HUNTINGTON BANCSHARES INC MD

Overview

Huntington’s business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. To align with our strategic priorities, during the second quarter of 2023, we completed an organizational realignment and now report on two business segments: Consumer & Regional Banking and Commercial Banking. The Treasury / Other function includes technology and operations, and other unallocated assets, liabilities, revenue, and expense. The organizational realignment primarily involved consolidating our previously reported Consumer and Business Banking, Vehicle Finance and RBHPCG, into one new business segment called Consumer & Regional Banking. Prior period results have been adjusted to conform to the new segment presentation.

Business segment results are determined based upon our management practices, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions.

Revenue Sharing

Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to or providing service to customers. Results of operations for the business segments reflect these fee sharing allocations.

Expense Allocation

The management process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit costs (activity-based costs) to activities related to product origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to the business segments from Treasury / Other. We utilize a full-allocation methodology, where all Treasury / Other expenses, except reported acquisition-related expenses, if any, and a small amount of other residual unallocated expenses, are allocated to the business segments.

2023 Form 10-K 81

Funds Transfer Pricing (FTP)

We use an active and centralized FTP methodology to attribute appropriate net interest income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing modeled duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment.

During the fourth quarter of 2023, we revised our FTP methodology for non-maturity deposits, which has been enhanced to consider the internally modeled weighted average life by non-maturity deposit type. In general, the impact of the FTP methodology revision resulted in a higher cost of funds allocation as compared with the previous method. Prior period results have been adjusted to conform to the revised FTP methodology.

Net Income (Loss) by Business Segment

Net income (loss) by business segment for the past three years is presented in the following table:

82 Huntington Bancshares Incorporated

Consumer & Regional Banking reported net income of $1.3 billion in 2023, an increase of $288 million, or 28%, compared to the year-ago period. Segment net interest income increased $504 million, or 16%, primarily due to a $2.5 billion, or 4%, increase in average loans and leases and a 46 basis point increase in NIM driven by the higher rate environment. The provision for credit losses decreased $14 million, or 5%, primarily due to modest improvement in the macroeconomic environment that was somewhat offset by consumer loan growth over the course of 2023. Noninterest income decreased $15 million, or 1%, primarily due to decreases in gain on sale of loans resulting from the strategic decision to retain the guaranteed portion of SBA loans at origination, in customer deposit and loan fees largely due to program changes, and in mortgage banking income reflecting secondary marketing spreads and lower salable volume. The decreases in noninterest income were partially offset by a $57 million gain on the sale of our RPS business and increases in wealth and asset management revenue and payments and cash management revenue. Noninterest expense increased $140 million, or 5%, primarily due to higher overhead allocations, gains from branch sales recognized in 2022, an increase in personnel expense, and the impact of the FDIC DIF special assessment.

Consumer & Regional Banking reported net income of $1.0 billion in 2022, a decrease of $310 million, compared to the prior year period. Segment net interest income increased $110 million, or 4%, primarily due to an increase in average assets reflecting organic growth and the impact of the TCF acquisition, partially offset by a 32 basis point decrease in NIM driven by higher cost of funds and a decrease in accelerated PPP loan fees recognized upon forgiveness payments from the SBA. The provision for credit losses increased $258 million, primarily due to reserve releases in 2021 as the economic environment was improving, contrasted with reserve builds in 2022 that recognized the increased near-term recessionary risks. Noninterest income decreased $17 million, or 1%, primarily due to lower mortgage banking income reflecting lower salable volume and secondary marketing spreads, partially offset by the impact of the TCF acquisition and an increase in gain on sale of loans, primarily due to sales of SBA loans during the first through third quarters of 2022. Noninterest expense increased $226 million, or 8%, primarily due to the impact of the TCF acquisition largely driven by higher personnel expense reflecting an increase in the number of full-time equivalent employees and allocated overhead.

2023 Form 10-K 83

Commercial Banking reported net income of $1.2 billion in 2023, an increase of $92 million, or 8%, compared to the year-ago period. Segment net interest income increased $355 million, or 20%, primarily due to a 44 basis point increase in NIM, driven by the higher rate environment resulting in an increase in spreads and an increase in average loans and leases, partially offset by an increase in average deposits. The provision for credit losses increased $127 million due to a combination of commercial loan and lease growth and an increase in the coverage ratio in the commercial real estate portfolio, reflecting ongoing risks in the commercial real estate environment. Noninterest income decreased $21 million, or 3%, primarily due to a decrease in customer deposit and loan fees driven by a reduction in loan commitment fees and a decrease in capital markets and advisory fees, largely due to lower interest rate derivatives fees, partially offset by higher advisory fees from the Capstone acquisition. Partially offsetting these decreases in noninterest income were increases in payments and cash management revenue and wealth and asset management revenue. Noninterest expense increased $78 million, or 7%, primarily due to an increase in personnel costs reflecting the impact of the Capstone acquisition and an increase in average full-time equivalent employees, higher allocated overhead, and the impact of the FDIC DIF special assessment, partially offset by lower lease financing equipment depreciation.

Commercial Banking reported net income of $1.1 billion in 2022, an increase of $148 million, or 16%, compared to the prior year period. Segment net interest income increased $324 million, or 22%, primarily due to an increase in average loans and leases, reflecting the impact of the TCF acquisition and continued organic loan and lease growth, partially offset by a 34 basis point decrease in NIM, driven by higher cost of funds. The provision for credit losses increased $6 million due to a combination of loan and lease growth in 2022 and a reduction in ACL coverage ratios over the course of 2021, as there was more clarity around the economic impacts of COVID-19. Noninterest income increased $148 million, or 29%, reflecting the impact of the TCF acquisition in addition to an increase in capital markets and advisory fees, primarily due to higher advisory fees supported by the impact of the Capstone Partners acquisition, loan syndication fees, foreign exchange fees, and interest rate derivatives fees. Noninterest expense increased $269 million, or 34%, primarily reflecting the impact of the TCF and Capstone Partners acquisitions, which led to higher personnel costs and allocated overhead.

Treasury / Other

The Treasury / Other function includes revenue and expense related to assets, liabilities, derivatives (including mark-to-market of interest rate caps, as applicable), and equity not directly assigned or allocated to one of the business segments. Assets include investment securities and bank owned life insurance.

Net interest income includes the impact of administering our investment securities portfolios, the net impact of derivatives used to hedge interest rate sensitivity, as well as the financial impact associated with our FTP methodology, as described above. Noninterest income includes miscellaneous fee income not allocated to other business segments, such as bank owned life insurance income and securities and trading asset gains or losses. Noninterest expense includes certain corporate administrative, acquisition-related, if any, and other miscellaneous expenses not allocated to other business segments. The provision for income taxes for the business segments is calculated at a statutory 21% tax rate, although our overall effective tax rate is lower.

Treasury / Other reported a net loss of $543 million in 2023, a decrease in net income of $667 million, compared to the year-ago period, driven by a decrease in net interest income and an increase in noninterest expense, partially offset by an increase in provision benefit for income tax. Net interest income decreased $693 million primarily due to a higher cost of funds. Noninterest expense increased $155 million primarily due to increases in personnel costs and professional services. The increase in provision benefit for income taxes of $204 million is primarily due to lower pre-tax income in addition an increase in discrete tax benefits.

Treasury / Other reported net income of $124 million in 2022, an increase of $1.1 billion, compared to the year-ago period, driven by a $737 million increase in net interest income and a $669 million decrease in noninterest expense, partially offset by a $261 million reduction in provision benefit for income taxes.

84 Huntington Bancshares Incorporated