Q2 2020 Huntington Bancshares Inc Earnings Call
Hi, all participants are named listen only mode.
Well all the oral presentation, if anyone should or fire operator systems. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded and it's now my pleasure to introduce your host Mr. Mark Muth director of Investor Relations. Thank you Sir you may begin.
Well I'm, Mark Smith director of Investor Relations for Honey.
But we will there be I can be found on the Investor Relations section of our website.
[music] call is being recorded and will be available or rebroadcast starting about one out close call.
Presenters today Steve.
Chairman, President and CEO, Zach Wasserman, Chief Financial Officer, enriched polling chief credit Officer.
No no lots to today's discussion.
During the Q when I hear you will contain forward looking statements.
Mr based on information assumptions available.
Her subject to changes risks and uncertainties, which may cause actual results to differ materially we assume no obligation to update.
For a complete discussion of risks and uncertainties. Please refer to this law and material.
See including our most recent forms 10-K 10-Q and <unk>.
Now I'll turn it over Steve for opening remarks, thanks, Mark. Thank you everyone for joining the call today.
Pleased with our second quarter results will reflect solid execution across the bank. Despite an incredibly dynamic in challenging operating environment.
Revenue was essentially level with a year ago quarters record mortgage income offset pandemic related headwinds.
The actions, we've taken to reduce our costs along with the hedging strategy. We implemented in 2018 are helping to offset the impact from lower rates expenses were down year over year. As a result was a proactive expense actions, we took the fourth quarter like gene as well as the new program. We are implementing in 2020.
Our business model.
<unk> commercial and consumer provides diversification of rather.
Hi, Good performance is all studies challenges our increased fees in our year over year ever pledged consistent execution our strategies.
Our purpose looking out for people and started interactions during these difficult times I'm extremely proud well my colleagues and their continued efforts to communicate with and support our customers as well as each other.
Last month, the bank funded more than 37000 loves the total volume more than $6 billion through the S.P. as they check protection program or PPP, a small and medium sized businesses across our footprint.
Jim is well positioned with robust capital and liquidity remains supportive of our customers. It's really is going forward.
I mean should receive the highest score the JD power mobile 2020 mobile labs satisfaction study for regional banks now. This is the second year in a row, we've been recognized by JD power, providing evidence that our focus technology investments are being well received.
Customers.
As we assess the outlook for the economy, we're guardedly optimistic for a gradual economic recovery.
Yes precedent levels government stimulus that supported both individuals and many companies that support is bought financial stability. The markets recent economic headlines generally appear more positive.
With homebuilder, although RV in marine sales instead of that exceeding pre pandemic levels U.S. consumer retail sales rose 7% in June as businesses have resumed operations.
Our businesses, we saw record consumer mortgage origination activity in second quarter, our commercial pipeline.
Oops over the past few weeks, where customers are becoming more optimistic for the future with many manufacturing customers expected to be fair to pretend that makes activity levels. During the second half of the year.
Our outlook reflects consensus field, how does this that the recovery is taking hold what progress will be on either.
Well, we do see signs for optimism, we remain vigilant the possible risks and our visibility is generally limited to the next few months.
The range of potential outcomes on key metrics remains why.
We are monitoring economic in customer data closely tightly managing our businesses.
As a result of lower interest rate levels, we are taking actions to manage expenses this year, which will further described.
We remain disciplined on expense rose well, making further investments in technology and other strategic business initiatives as the economy recovers.
As we've discussed previously it was not stuck did we have fundamentally changed on each as enterprise risk management. It's now the strength of the company as compared to a weakness during the prior cycle. Most recent de fast results demonstrate superior credit performance for our fifth consecutive defects filing.
Well, Jim <unk> loan losses in the fed severely adverse scenario remain among the best of the peer group well our stress capital buffer established at the minimal level up to about 5%.
And then into an aggregate moderates a little risk profiles illustrate into the disasters loves our second quarter credit metrics remain sound as we addressed the issues in our oil and gas portfolio with a second quarter provision. We believe we have the loss exposure in the oil and gas portfolio fully reserved under.
Hi portfolio metrics continue to reflect our expectation for outperformance through the cycle, we restrained our commercial lending to 20 like gene was afford fourth quarter average year over year growth rate of 1.8%, which gives us a more season.
Folio commercial loans at this point.
In the cycle.
Sporting we announced that the board declared third quarter cash dividends, a 15 cents per common share unchanged from the prior quarter.
