginning, we recognize the pandemic is 1st and foremost 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 front lines with our customers every day, and it's challenged us to serve our customers in new ways. To ensure their safety and our branches, we moved early to drive thru only within person meetings by appointment. We closed all in store branches and traditional branches, which did not have a drive thru. For most other colleagues, we implemented a work from home policy, and now have more than 80% of our colleagues working remotely. This is possible because of the commitment and flexibility of our colleagues, and because of the tremendous work by our technology teams by our business continuity planning teams over the years.
We also increased our communication with colleagues, not only to keep them informed, but also to keep them engaged in 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 announcing a variety of relief program measures that included loan payment deferrals, fee waivers, and the suspension of foreclosures and repossessions. These measures address 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.
Will continue to support them in the future. We believe it's in our best mutual interest to work with our customers during tough times, relationships are strengthened in these moments. Thousands of college from across the bank globalized to help small business and commercial customers access the SBA paycheck protection program. And over the last 3 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 the loan volume of more than $6,100,000,000.
We were able to process almost every one of these applications into the SBA Etran system before it closed when funding was exhausted on April 16. We entered 2020 with a relatively healthy economic backdrop across our footprint and 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 try to assess what is in store for the economy now. We've informed our thinking with multiple potential economic scenarios. The best case is characterized by a deep, the shaped economy with a trough in the second quarter, followed by a relatively strong recovery later this year.
More likely scenario could be described as a long use shaped recovery in which the trough extends later into the year and then 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 aggressively deteriorated. It appears that the reopening of the economy will be more protracted than initially expected. At a U shape 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 and the range of potential outcomes on the key metrics is quite wide. Instead, Zach will provide some near term expectations later in the presentation. Conservative view on the economic outlook also informs our thinking on how we manage capital, liquidity and credit Zack 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 fundamentally changed Huntington's Enterprise Risk Management.
We believe it's now a stress of 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 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 reposition the balance sheet over time. We implemented a deep relationship focus across the bank, focusing on the primary bank relationships and exiting loan only relationships that did not meet appropriate return of 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 of commercial real estate.
We established conservative standards and policies for leverage lending as well. We've pointed out over time that the only comparison of potential loss for the sector is the Federal Reserve's deep bad 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 the 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 view, conservative approach to capital. Our capital ratios are strong. We intend to maintain high capital ratios as a source of strength to support 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-nineteen pandemic. While our underlying earnings momentum was strong, 1st quarter results included provision for credit losses of $441,000,000 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 provision earnings. Year over year, pre tax 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 $42,000,000 or 13 percent year over year growth in non interest income. FTE net interest income decreased $33,000,000 or 4 percent 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 2 basis points 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 environment.
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 manage 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 31 in store branches, as well as actions we took during Q1 to quickly react to the current environment. Balance against the impact of continued investment in our technology capabilities. During the quarter, we began the 1st steps of a multi part 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, net interest margin, fee income, and non interest expense can be found in the appendix.
Turning to Slide 6. Average earning assets increased to $2,600,000,000 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 instead are using this liquidity to fund loan growth. Average loans and leases increased, $900,000,000 or 1 percent year over year, primarily driven by the consumer portfolio.
Consumer loan growth remained focused on the residential mortgage portfolio, reflecting robust originations of the past 4 quarters. Average commercial and industrial loans increased 1% from the year ago quarter as commercial activity was restrained by economic uncertainty during the 1st 2 months of the quarter. However, on a linked quarter basis, we saw end of period C and I loans grow 7%. Reflecting significant drawdown activity on credit lines. During March, we saw $2,500,000,000 of commercial credit lines.
While we have seen draw activity continue in the 1st weeks of April with another $700,000,000 strong through April 15. The pace that has started to slow significantly. It is uncertain how long customers will retain these funds as extra liquidity and a 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.
We that this growth rate was negatively impacted by the June 2019 sale of the Wisconsin retail branch network, which included approximately $225,000,000 or almost 1% of core deposits. On linked quarter basis, 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 amount of commercial lines draws, allowing us to maintain excess liquidity to meet future customer lending needs. 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 7% and core CDs decreased 35%. We expect this dynamic to continue through 2020. Average interest bearing EDA deposits increased 7% year over year while non interest bearing DDA increased non interest bearing deposits increased 5% year over year. This growth highlights our continued focus on new customer acquisition and relationship deepening. Slide 8 continues to illustrate the continued strength of our capital ratios.
