Huntington Bancshares Incorporated — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Huntington is a regional bank holding company headquartered in Columbus, Ohio, with banking and related financial services across seven Midwestern states. Financial statements are unaudited.
Financial results and position
- Q2 earnings: Net income was $150 million, or $0.13 diluted EPS, versus $364 million and $0.33 a year earlier. Six-month net income was $198 million, down from $722 million; diluted EPS was $0.16 versus $0.64.
- Revenue and margin: Q2 GAAP net interest income was $792 million; fully taxable-equivalent (FTE) net interest income was $797 million, down 3% year over year. FTE net interest margin fell 37 basis points to 2.94%. Total revenue on an FTE basis was $1.188 billion, approximately flat year over year. Six-month FTE revenue was $2.345 billion, also approximately flat.
- Credit costs: Q2 provision for credit losses was $327 million, up $268 million year over year. Six-month provision was $768 million versus $126 million. Q2 net charge-offs were $107 million, or 0.54% of average loans, compared with $48 million and 0.25% a year earlier; six-month net charge-offs were $224 million versus $119 million.
- Other income and expenses: Q2 noninterest income rose 5% to $391 million, led by mortgage banking income of $96 million (up $62 million year over year). Deposit service charges fell 35% to $60 million. Noninterest expense declined 4% to $675 million. The efficiency ratio was 55.9%.
- Balance sheet: At June 30, total assets were $118.4 billion, loans and leases $80.1 billion, deposits $93.7 billion, and long-term debt $9.8 billion. Compared with year-end 2019, deposits grew $11.3 billion and loans grew $4.7 billion; short-term borrowings declined to $146 million from $2.6 billion.
- Cash flow and liquidity: For the first six months, operating cash flow was $710 million, investing cash outflow $4.369 billion, and financing cash inflow $8.782 billion. Cash and cash equivalents ended at $6.293 billion. Core deposits were 96% of total deposits; unpledged securities were $4.7 billion and unused FHLB capacity was $34.1 billion. Management said the Bank had sufficient liquidity for the foreseeable future.
- Capital: Consolidated CET1 ratio was 9.84%, Tier 1 risk-based ratio 11.79%, and total risk-based capital ratio 13.84%. Huntington issued $500 million of Series F preferred stock in Q2. Its Q2 common dividend was $0.15 per share; the Federal Reserve restricted share repurchases for Q3, subject to limited exceptions.
Material changes and significant items
- Average earning assets increased 10% year over year, including growth in PPP lending and Federal Reserve deposits, but lower market rates reduced asset yields and compressed margin.
- Huntington originated more than 35,000 PPP loans, with $6.2 billion outstanding at quarter-end. Total loans under COVID-related deferral or accommodation programs were $6.819 billion, or 9% of loans.
- Nonperforming assets rose to $713 million from $460 million a year earlier; the NPA ratio increased to 0.89% from 0.61%. Commercial nonaccrual loans increased, principally reflecting oil and gas exposure.
- The allowance for credit losses was $1.821 billion, or 2.27% of loans, at quarter-end. This included the $393 million CECL adoption increase and subsequent reserve increases associated with the deteriorating economic outlook and specific credit exposures. Management used a single baseline economic scenario plus qualitative reserves; its baseline unemployment forecast peaked at 15%.
- Mortgage banking benefited from higher originations and secondary-market spreads. Q2 also included a $13 million retiree health-plan annuitization gain and a $5 million gain on the sale of a retirement-plan-services business. Comparability was affected by prior-year branch-sale and other gains.
- Management described the pandemic’s duration and economic effects as uncertain and expected adverse effects on future operating results, with continued elevated charge-offs possible. It did not provide specific earnings or margin guidance in the supplied filing text.
Outlook, risks, and contingencies
- Key risks include a prolonged recession or renewed economic deterioration, borrower defaults and credit losses, low interest rates and margin pressure, market volatility, liquidity and capital demands, and potential impairment of goodwill or financial assets. Management’s credit estimates depend on uncertain forecasts and may prove insufficient if conditions worsen.
- Customer relief included payment deferrals, fee waivers, and suspension of foreclosures; automobile and RV/marine repossessions resumed June 1, while mortgage foreclosures remained suspended. Commercial deferrals were primarily 90 days and expected to begin expiring in Q3.
- Potential litigation and regulatory losses were estimated at an aggregate range of $0–$20 million in excess of accrued liabilities for matters where a range could be estimated. The filing cautions that this is not maximum exposure and that other matters may not be estimable.
- The Federal Reserve’s preliminary stress capital buffer was 2.5%, effective October 1, 2020 through September 30, 2021, subject to possible revision. Huntington was required to resubmit its capital plan.
Important facts for investors to verify
- How credit quality evolves as deferrals expire, particularly in oil and gas, hospitality, and other pandemic-sensitive commercial industries.
- Whether the $1.821 billion allowance adequately reflects future losses, and how CECL scenario assumptions and qualitative reserves change.
- Whether deposit growth and loan mix can offset continued low-rate pressure on net interest margin.
- The performance of deferred consumer and commercial loans, including residential mortgage deferrals, for which management said post-deferral evidence was not yet sufficient.
- Future regulatory capital distributions, dividend capacity, and any changes to the stress capital buffer or repurchase restrictions.
- Potential litigation outcomes and the sensitivity of mortgage servicing rights and other fair-value estimates to rates and prepayments.