Based on what we know today management expects to maintain the quarterly dividend rate in the fourth quarter subject to the board's normal quarterly approval process and you'll hear more about the dividends from Zach as well.
So that.
Well ask me I'll provide an overview of the financial performance and carry forward. Thank Steve and good morning, everyone. Slide three provides the highlights for the 2022nd quarter.
<unk> earnings per common share of 13 cents, which on average assets was 51 basis points, which on average common equity was 5% Elektron Albert's tangible common equity was 6.7%.
Clearly results were significantly impacted by the elevated level of credit provision expense as we added 218 million. So the reserve during the quarter.
Now, let's turn to slide four to review our results in more detail.
Year over year pretax pre provision earnings growth was 4%. We believe is a solid performance in light of the challenges of the interest rate environment and the rapid decline in short term rates year to date.
Total revenue was relatively flat versus a year ago corridor as pressure on spread revenues was nearly offset by growth in fee income.
Specifically record mortgage banking income of $96 million.
Was partially offset by waivers to assist our customers reduced customer activity and at the higher levels of consumer deposit account balances the reduced the deposit service charges and cards and payments the line items.
Total expenses were lower by $25 billion or 4% from a year ago corridor. This expense discipline reflects the actions we took in the 2019 fourth quarter to reduce our overhead expense run rate, including a reduction of 200 positions and the closure of 31 against all branches as well as the actions we have taken to adapt to the current environment.
Balanced against the impact from continued investment in our technology capabilities.
Finally, I would like to note that normal size continuing kept comparisons for our net interest income fee income and non interest expense can be found in the appendix.
Turning to slide five.
Net interest margin was 2.94% for the quarter down 20 basis points linked quarter inline with the guidance. We provided the Morgan Stanley Conference in June.
The second quarter NIM was negatively impacted by a few unusual items, but I would like to highlight.
Elevated deposits held at the fed during the quarter reduced NIM by seven basis points versus the first quarter.
In fact would've been larger but for our active management to move several billion dollars of non primary bank relationship account balances office you during the quarter.
Reduce <unk> loans late fees, primarily at our auto portfolio compressed NIM by three basis points. Additionally, in Q2, NIM was negatively impacted by three basis point derivatives and effective Bismarck, while in Q1, the Mark was positive four basis points, but seven basis points of the 20 basis point.
As of quarter to quarter NIM compression was driven by this item.
Our underlying NIM performed quite well despite the challenging interest rate environment, given our strong liquidity position. We continue to actively managed our cost of funds. Our average cost of interest bearing deposits was 25 basis points in the month of June and we see some continued opportunity for modest further reduction.
Our hedging actions continue to reduce the unfavorable impacts of interest rate volatility and the lower interest rate environment.
In the second quarter, we had $1.6 billion a forward starting out that has just become active.
Providing NIM benefit going forward.
Moving forward to slide six average, earning assets increased 9.9 billion or 10% compared on a year ago quarter average commercial industrial loans increased 15% from the your difficult quarter and 14% linked quarter, reflecting the addition of 4.1 billion in average PPP loans.
I've been out of court around the total PPP loan balance was just over 6 billion.
Outside of PV view, I think we saw solid growth in health and health care and out that financing the corridor offsetting this growth auto floor plan line utilization was suppressed due to lack of new inventory Oems and we continue to actively manage the non core exposure in our oil and gas portfolio down, including 100 and so.
$70 million of loans sold or under contract to be sold in the second quarter.
Sumer loan growth remained focused on the residential mortgage portfolio, reflecting robust originations over the past four quarters.
Also as a result of the elevated deposit levels in the quarter, we saw a material increase in interest bearing deposits being held at the fed.
Turning to slide seven we will review the deposit growth.
Average core deposits increased 13% year over year, and 12% versus the first quarter, primarily driven by commercial loan growth related to the P.P. loans and commercial line draws consumer growth related the government stimulus and reduced account attrition.
During the quarter, we saw a dramatic shifts in the retail deposit acquisition trends as consumer and business banking customers adopt it to the Kobin environment. We saw utilization of online account opening channels increased 13% quarter over quarter and 61% year over year.
Announcing traditional we're now seeing traditional branch based acquisition approaching pre kobin levels.
Slide eight highlights the trends in commercial loans total deposits salable mortgage originations and debit card spend which is consistent with what we disclosed last month Morgan Stanley called for Us.
Slide nine illustrates the continued strength of our capital and liquidity ratios the common equity tier one ratio or C.T.. One ended the quarter at 9.84% down four basis points year over year, a tangible common equity ratio or Tc. He ended the quarter, 7.28% down 52 basis.
