Huntington Bancshares Incorporated — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Huntington is a diversified regional bank headquartered in Columbus, Ohio. Financial statements are unaudited.
Key financial results
| Metric | Q2 2023 | Comparison / context |
|---|---|---|
| Net income attributable to Huntington | $559 million | Up 4% from $539 million a year earlier |
| Diluted earnings per common share | $0.35 | Unchanged year over year |
| Net interest income | $1.346 billion | Up 7% year over year; FTE NIM was 3.11%, down 4 basis points |
| Total noninterest income | $495 million | Up 2% year over year |
| Total noninterest expense | $1.050 billion | Up 3% year over year |
| Provision for credit losses | $92 million | Up $25 million year over year |
| Return on average assets / common equity | 1.18% / 12.7% | Prior-year quarter: 1.22% / 12.8% |
| Efficiency ratio | 55.9% | Improved from 57.3% in the prior-year quarter |
For the first six months, net income was $1.161 billion, diluted EPS was $0.74, net interest income was $2.755 billion, and FTE NIM was 3.25%. Net income increased 16% and diluted EPS increased 16% year over year.
Balance sheet, liquidity, capital and credit
- Assets and loans: Total assets were $188.5 billion at June 30, up 3% from year-end 2022. Loans and leases were $121.2 billion, up 1% from year-end.
- Deposits and funding: Deposits totaled $148.0 billion, little changed from year-end. Core deposits were $142.9 billion, or 97% of deposits. Uninsured deposits were $43.1 billion, or 29% of deposits, on the company’s consolidated basis. Long-term debt rose to $14.7 billion from $9.7 billion at year-end.
- Cash and liquidity: Cash and cash equivalents were $11.1 billion, versus $6.7 billion at year-end. Available contingent FHLB and Federal Reserve borrowing capacity was $77.2 billion. Management stated liquidity was sufficient for obligations over the next 12 months and foreseeable future; the Bank had not drawn on the Bank Term Funding Program through June 30.
- Capital: Consolidated CET1 ratio was 9.82%, versus 9.36% at year-end; tangible common equity to tangible assets was 5.80%. Shareholders’ equity was $18.8 billion, up 6% from year-end.
- Credit: Allowance for credit losses (ACL) was $2.342 billion, or 1.93% of loans and leases, versus 1.90% at year-end. Q2 annualized net charge-offs were 0.16% of average loans, compared with 0.03% a year earlier. Nonperforming assets fell to $557 million from $594 million at year-end; nonaccrual loans were 0.42% of loans.
- Cash flow: For the six months, operating activities provided $760 million, investing activities used $1.132 billion, and financing activities provided $4.747 billion. Cash and cash equivalents increased $4.375 billion.
Material changes and unusual items
- Higher average earning assets and loan yields supported net interest income, but rising funding costs and higher cash balances pressured Q2 NIM. Average interest-bearing liabilities increased, including substantially higher borrowings; average noninterest-bearing deposits declined 18% year over year.
- Q2 noninterest income included an $18 million year-over-year increase from favorable mark-to-market on pay-fixed swaptions. First-half other noninterest income included a $57 million gain on the March sale of the Retirement Plan Services business (RPS).
- First-half personnel expense included $36 million of voluntary retirement program expense and $6 million of organizational realignment expense. Huntington also reorganized reporting into Consumer & Regional Banking and Commercial Banking; prior segment results were recast.
- Commercial and industrial loans increased from $48.1 billion at year-end to $49.8 billion; commercial real estate loans declined from $13.6 billion to $13.2 billion. Huntington reclassified certain non-real-estate-secured commercial loans, primarily REIT loans, from CRE to C&I and adjusted prior periods.
- Available-for-sale securities had $3.687 billion of gross unrealized losses at June 30; held-to-maturity securities had $2.270 billion. The filing says Huntington expects to receive contractual cash flows from both portfolios. Accumulated other comprehensive loss was $3.006 billion.
- Six-month net cash from operations declined from $1.824 billion in 2022 to $760 million in 2023. Financing cash flows included $13.594 billion of long-term debt issuance and $8.536 billion of maturities or redemptions.
Outlook, risks and contingencies
- Management’s economic baseline assumes slower growth over the next 12 months, modest growth returning in 2024, moderating inflation, and unemployment gradually rising to 4.2% by Q4 2024. The filing provides no specific earnings or revenue guidance.
- Management cited uncertainty from inflation, interest rates, tighter credit conditions, geopolitical developments and potential recession. It reported that credit was performing well overall, while describing the ACL build as reflecting loan growth and modest macroeconomic deterioration.
- The FDIC proposed a special assessment to recoup losses related to recent bank failures. Huntington estimated an impact of about $115 million under the proposal based on reported uninsured deposits, or about $199 million if inter-company bank subsidiary deposits were included under subsequent FDIC clarification. The final amount was uncertain; Huntington expected to record the impact when the final rule is enacted.
- Banking agencies proposed Basel III capital-rule revisions in July 2023; Huntington was evaluating potential effects. The filing also identifies possible higher capital and long-term debt requirements and increased regulatory costs.
- In a hypothetical 100%-adverse-scenario sensitivity analysis, excluding qualitative adjustments, ACL would be approximately $1.2 billion higher. Huntington emphasized this was not an expected allowance increase.
- Management estimated aggregate reasonably possible litigation losses of $0–$20 million above any related accrual where a range could be estimated; this is not the maximum exposure. Management did not believe pending matters would materially affect consolidated financial position, but noted an adverse outcome could materially affect results in a particular period.
- Huntington repurchased no shares under its $1.0 billion authorization in the first half and said it did not expect to use the program in 2023, as organic capital was expected to support loan growth.
Most important facts for investors to verify
- Whether deposit composition, funding costs and borrowings continue to pressure net interest margin.
- The final FDIC assessment methodology and Huntington’s resulting expense, particularly the treatment of inter-company deposits.
- Whether charge-offs, delinquencies and criticized commercial credits continue to rise, and whether ACL remains adequate as the economic outlook changes.
- How unrealized securities losses, deposit outflows or securities sales could affect liquidity, capital and earnings.
- The impact of proposed capital and long-term debt regulations, alongside the company’s capital distribution plans.
- Whether reported earnings trends are sustained without the RPS sale gain and favorable derivative marks.