Huntington Bancshares Incorporated — 2020 Q3 Form 10-Q
Reporting period: Quarter ended September 30, 2020; unaudited. Huntington is a regional bank holding company headquartered in Columbus, Ohio, operating across seven states and offering commercial and consumer banking and related financial services.
Financial performance and position
| Metric | Q3 2020 | Comparable period / change |
|---|---|---|
| Net income | $303 million; diluted EPS $0.27 | $372 million; $0.34 in Q3 2019 |
| Net interest income, GAAP | $817 million | $799 million in Q3 2019 |
| Net interest income, FTE | $822 million | $805 million in Q3 2019; up 2% |
| Net interest margin | 2.96% | 3.20% in Q3 2019 |
| Provision for credit losses | $177 million | $82 million in Q3 2019 |
| Net charge-offs | $113 million; 0.56% annualized | $73 million; 0.39% in Q3 2019 |
| Noninterest income / expense | $430 million / $712 million | $389 million / $667 million in Q3 2019 |
- For the first nine months, net income was $501 million versus $1.094 billion in 2019; diluted EPS was $0.42 versus $0.98. Total revenue on an FTE basis rose 2% to $3.597 billion, while provision for credit losses increased to $945 million from $208 million.
- Mortgage banking income supported fee growth: $122 million in Q3, up 126% year over year, reflecting higher secondary marketing spreads and originations. Deposit service charges fell 22% year over year. Personnel costs rose 12%, including increased incentives, contract help, overtime, equity compensation and $11 million of position-reduction expense.
- At September 30, total assets were $120.1 billion, loans and leases $81.2 billion, and deposits $95.2 billion. Deposits grew from $82.3 billion at year-end 2019, while loans grew from $75.4 billion. Cash and cash equivalents were $6.3 billion at period end.
- Allowance for loan and lease losses was $1.796 billion; total allowance for credit losses, including unfunded commitments, was $1.878 billion, or 2.31% of loans. The allowance ratio was 1.18% at December 31, 2019.
- Short-term borrowings were $222 million and long-term debt $9.174 billion, compared with $2.606 billion and $9.849 billion, respectively, at year-end. Core deposits were 96% of deposits; unused FHLB borrowing capacity was $31.7 billion and unpledged securities totaled $7.1 billion.
- Nine-month operating cash flow was $1.259 billion, investing cash outflow $6.152 billion and financing cash inflow $9.998 billion. Cash and cash equivalents increased $5.105 billion from the start of the period.
- Consolidated CET1, Tier 1 and total risk-based capital ratios were 9.89%, 12.37% and 14.39%, respectively. The company issued $500 million each of Series F and Series G preferred stock during the second and third quarters.
Material changes and management commentary
- Lower interest rates compressed asset yields and the net interest margin; lower deposit and borrowing costs partly offset the impact. Average earning assets increased 11% year over year, including growth in PPP lending and Federal Reserve deposits.
- Huntington had funded more than 38,000 SBA Paycheck Protection Program loans, with $6.3 billion outstanding at quarter end. Average PPP loans were about $6.1 billion in Q3.
- Credit accommodations declined substantially: loans in COVID-related deferral programs were $1.427 billion, or 2% of the portfolio, versus $6.819 billion, or 9%, at June 30. Management reported generally positive payment patterns after deferrals expired.
- Q3 net charge-offs were concentrated in commercial lending, particularly oil and gas; about $44 million of the $89 million in commercial net charge-offs related to oil and gas loans, largely loans sold or under contract for sale. Nonperforming assets were $602 million, up from $498 million at year-end, but down from $713 million at June 30.
- Management said it expects the pandemic and related economic crisis to adversely affect future results, but provided no quantified earnings or credit-loss guidance. It described the economy in its footprint as likely to remain challenged.
Outlook, risks and unusual items
- Credit-loss estimates remain sensitive to the pandemic, unemployment, GDP, government relief and the pace of economic recovery. Management used probability-weighted economic scenarios; a hypothetical 100% adverse-scenario weighting would add approximately $1.4 billion to modeled allowance needs versus a 100% baseline weighting. The company emphasized this is a sensitivity illustration, not an expected reserve increase.
- COVID-19 risks include borrower defaults, further credit deterioration, weaker revenues, market volatility, liquidity and capital pressures, and possible goodwill or financial-asset impairment. Huntington noted increased COVID-themed phishing activity but no material cyber losses to date.
- CECL adoption on January 1, 2020 increased the allowance by $393 million and reduced retained earnings by approximately $306 million after tax. The company elected the regulatory capital transition relief for CECL.
- The Federal Reserve’s restrictions barred share repurchases in Q3 and Q4 2020, subject to limited exceptions. The Board’s October 21 common dividend declaration was $0.15 per share; future capital distributions remained subject to regulatory limits and review.
- Management estimated aggregate reasonably possible legal and regulatory losses of $0–$10 million in excess of any accrued liability for matters where a range could be estimated; this is not the company’s maximum exposure. Management said pending matters were not expected to materially affect consolidated financial position, while noting a matter could materially affect results for a particular period.
- Other notable items included a $13 million gain on annuitization of a retiree health plan and a $5 million gain on sale of retirement-plan recordkeeping services in Q2 2020; these contributed to sequential comparisons of other noninterest income.
Most important facts for investors to verify
- Reconcile the filing’s FTE net interest income description: its executive overview says the amount declined year over year, while the detailed discussion and tables show an increase of $17 million, or 2%, to $822 million.
- Track the adequacy of the $1.878 billion credit-loss allowance against subsequent pandemic-related loan performance, especially commercial oil and gas and other stressed industries.
- Monitor migration from expired payment deferrals, nonperforming assets and charge-offs; reported deferral balances exclude certain loans modified under pandemic relief guidance.
- Assess whether low rates, deposit growth and the large Federal Reserve cash balance continue to pressure net interest margin and earnings.
- Confirm capital distributions remain within Federal Reserve restrictions, and review the implications of the new preferred stock and CECL capital-transition treatment.