It's from a year ago.
He turned over now to rich to cover credit rich. Thanks Zack.
Before I get into the second quarter credit results I want to turn your attention to slide 10, which illustrates the relative rankings of modeled cumulative loan losses for Huntington and our peers in the federal reserve severely adverse scenario. So the 2020 deepest exercise.
Steve just mentioned overtime. This is the only true comparison of credit risk across the sector that we know.
Provides us independent validation of the credit risk management discipline and practices, we've been implementing for over a decade now to achieve an aggregate moderate to low risk profile.
Our 2020 do fast result puts us at the top our pure we've done a top cortile pure performer and each defects exercise since 2015.
Our portfolio composition evenly split between consumer and commercial businesses gives us diversification in periods of economic stress and our defense numbers reflect as much.
Turning now to the credit metrics and results.
Slide 11 provides a walk of our allowance for credit losses or do you see all from year end 2019 to the second quarter you can see our ATM has more than doubled during this period, increasing by just under a billion dollars to 2.27% of loans. Excluding the DPP loan balances are tcl would be 2.4 or 5% as of June 30.
Second quarter alone. This represents a $218 million serve built from the first quarter.
Like the first quarter there are multiple data points used to size the commission expense for Q2.
The primary economic scenario within our loss estimation process was amazed Moody's baseline forecast.
The scenario assumes peak unemployment in Q2 2020, the 15% followed by a rebound to 9% by the end of 2020, and a slow recovery to 8.5% by the fourth quarter 2021.
GDP recovers from a 33% declined to two key 2020 to end the full year down almost 6% demonstrates 1.5% growth in 2021 with most occurring in the second half of the year.
The Q2 Hcl now includes a 30% reserve against oil and gas portfolio. We believe we have the loss content in this portfolio fully reserved we have bifurcated this portfolio into core and non core segments with the noncore portion, representing just under 60% of oil and gas borrowings.
30% coverage includes a 44% coverage ratio against the noncore portfolio.
9% reserve against the core portfolio.
Recall that our oil and gas portfolio represents about one percentage of total loans.
Slide 12 shows our NPS and TV ours and demonstrates the impact on our oil and gas portfolio has had on our overall level of npis.
We have discussed for several quarters the challenges we see what this portfolio commodity prices continued to range below economical levels for this industry oil and gas MPS represent 40% of our overall idea is and are also a significant contributor to our Q2 M.P. adult.
Notably over 95% of or oil and gas up here is where current pay with respect to principal and interest stuff of course correct.
Slide 13 provides additional details around the financial accommodations, we provided our commercial customers. The commercial deferrals are now graduating from amendments or waivers and outside of the hospitality and other troubled related businesses, we do not see a widespread need for additional payment really.
Auto dealers the franchise restaurant customers two of our larger deferral users are both exiting those deferral periods and strong shape and we expect nearly all those deferrals to run their course in Q3.
Today request for additional deferral periods have been limited and the other commercial portfolios as well.
Slide 14 chose our consumer deferrals in the early news here as good as well our auto RV Marine and he'll have portfolios are performing as we would have expected with modest post deferral delinquencies are focused on high FICO customers here, a shielded us somewhat from job losses with Citi.
The mortgage accommodations, our two step process as a new forbearance agreement as necessary upon the expiration of the first as a result, we have limited visibility into the resolution here.
Slide 15 provides an update to the industry's hardest hit by Coca 19 to date.
Thoroughly reviewed these portfolios as well the 75% of our total commercial loan portfolio since April and believe we have the existing risks identified an appropriately manage our hotel exposure is centered on five primary sponsors most of them are long term relationships, including through the last downturn.
We believe these sponsors have to liquidity and financial flexibility so either way through the longer term recovery period, we forecast for this industry.
Our restaurant exposures, primarily in the National could service brands that have maintained drive up operations and our sandwich, a pizza customers up and open for take out service to offset the declines in how season.
We believe this book to be in good shape overall, but we'll continue to closely monitor the heightened risk in a single location and other non franchise names in the portfolio.
As a leading us to be a lender in the country. We also have guarantees on over $400 million up the restaurant childcare physician practices and other sectors, which provides us additional opportunities for recoveries.
And the second quarter as part of our active portfolio management process and devaluated, the coated related impacts across all portfolios. It took appropriate actions as required by regulatory guidance to downgrade those severely impacted credits to criticized status distribute resulted in increased our criticized asset levels at $1.1 billion.
Hours in the quarter.
