Huntington Bancshares Incorporated — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial figures are generally in millions unless stated otherwise.
Business context and reporting period
Huntington is a regional bank holding company headquartered in Columbus, Ohio. On June 9, 2021, it completed its all-stock acquisition of TCF Financial Corporation for an indicated transaction value of $7.2 billion. Results before that date reflect legacy Huntington; subsequent results include TCF. The short post-close period and acquisition accounting limit direct comparability with prior periods.
Financial performance and condition
- Q2 earnings: Net loss was $15 million, versus net income of $150 million in Q2 2020. Diluted loss per common share was $0.05, versus earnings of $0.13. Results included $269 million of TCF acquisition-related expenses ($218 million after tax) and a $294 million initial provision for acquired credit exposures ($239 million after tax).
- Revenue and margin: Net interest income was $838 million, up 6% year over year; fully taxable equivalent (FTE) net interest income was $844 million. Net interest margin was 2.66%, down 28 basis points year over year. Noninterest income was $444 million, up 14%; total FTE revenue was $1.288 billion.
- Credit costs: Provision for credit losses was $211 million, down $116 million year over year, despite the TCF acquisition provision. Net charge-offs were $62 million, or 0.28% of average loans, compared with $107 million and 0.54% a year earlier. The allowance for credit losses was $2.322 billion, 2.08% of loans and leases.
- Expenses and efficiency: Noninterest expense rose 59% year over year to $1.072 billion, primarily reflecting TCF-related costs and the expanded business. The reported efficiency ratio was 83.1%, versus 55.9% a year earlier.
- Six-month results: Net income was $517 million, versus $198 million in the first half of 2020; diluted earnings per share were $0.40 versus $0.16. Net interest income increased 14% to $1.810 billion, noninterest income increased 12% to $839 million, and provision expense fell 80% to $151 million. Noninterest expense increased 41% to $1.865 billion.
- Balance sheet and debt: Total assets were $175.2 billion at June 30, versus $123.0 billion at year-end 2020; loans and leases were $111.9 billion versus $81.6 billion, and deposits were $142.8 billion versus $98.9 billion. Short-term borrowings were $391 million and long-term debt was $7.342 billion. Goodwill was $5.316 billion, including $3.326 billion recorded for TCF.
- Cash flow and liquidity: For the first half, operating cash flow was $988 million, investing cash flow was $3.986 billion, and financing cash flow was $1.686 billion. Consolidated cash and cash equivalents ended the period at $13.255 billion. Core deposits were approximately 97% of deposits; unpledged securities totaled $14.3 billion. The parent company reported $4.4 billion in cash and cash equivalents.
- Capital: Consolidated CET1 ratio was 9.98% and total risk-based capital ratio was 14.15% at June 30. The company reported ratios above regulatory well-capitalized standards.
Material changes versus comparable periods
- Q2 net income shifted to a loss, principally because of acquisition-related expenses and the initial credit provision for TCF. Excluding the acquisition’s partial-quarter contribution, the reported results also reflect ongoing legacy operations.
- Higher average earning assets helped lift year-over-year net interest income, but margin declined amid lower rates and balance-sheet mix changes. Q2 NII included a $55 million adverse interest-rate-cap mark-to-market and $30 million of PPP loan fees recognized on forgiveness; the cap impact reduced margin by about 17 basis points, while PPP fees added about 9 basis points.
- Loan, deposit, asset, and equity balances increased substantially with TCF. Acquisition-related accounting and expenses affect period-to-period comparisons; the filing says acquired TCF revenue and pretax income after closing cannot practicably be disclosed separately.
- For the first half, the sharp reduction in credit provision versus 2020 was a major contributor to higher net income. Management attributed it primarily to an improved economic outlook, partly offset by TCF’s initial credit provision.
Outlook, risks, contingencies, and unusual items
- Management described the recovery and customer activity as encouraging, with lending pipelines growing and loan demand expected to increase later in 2021. The filing provides no specific earnings or revenue guidance.
- COVID-19 effects and the durability of the recovery remained uncertain. The credit allowance included a material general reserve and industry-specific adjustments; a hypothetical 100%-adverse-scenario sensitivity would increase the quantitative allowance by approximately $1.1 billion, but management cautioned this is not an expected increase.
- TCF integration is a significant execution undertaking. Preliminary acquisition fair values may be adjusted during the one-year measurement period. A sale of 14 acquired branches and related assets and deposits to Horizon Bank was expected to close by the end of Q3 2021, subject to approvals and other conditions.
- After quarter-end, Huntington redeemed all $600 million of Series D preferred stock on July 15 and authorized up to $800 million of common-stock repurchases over the next four quarters. The board also declared a $0.15-per-share quarterly common dividend.
- Interest-rate risk, credit deterioration, liquidity, cybersecurity, regulatory compliance, and acquisition integration are among the disclosed risks. The company reported the balance sheet as asset sensitive for net interest income scenarios, while economic value of equity showed a liability-sensitive profile at June 30.
- Legal and regulatory matters are described as arising in the ordinary course. For matters where a loss range could be estimated, the aggregate reasonably possible loss was $0–$15 million above any accrued liability; management said the range is not the maximum exposure.
Important facts for investors to verify
- How TCF integration costs, expected synergies, and the acquired portfolio’s credit performance develop; confirm the final acquisition fair-value allocations.
- Whether the improvement in credit outlook and lower charge-offs persist, and how the allowance responds to changing economic forecasts.
- Underlying net interest income and margin trends after the unusual interest-rate-cap mark-to-market and PPP fee effects.
- Progress and closing terms for the planned branch divestiture, and the effects of any resulting balance-sheet changes.
- Capital and liquidity after preferred-stock redemption, dividends, and the authorized share repurchases.