The common equity Tier 1 ratio or CET1 ended the quarter at 9.47 percent, down 37 basis points year over year, the tangible common equity ratio or TCE, ended the quarter at 7.52 percent, down 5 basis points from a year ago. During the first quarter through mid March, we repurchased 7,100,000 common shares at an average cost of $12.38 per share or a total of $88,000,000. When the COVID-nineteen pandemic first started to impact the US, we paused our buyback for the remainder of the first quarter. Do not currently intend to repurchase shares for the balance of 20.20. This morning, we announced the board just declared the 2nd quarter cash dividend of $0.15 per common share unchanged from the prior quarter.
Is paramount. Our position of strength on liquidity draws its foundation from our deposit base and the depth of our relationship with our customers. A ratio of loans to deposits is 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 3rd 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. Rich?
Thanks, Zack. Before I provide details on the performance of the first quarter, I wanted to elaborate on comments Steve touched on at the beginning of the call. Let 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 of our auto finance business is the RV and marine portfolio that was expanded through the FirstMerit acquisition. Recall that our indirect auto and floor land dealer floor plan portfolios are among the best performing in DFAST.
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 RV and green books, and have 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 relevant rankings of mild cumulative loan losses for Huntington and our peers and the Federal Reserves 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 was evenly split between consumer and commercial businesses. It gives us nice diversification and 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 percent at 2019 year end. The increase was comprised of the $393,000,000 day 1 adjustment a $323,000,000 reserve build via day 2 provision during the first quarter.
As you recall, the day 1 increase was a function of our 50 percent weighting in the consumer portfolio, which has a much longer weighted average life and therefore, a larger lifetime loss under CECL. In the quarter, our reserve build consisted of a $258,000,000 increase due primarily to the ongoing economic uncertainty and a $65,000,000 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 8 18% in Q2 and differing levels of recovery in subsequent quarters. We also weigh the unprecedented level of governance stimulus both to consumers as well as 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 volume by 30% in Q2. And an improvement fees as we size our provision expense for the second quarter. Slide 13 shows our NPAs and TDRs, 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 we see with this portfolio 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 1 third of our overall NPAs. They are also a significant contributor to our Q1 NPA increase. Notably, over 90% from a dollar standpoint These NPAs remain current with respect to principal and interest payments. Outside of our oil and gas portfolio, commercial NPAs were reduced in the 1st quarter by $65,000,000. Slide 14 demonstrates that we have a fairly modest exposure to some of the areas that have been hardest hit at COVID-nineteen to date.
We have recently completed deep dives into nearly all these portfolios and are comfortable with our team's assessment of the current situation. Our restaurant exposures primarily to national quick service brands that have maintained drive up operations and our sandwich and pizza chain customers have been open for takeout service to offset the declines in in house seating. Slide 15 details our leverage lending portfolio. Our conservative definition uses 2.5 times senior leverage for borrowers with under $500,000,000 of revenues to account for heightened risks in leveraging smaller companies. Our leverage loan book represents under 4% of our total loans, and as a percentage of capital is at its lowest point in several years.
We focus on borrowers that are weighted toward manufacturers as opposed to service and other asset light borrowers. They tend to provide more collateral. Within the Manufacturing segment of our leverage lending book, there are no subsegments that account more than 20%. We've deliberately avoided covenant light term loan fee structures because the plan that market generally requires providing structured, hairy 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 Slide 16 provides a snapshot of key credit quality metrics for the quarter. At charge offs represented an annualized 62 basis points on average loans and leases in the current quarter, up from 39 basis points in the prior quarter, up from 38 basis points in the year ago quarter. The increase was centered on the oil and gas portfolio and 1 large coal related commercial credit which together made up approximately 3 4ths of the total commercial net charge offs. The oil and gas portfolio continues to be impacted by low commodity prices limited capital markets activity. As I mentioned earlier, we have allocated significant reserves against this portfolio.
Annualized net charge offs excluding the 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 $200,000,000, of which 20% carries an investment grade guarantee. Nonperforming asset ratio increased 9 basis points linked quarter 14 basis points year over year to 75 basis points due to the oil and gas impact I described earlier. Dimmer 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 on the slides. Let me turn it back over to Zack.