As you would expect they were centered on the industry's referenced in the chart hospitality retail airport parking and other suppliers the customer's needs affected industrialist except for auto but have longer pass back to a full recovery. We felt it proved to move those credits to criticized status, we will take a patient approach to working with these customers.
Currently do not see a significant loss content.
Oh, the 30% or the downgrades, we did not a tribute to co but most of that was in our oil and gas portfolio.
Slide 16 provides a snapshot of t. credit quality metrics for the quarter, our credit performance on the whole was strong.
Net charge offs, representing an annualized 54 basis points of average loans and leases the commercial charge offs were centered in the oil and gas portfolio, which made up approximately 75% of the total commercial that charge offs.
I'd also point out the nearly all these oil and gas charge offs resulted from loan sales closed our contracted for sale during the quarter as we prudently reduce our exposure to the sitting history.
Annualized total net charge offs, excluding the oil and gas related losses were 24 basis points demonstrating that the balance of our portfolio continued to perform well in Q2.
<unk> charge offs were down to 30 basis points, you Q2, demonstrating our continued strong consumer portfolio.
As always we have provided additional granularity like portfolio at the analyst package on slides.
The nonperforming asset ratio increased 14 basis points linked quarter, and 28 basis points year over year to 89 basis points due to the oil and gas impact I described earlier.
Let me turn it back over to attack. Thank you rich turning to slide 17, I will provide our expectations for the third quarter.
I was was the case last quarter, we feel it's prudent to limit our guidance to the current corridor the ongoing uncertainty around the economic outlook.
Steve alluded to earlier, you confident that our businesses are pleased with our second quarter results given the headwinds in the quarter. Our sentiment has improved from 90 days ago due to the recent trends, we're seeing and the actions we've taken to better position the bank for success going forward.
Looking at the average balance sheet for the third quarter, we expect average loans to be approximately flat on a linked quarter basis consumer loans are expected to increase approximately 2% driven by continued growth in the residential mortgage and RV Marineland <unk>.
Commercial loans are expected to decrease approximately 1% at the full quarter impact of PBP is more than offset by continued reductions in dealer floor plan and commercial loan utilization rates. Our current projections assume the majority of the Pvp balances will remain on the balance sheet through the end of the year.
Early stage commercial pipelines have been building over the past several weeks supporting the expectation of accelerating growth in the latter part of the year.
We balance biscuit customer optimism with an acknowledgment of the fluidity of the current economy and some concern that the recent upward trend than the infection could dampen the pace of the economic recovery.
We expect average total deposits decreased approximately 1% linked quarter commercial deposits are expected to decrease approximately 3% assuming gradual usage of deposit inflows from the government stimulus.
We expect total revenue to increase approximately 2% linked quarter, what the net interest income increasing 2% to 4%, we expect GAAP NIM to expand approximately seven to 10 basis points versus the second quarter now of 2.94% as a result of the hedging strategy and the elimination of notable item.
Which negatively impacted the second quarter.
Namely three basis points of reduced loan rate fees, and three basis points of derivative and effectiveness Mark.
Our NIM expectation does not include material benefit from the acceleration of PBP piece from a from the repayment or for debt forgiveness of those loans in the third quarter.
We expect fee income to be approximately flat as mortgage banking activity remains robust and pandemic impacted revenue lines rebound.
Based on the debit card trends, we would expect a slight pickup in card related fees in the third quarter.
Deposit account activity volumes are increasing yes, given the elevated level of consumer deposits, we do not expect a full recovery in deposit service charges.
These increases are expected to be offset by reduced other income.
The second can talk a second quarter contained gains of $18 million related to be annuitization. Other retiree health plan and the retirement plan services record keeping business sale.
As I mentioned earlier, we're benefiting from the expense actions, we took in the fourth quarter of 29 team.
In addition, given both the significant economic challenges of 2020, and the desire to self fund some of the compelling initiatives being identified in our ongoing strategic planning process. We're now executing the expense management program, we have a preview for you on prior calls.
As I mentioned previously our outlook to this plan is focused on four categories. The expenses the size and compensation level of the organization structural expenses, including our branch and corporate facilities investments primarily be optimization of level of marketing and lastly, other discretionary expenses.
Program is size to generate approximately $75 million annual savings in 2020 and 2021.
In 2020, this cost rationalization will allow the bank to prudently manage expenses, given the economic and business uncertainty that exist this year.
We've modeled numerous scenarios for the 2020 financial outlook, but the majority of these forecasts achieving positive operating leverage for Twentytwenty inclusive of the expected approximately $25 million of restructuring cost related to the expense management program.
Importantly, we would positioning the company for some time to be ready to capitalize on opportunities to drive accelerated revenue and market share growth that will arise when the economy economic recovery begins to solidify.
While our longer term planning for 2021, it's still a work in process.
Our current expectation is that if we continue to see positive signs of economic stabilization and re growth, we will accelerate investments in digital technology capabilities product differentiation and other strategic initiatives in the latter part of 2020 and into next year potentially utilizing up to the full amount of these savings for this.
Purpose in calendar year 2020.
Does this program provides the opportunity to fund these initiatives will generally maintaining a strong expense efficiency level in 2020.
Focusing on the expense outlook for the third corridor, we expect non interest expenses to increase approximately 5% on a linked quarter basis, approximately 2% of this growth is driven by the $15 million of the total approximately $25 million restructuring cost associated with the expense management actions that we recognized in the third quarter the remote.
Anything approximately 3% is driven by investments in technology and marketing as well as the return of customer in sales activity closer to pre pandemic levels.
Finally, we expect.
Net charge offs in the third quarter to be near 65 basis points. This was reflective of the potential charge offs in the oil and gas portfolio as well as broader economic considerations fundamentally our credit remains sound. However, the economic outlook remains uncertain.
And we are likely to see elevated provision expense through the remainder of 2020.
So we will now take questions. We also incurred to speak to your peers. Each person ask only one question and one related follow up and then if that person have any additional questions he or she can add themselves back into the queue. Thank you.
Thank you.
The question. Please press star one on your telephone keypad.
Well I'm willing to take your line is in the question.
You may pets, sorry kill it seems like your with your question from the Q.
Do you think deeper witnessed maybe necessary to pick up your hands that before passing the stark. He is one moment. Please.
And.
Our first question comes on line, Jon Arfstrom with RBC capital. Please proceed with your question.
Thanks, Good morning, guys.
We're not Arctic nice nice job.
There's a lot of places to go but let's just talk oil and gas to get that out of the way longer term. What's the plan there or is it just to get down to five or 600 million.
No what you'd call your core portfolio.
And.
If you could maybe project is it are you done in Q3 are you done in Q4 went when does the noise.
Start to go working portfolio.
Hey, John it's rich.
With respect to the oil and gas piece of it we've got a bifurcated into a coal car in a car sector and the focus is really on getting that noncore piece of the portfolio down and you know through whatever methods. We have many of you saw in Q2 that we sold about a 107.
$2 billion to the extent that we've got opportunities, where we think the sale prices better than what a recovery might be it the credit got into trouble, we would certainly do that.
As it relates to the ongoing strategy you know, we're not originating any new loans in that space, we havent for over a year now I think we're really just focused on the portfolio, we have now and managing the risk better.
John This is probably the last quarter, we're going to distinguish ourselves with reported out the oil and gas like this because we believe we've got a box now fully reserved.
And and while you will see metrics around that we don't feel a.
The the so called it out like we have this quarter is picking up in the normal course.
Well look to maximize the portfolio, particularly noncore overtime.
Okay.
Alright, and then just a follow up the rest of it looks so Kevin.
Credit perspective.
And Jack you talked about the third quarter fourth quarter provisions remain elevated.
I see it to 45, PCL and relatively tame credit metrics.
I guess the question is how much of reserve Bill do you think you still need.
How do you want us to think through bad third quarter fourth quarter provision level.
Hey, John it's rich I'll take that the you know we havent really.
Thought about what filled in the third quarter, but will look like you know as you work through the seasonal methodology. This is a point in time.
As such and so similar to what we did in Q2.
We will do the same processing in Q3, we will look at what the change in the economic outlook might be.
For the end of September were certainly not kind of recent anything.
Earlier in the quarter, but we're going to take every available today, we have to look at the economic.
Condition.
And the forecast that we see well also have another quarter of portfolio activity to see how the.
Portfolio was is behaving relative to our expectations and based on those two factors will look at.
Where we think the provision ought to be so it's really hard for us to sit here and really Cecil wouldn't have you forecast additional builds its really a corridor by corridor.
Step by step process.
Can we do like generally now the portfolios performed thus far.
And.
Feel good having looked at a very substantial amount of the commercial portfolio in depth during the quarter and tried to have a realistic if not conservative lens on it.
Which is reflected in some of the metrics like the criticized loans increased.
But it's the performance.
For the quarter was frankly better than we would have expected it to me at the port and.
And were Oh, but were you know we've got to a recurrence of the virus it looks like commitment.