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. 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 2nd quarter. Starting with loans, the $3,200,000,000 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
$6,000,000,000 of SBA PPP loans and any additional SBA PPP loans made in the next phase. 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 the 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. Modestly higher in the second quarter and the robust level of refinancing activity acts as a governor on growth. We expect average core deposits to increase 2% to 3 percent linked quarter. Similar to our expectations for commercial loans, we expect the recent in flux 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 will step flow out of the bank over the next 8 weeks, consistent with the intent of the program. We do not expect deposit growth to fully fund loan growth in the 2nd quarter. Moving to the income statement, provisioning is a key driver of variability in the Q2 earnings outlook, but revenue and 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 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 the short long term results. Within these confines, we expect total revenues 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, items, 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 order. We expect non interest expenses to increase between 5% 6% on a sequential basis, driven primarily by the seasonal increase in compensation related expense. Related to the annual grant 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 we began implementing these plans. Our approach is focused on 4 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. 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 were also curtailing non essential consulting outside services expenses. In the investment category, given the macro environment depressing customer acquisition activities, we're 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 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 were taking decisive action. Finally, the most uncertain item in the earnings outlook is credit provisioning. We currently expect net charge offs in the 2nd quarter to be near the high end of our average through the cycle target range, 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 an elevated provisioning and additional reserve building in the 2nd quarter and most likely for the next several quarters. It is too much 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. Mark?
Thanks, Zach. Sherry, we will now take questions.
We ask that
as the courtesy of your peers, each person ask only one question and one related follow-up. And then if that person has any additional questions, he or she can add themselves back into the queue.
You. Our first question is from Erika Najarian with Bank of America. Please proceed.
Hi, good morning. Thank you. My first question is, hi. My first question is for Rich. I'm wondering if you could give us a sense on of how your allowance was allocated by loan category, please?
Yes, by loan category, I mean, we've got, the consumer was about 1.44 and commercial was 2.61, to get to the 2.05, total allowance. That's the breakdown that we've got for that. I think, you know, the challenge that we have with the allowance 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, you know, is forthcoming, but really hasn't, 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 provision and 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, appreciate the detail on reserves relative to DFAST losses. When I look at the Fed run test and even your company run test 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 the 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 you know, what can actually be incurred in terms of, of charge offs?
In other words, you know, is, what part of the stress test is back or very backward looking in terms of historical losses in CRE. And what part of the stress test, obviously, unemployment is is is one place, seems to be not severe enough.
So as it relates to, I think you hit the nail on the head. The DFAS numbers are backwards looking. So the the fundamental change that has transpired over this company since the last downturn, has been remarkable. And I would say that commercial real estate probably the one area where we are so fundamentally different today than we were going back. I mean, we had close to 5000 customers on the commercial real estate side going into the last downturn.
We have about 300 today. So if there's a clear focus on tier 1 sponsors, tier 2 sponsors, institutional sponsors. And so we really focus on knowing the developer and 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 stay point, we're over 200 percent of capital going into the last downturn. We're under 100 percent of capital today.
And with very strict limits on various sub limits 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 I've been very consistent over time and our consumer charge offs in the defense 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 'twenty.
Eric, my dad, this is Steve. The joblessness, earn unemployment levels in Ohio and Michigan were double it when, 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 at a fraction in Michigan. So that has drove us to a super prime level of origination We use our Prop score, but the equivalent FICO, you've seen quarterly for 10 years.
And we, that's half the book. So we, we believe we've got a very sound consumer loan portfolio and the performance expectations around that. 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, and, and we've also shared that we expect to address that substantially, early this year having started to do that last year.
So these are all these oil and gas credits are all snicks. Our losses from what we can tell are something we're taking them earlier than certainly earlier than required, including the non accrual decisions. And, I think we're, we're frankly going to be slightly ahead or ahead of others in the industry in that regard.
Our next question is from Scott Siefers with Piper Sandler. Please proceed.
Great. I was hoping for maybe a little more detail on the overall modifications and deferrals, definitely get the the number of customers, but maybe if there are some, dollars of total modifications in both the, consumer and commercial portfolios?
Happy to answer that for you, Scott. It's Rich. Yeah, on the consumer side, it's about $2,000,000,000 of the that we've processed. We also have, you know, made some deferrals for some of the mortgages that, that we're a servicing agent on. But, you know, for our book, it's about $2,000,000,000.
On the commercial side, it's about $6,000,000,000, but I would say half of that is in our auto floor plan dealership and we're counting the curtailments, in that number. And most of what we're doing in the auto floor plan spaces more curtailment than the payment deferral. Clearly, you know, we need the cars to be on the lots a little bit longer than they have been, historically just given the current environment. So, digging into some of the other areas where we've provided deferrals on the commercial real estate and the hospitality space. And retail is, 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 floor plan, 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 a, you know, kind of insurance in the in this environment?
I would say that, you know, I would say that the commercial real estate deferrals are needed, for the most part, you know, 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, there, you know, that's a need. I think the cash crunch in commercial real estate is real. You know, we, We generally did not have a high bar on proving that you needed it.