We don't know what fourth round if it happens within those with the slot of unknowns here. So it's very very difficult to project, where this is not yet.
Okay.
Alright, thank you.
Thank you our next question.
John Pancari with Evercore ISI. Please proceed with your question.
Good morning.
Up on your comment right that you just mentioned the John about looking at the reserve a each quarter or do you trust that shouldn't you're looking at the behavior of your credit versus your expectations.
It's about a dynamic that underscores that have already been factored into the reserve.
Terms of how the credits are actually behaving versus what your model because now you're providing that a lifetime losses expectation.
Oh, that's right and I thought.
Hi, My comment was meant to means that we will look at how the portfolio. If there are changes in the portfolio from the end of Q2 to the end of Q3.
Okay. So more about the growth then versus well the underlying credit you could be growth. It could also be changes and underlying president I mean to the extent that.
There is further deterioration or improvement either way in the portfolio that gets reflected in.
The modeled outputs for what would go into Q3.
Okay got it and then I guess, so if the if the.
2.4, or 5% a reserve right now excluding PBP loans.
Does represent your pets expectation of the lifetime loss content of your loan portfolio.
How do you attribute the difference between that ratio and your company run most recent de fast estimate that you did they said they all come down to the macro assumptions any amount of stimulus that you're factoring it.
Yeah, I mean, we haven't disclosed the company run.
She's got scenarios, but that certainly.
Theres going to be a number of factors that will go into you know what we provided in our forecast versus you know what well just running through the models.
Okay I got it and then lastly, it's one that's what the cadence of the cost saves that 75 million. Okay. How I know you mentioned a portion and Oh 2020.
And then the rest from 2020 wants to talk about how we can expect the timing about the play out.
Sure.
Because of that John Thanks for the question. So as I mentioned that the it's about a $75 million save in both years and overtime.
Like we've said many times in the past we want to manage the expense base based on the revenue outlook and so you know a very substantial chunk of that $35 million, we would expect to flow to the bottom line 2020, and not be reinvested to the extent that we see the economy, improving as we go forward and the pacing and.
And level of that recovered because more certain we would expect to start to ramp up the investments as I mentioned aren't prepared remarks, and therefore have a less or perhaps even neutral net benefit for about a 21.
As we go forward, but for 2020, just to kind of come back to your question specifically around a third about say accrued to the second quarter as it was around $50 million left on a gross basis before at a modest acceleration investment in the backup in the year and before the 25 million.
Ultra restructuring costs.
In Q3 in Q4.
Got it thanks that's helpful.
Our next question comes from the line up can you send with Jefferies. Please proceed with your question.
Hey, guys. Good morning, I was just wondering if you could help us walk through the impact of PPP in terms of the yield you're seeing on that portfolio, what it added to and I and Jack I know you said that forgiveness, there's not built into the forecast, but how are you generally anticipate.
Thing it took to go going forward. Thanks.
Thanks for the question, let me I'm trying to put some some math behind this for you just starting first with the yield.
It was accretive to yield in the second quarter by advisories noted about two basis points of net interest margin really what drives that is the portfolio rate and we were seeing in June was 3.43% on an accrual basis for those loans in June which was made up of 1% of the underlying yield and then the amortization.
What for US based on the size mix of our loan PBB RPP loans was around 3% placement fees over the life or below so the combination of those two things for June was 3.43% and has additive to the overall NIM by around.
Two basis points.
It was about $35 million revenue in Q2 as well.
As we go forward into Q3 from a NIM perspective, I think it's accretive by around one basis points as our current estimates. So it's a tiny drag on a quarter to quarter basis of one basis point down, but pretty neutral in that respect into the third quarter.
In terms of the forgiveness I use the other part of your question.
You know the this continues to be a function of estimates as you might imagine, but our planning estimate at this point is that a roughly 85% of the loans outstanding well before given.
But the process around that is is the thing that's driving the most uncertainty around the timing.
And so right now, we're assuming that the loans less than $150000, each which is around 2 billion.
The $6 billion loans will be on likely on a fast track forgiveness process that heads will likely be forget but in the fourth quarter, that's our planning assumption for that.
And then then let's say around 10% of the remaining greater than what are you felt dollar loans are forgiven in Q4, so which would make about one quarter of the totaled $6 billion forgiven acute in Q4 with the remainder of 75% forgiven of what's going to be forgiven forgiven in in Q1.
So I think by the end of the year, we expect an average basis in Q4, we still expect to see around $4.7 billion would be in the fourth quarter coming down to around $700 million by Q1 next year does that okay. That's a more yep.
And just a follow up that 35 million recognize in Twoq when you get a full quarter of it in Threeq here, what do you Ballparking that got to turn into I know you put it in NIM terms directionally, but in terms of dollar terms.
Good question $50 million roughly Q3, Okay got it thanks very much.
[music].
Thank you once again as a reminder, if he would like to ask your question. Please press star one on your telephone keypad.
Participants isn't speaker equipment, maybe necessary to pick up your hands that before passing the Sarkies. Our next question comes from the line, Steve Alexopoulos with JP Morgan. Please proceed with your question.
Understood.
Hi, This is generally on for Steve I've, a follow up question I'm energies to your energy levels are at 30% of total exposure I'm just thinking fully reserved for the last I think can you just share without some of the key underlying assumptions baked into that Im sorry, love all such as H.
I forget the energy charge offs npls in criticized going from here as well at some of the macro factors like when you think the oil price.
By now.
Hi.
Yeah.
We took a.
Rich can we took a number of factors as we kind of size of the reserve build there when we looked at the core and non core.
Folios.
There are a number of factors that went into that designation, whether it's you know liquidity and but a big piece of that is borrowing based coverage and you know that last as long as the hedges last and so our our challenge with with the book in General is just our view on where commodity prices are going to go and that's the hedges roll off.
There's just more exposure to what we think is a pretty on economical level.
Oh price to support drilling and more important to support capital. So you know the seasonality of oil and gas business will drive some of the charge off decisions as you would expect.
The spring and fall borrowing base Redeterminations, our big driver of kind of a fresh look at.
What are the loans are relative to the.
So the collateral and that's part of what we saw in the second quarter.
Was the spring Redetermination results kind of flowing through and Oh, we're very proactive in terms of.
Getting out of credits that were for structural over advances in deals in our book in the four in the second quarter, we sold two of them and would be up there to the npls. So I think you know as it relates to further NPK growth.
That will be really base more around borrowing base redetermination areas the charge offs.
Both will be a function largely of star sale opportunities and also around borrowing base redetermination.
Okay. That's helpful.
And I think last quarter, you disclosed rebellion exposure leveraged lending comprised of a number up there.
Street I Love your appears experience in charge offs in the leverage I mean, I just want to see like how this portfolio as well I mean, I'm hopeful normal you're staying on the credit.
Yes, as it relates the leverage lending that the portfolio did go up modestly in the second quarter went up by about five 5% to 6% really due to fallen angel activity.
More than anything as it relates to new origination. So as you might recall, we've got a fairly modest leverage.
Special for leverage loans, its 2.5 times senior as opposed to most people do three times. So to the extent that you know these credits with US first quarter results Kinda Feldman too.
That criteria, we designated them fallen Angels.
I think bucket.
We did not have any leverage lending originated charge offs in Q2.
We are keeping an eye on them from a quick class standpoint.
There were some.
Downgrades within that book as you might expect but nothing significant.
Okay, great. Thanks for taking my question.
Thank you. Our next question comes in the line of Terry Mckee.
Even then please proceed with your question.
Hi, Thanks, good morning.
Hi, I'm not just was wondering if you could discuss a the health of the auto dealer portfolio. I know is an area of focus last quarter. You you mentioned earlier on the call that inventory levels are lower and there was some incremental reserve build here in the second quarter.
Yes, the Oh, floorplan businesses actually bouncing back and very good shape, we had about a half a million <unk> billion dollars of deferrals deferred PNR side.
In that book and that is all going to roll off in the third quarter.
There is very but the demand notwithstanding the fact that the new car inventories are down June results were very strong across our dealer book So.
We expect that book barring any further shutdowns or things like that to bounce back pretty quickly.
The challenge for that.
That's sectors, just getting inventory and they don't think that they'll be back to full inventory levels. Other lots before the end of the Europe.
So there was not much in the way and all of a reserve build as it relates to the before.
And the indirect onetime 11 sure the indirect is performing very well.
You can see.
The deferral piece of that was was fairly modest to start with about 8% I'm, sorry about 3% of the book and coming out of the deferral.
Payment rates are very strongly got your 92%.
Paying as agreed coming out of the deferral. So you know we are watching that like we're watching all of the consumer portfolios just given that.
The impact of the difference on the overall book, but.
That is a high FICO book.
We have a custom scorecard in that book has performed very well through the deepest exercises and we expected to continue to perform well.
Thank you and then just as a follow up thanks for a page eight the bottom right that the volume thanks for updating that that.