You know, part of our looking out for customers is being there when they need us. And so our, 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, you know, who really needed it and who didn't. I would just point to commercial real estate is probably the area that needed it most.
And of the $6,000,000,000, floor plan was 3 to 6, Scott. So, many of the showrooms just frankly aren't open. So, understandable there. 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've taken as a good sign that they intend to, to, you know, stay in the residence or keep the car or other things, with the rapid, increase in unemployment, these indications are actually positive from our perspective versus 809 when it was hard to communicate with with customers intended to let houses go. I think the nature of this prices will be much more likelihood to protect the house than we would have seen in that prior cycle.
Yeah.
Yeah. The other that I just point to is, you know, at the time of the deferral, you know, 98% of our consumer and even a higher number of our commercial customers weren't current. So it wasn't as though, you know, this was, you know, kind of, the delinquent customers reaching out for, for help, these new customers needed the assistance.
Our next question is from John Pancari with Evercore ISI. Please proceed.
Good morning.
Good morning, Todd.
I appreciate the color you just gave regarding the prior
the stress test and the changes
in your business mix over time that 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 if you 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 the reserve being 42 percent of the 2018 to really adverse feedback. But you also indicated that the April data is pointing to did point to worsening. What do you think a, the incremental reserve additions could go to here?
What do you think an appropriate a relative percentage against the Deepak 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, I think that 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 then what the new you know, behaviors are coming out of this. You know, we feel good about the book, going into it, you know, on the consumer side, we, you know, 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, through the cycle here.
John, we're, 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 1st, Michigan following that, middle of May. And, as as these industries start spooling up again, we'll, we'll, we'll get a better sense of, 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 3rd or 4th quarter before we really understand what the the growth, rates could be to come off what will be this very challenging moment in time. And the sustainability of these, these businesses and ultimately how they're going to advance.
Yes. So as it relates to what you might see in the 2nd quarter, we're clearly you know, probably snap that line at the end of the quarter. We'll, we'll take a look at all the new scenarios, we'll look at the impact of the stimulus. As I mentioned, a lot of that is just kind of reaching, the businesses and customer years now. There'll be a lot more data that we'll have at the end of the second quarter to size what the provision expense would be for the quarter.
It's going to just really tough to estimate that right now.
Okay. That's helpful. Thanks, for that color. And then, I mean, you indicated Zack in your prepared remarks that 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.
I mean, our intention is to maintain the dividend at the current level. I 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.
Our next question is from Steven Alexopoulos with JP Morgan. Please proceed.
So to start, just
to follow-up on Erica'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 DFAS losses, it seems really low. And I think we're trying to get at it 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 test.
Steve, it's Rich. I think, you know, DFAST and CSAR are really 2 different exercises. Right? You can try to them together. But there are fundamental differences in the assumptions to reach.
The DFAST scenario, 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, you know, is you're looking at something that is reasonable, supportable over a period of time that eventually returns to the meat. And so you're running in a scenario that, you know, we'll have a 2 or 3 year life and then there's a reversion to the mean on it. And it's also assuming you don't make another loan.
So, you know, while I think the CECL to DefAS comparison is a good data point, I also don't think you can necessarily draw too much, you know, from it, inclusion wise.
Okay. That's fair. And 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, you know, I think about floor plan 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 into the same category as hotels and some of the other areas where it, 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, you know, RV that we do with some of the other ones that we've got in here.
The floor plan club, Steven, are 2, dealers that have multiple flags. And the O 80910 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, and dealers that we believe will will be very supportive to the extent they need to.
Part of our underwriting also looks at coverage ratio of service and parts to, to, to, excharge. And, and, and most of these are really strong in that regard. And just
to piggyback, does that mean this, 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 haven't had a charge off in auto. It's been 2 decades, in what we've originated. And we certainly have a lot of conviction going forward, the quality of that book.
Okay, fair enough. Thanks for taking my questions.
Our next question is from Ken Zerbe with Morgan Stanley. Please proceed.
Great. Thanks. I guess just a really 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. 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.
Well, as we all know, these are all SNCs. So there's there's good company and 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 fervent 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, you know, where the 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, you know, I think we've sized reserve around this taking into account, you know, where we see long term prices, not, you know, not so much on where they are today, but longer term. And, you know, 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.