That exhibit just the the decline in the last couple weeks or maybe the last month and volume in transactions is that just a short term blip or are you seeing just the increase the number of Cobiz cases are beginning to impact a volume overall.
You're talking about the debit card volume chart correct correct bottom right.
This is act. So you know we've seen that it's like a roughly 2% year over year reduction in the last week versus the prior 10 days. So there's nothing in the first 10 days of July seven volumes were up about 20% year on year in the last week, they were up 18.7%, so not even 2%.
I guess would like as I talked about the numbers the.
And I think as we look across industries, we are seeing a little bit of a blip down I was studying the numbers. This morning, and one of the industries, where we're seeing the most substantial blip. So not surprisingly is in restaurants and bars. So you know.
Likely that is to some degree impacted by what we're seeing in terms of.
Some of the economic reopening guidance, changing and and things of that nature, but we're still seeing pretty robust snapping back and year over year growth overall.
Great. Thanks, Eric.
Thank you.
Thank you once again as a reminder, if he would like to ask your question. Please press star one on your telephone keypad. Our next question comes in the line Brock Vandervliet with <unk>. Please proceed with your question.
Hi, Thanks, most the.
Hi points been covered.
Wondering if you could just talk about a mortgage.
And.
Spectator plans are for the for the remainder of the year. It's it seems a bit like Cove. It is kind of pushed out a the spring selling season, obviously, we've got a massive change in rates.
Can you sustain your performance here longer than you would in a in a normal your I guess.
Rob.
What were seen in the markets here is that it's a lack of inventory we've had very good very strong.
Sales. So the construction is not keeping pace with demand and you're seeing that flow through in terms of a number of of.
Levels of inventory in a number of markets I should say so.
We've had a very strong performance on the housing front and and we think that will continue as a consequence of the virus.
That ends up it's somewhat labor constrained on the build for supply side.
Yep.
And the you know primary secondary mortgage spreads have been kind of two step with all the damage and fixed income markets do you see that rapidly coming in.
During the third quarter or is that more sustainable which would support a mortgage banking reps. Yeah. This is that goes tack on to sort of some steve's comments and try to dropped about so the question generally I think with the outlook for Q3 is pretty similar to Q2 in terms of volumes and a modest tightening of spreads.
What sort of around 15 basis points tend to 50 basis points lower spread as it was as.
That trend continues to be missing for for a while I think you know the with the outlook for Q4, it's harder to ascertain at this point just based on the timing of pipeline and things of that nature. Currently the pipeline for Q2 or for Q3 looks pretty similar to what it did for Q2 with that being said our planning assumption is that the spreads will continue to come down.
In Q4 and that volumes. Our teams are typically seasonally a fair amount lower acuform also see that down dropped as well so.
I think the trends you noted are in fact, it's happening you know the velocity with which they happened is still a question mark.
Okay, great and I'm on the deposit deposit fees.
Due to some of those waivers fees were kind of later how quickly can that come back.
Yeah. It's a here, we're assuming that some of them come back in the third quarter I think really if it's going to be a function of how quickly the deposits on the sheet start to get use I think you know this is a phenomenon that we've noted across the entire industry. The deposit gathering activity in second quarter was just extreme.
Really robust.
And what we've seen from our own portfolio was.
Around 70% we estimate.
On the consumer side of the government stimulus in summary, somebody out employee benefits are being saved that accounts and our that's only ticking down single digit percentage points per month as we go forward. So.
It's hard to say because we that's come to the key drivers is what happens with overall deposits and therefore, it's a overdraft activity without being so we are expecting a modest increase as we go to the third quarter, and then sort of indicative as our carbons Q4, as it's harder to ascertain.
One.
Got it thank you.
Welcome.
Thank you ladies and gentlemen, we have reached the end of our question and answer session I'd like to turn the call back over to Steve I know or for any closing remarks.
So thank you all for your questions an interest in Huntington.
Finally, we're pleased with second quarter performance, particularly given the challenges we face.
And while guardedly optimistic today, we acknowledge volatility in the uncertainty in the economy.
And I'm excited about or prospects going forward.
Finally, we always like and with reminded to our shareholders that there's a high level of alignment between the board management, our colleagues and our shareholders.
Gordon our colleagues are collectively are among the 10 largest shareholders money center and all of US are appropriately focused on driving sustained long term performance. Thank you again have a great day.
Thank you. This concludes today's teleconference. You may disconnect your lines at the time. Thank you for your participation and have a wonderful day.
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