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 at 83, the industry got clobbered, and, stayed in a tough shape for 4 or 5 years. And so we're just trying to be realistic with that view as to what we think the likely outcomes are for this 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. Having to have direct experience with this in that time frame. And, at least, me and, and I think that's as a consequence to be, to be, clear eyed about what to expect in the future and perhaps a bit conservative relative to some others. But 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 expect 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 you know, how much can you really front load for your reserve build versus, like, when we get to say fourth quarter, are you still maintaining a really high reserve even if in in provision expense even if the economy is not weakening at that point. Seems that provision should be a lot lower by 4th quarter, if I'm not mistaken.
Yes. I mean, 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, you know, clearly, in a very dynamic market where the economic assumptions that we have to use for the life of the loan are going to materially change over the next several quarters.
And that's what's going to drive the additions or, you know, down the road, hopefully, the release of reserves under the CECL methodology?
I do think, Ken, it's, it's, you know, we're, we're in a downdraft moment, but as we reopen in these different states start to get, a floor and stabilization and resiliency and 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, I, 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 and projections. And sharing those with you, collectively. And I think it will lead us to, a position where, having been intentionally, conservative, we'll see a better day on the horizon.
Where I hope there'll be some reserve recovery.
Our next question is from Ken Using with Jefferies. Please proceed.
Hey, thanks a lot guys. One question on the capital front. So you're right in the middle of that 9.5% CET1, 9 to 10 zone, that you enjoy. You want to try to stay around that? And also, how does TC, if at all, come into your, thought process around maintaining capital ratios?
Thanks.
Dan, this is Zach. I'll take this 1. So yes, so our CET1 for Q1 ended at just about 9.5%. Our goal was to be in high end of the 9% to 10% range over time. And I would expect continued growth in capital towards the year end.
That's the plan and intention at this point. I think the fact that we mentioned we paused on share repurchases with the time being for for the foreseeable future will be a major driver of that. And we continue to model, as you might imagine, innumerable scenarios around where the the year can play out here, but the expectation is sort of, continually, rising toward the end of the year. Excuse me. With that high end to 10% range.
So that's on CET1. You talked about TCE, TCE ended at just about 7.5%, 7.52 precisely. And likewise, our goal was to be in the, higher than that level as I expected that ratio to trend higher, throughout the year as well. You know, we think about both of the metrics, to be honest. We look at both of them just as much internally, as each other.
And the easy one is a critical regulatory, measure. It's also very comparable across banks. And so it's helpful, I think, for us and for you to understand the relative position. GCE is a key governor of those as well. And, particularly in the last downturn, you know, when when capital was precious, that, that measure moved large.
And so, we're cautious that both matter. And we factor both into our decisions. I think that said, as I look at the trajectory in both of them, they're pretty similar shapes. And I would expect both to be rising modestly toward the back half of this year.
Okay, got it. And just a follow-up on the auto and RV marine side. Just in terms of the growth outlook, you generally mentioned it in terms of your outlook on the consumer side. We noticed that the loan origination the first quarter of 116 in auto, probably the lowest we've seen in a long time. Do you have a way of helping us understand given the certainty, albeit just, you know, what you expect volume growth to traject like,
in auto and RV marine?
I mean, we really don't have a great view on it kind of longer term in the year and that's what we tried to realistically give you what Q2 looked like. And we do expect continued modest downdrafts in auto, just given the dynamics we've been talking about before about auto dealerships being largely shuttered and and therefore, you know, sales activity being lower. You know, really we'll spend on the pace of the recovery and what it looks like to see to what to degree, we start to see, you know, regrowth sequentially quarter to quarter in the back half of the year. Marine, RV, marine perspective, I think we're expecting less down draft. That portfolio was always very, very super prime, very focused on the regions where that was a key lifestyle.
A purchase for people. And it was, you know, it's a relatively smaller book too. So I think, probably expect, you know, more flattish to to down this there. But but we're also watching that pretty carefully. I think you didn't ask, but on the residential mortgage side, we expect continue to grow best demand as you might expect and essentially pretty flat growth there just given, that demand offsetting portfolio, run off, you know, as I spoke to them,
redo their mortgages almost.
We have reached the end of our question and answer session. I would like to turn the conference back over to Steve for closing remarks.
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. I'd like to ask you to take a step back and I'll offer you some perspective. Having been in this industry for 4 decades, I've seen uncertainty before.
And while this pandemic and the elevated conservative brings is very different than any prior periods in my career, we will get through this as a country thing we know from history is Americans are resilient at the core. We have a nation, I believe, had 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 in innovation, resulting in growth 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, of course, help the businesses in our local communities through the SBA PPP program. Their unwavering commitment to our purpose has been inspiring. 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. Varing for times like this is also why we took actions enumerated on Slide 10, amongst others. To position Huntington to outperform through the 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.