Just when a lot of folks thought credit quality woes were old news, two regional banks in the Midwest — Huntington Bancorp and UMB Financial — on Wednesday reported double-digit increases in chargeoffs.
They were among several midsize and regional banks that have reported such increases this earnings season. Is it time to be concerned?
The $101 billion-asset Huntington's third-quarter chargeoffs jumped 82% compared with the same period in 2015, but Chairman and Chief Executive Steve Steinour said he isn't sweating about asset quality.
"Credit quality for the quarter was really good," Steinour said Wednesday in an interview. "Nonperforming loans fell, delinquencies held steady or fell, criticized loans fell."
And while it is true net quarterly chargeoffs increased to $40 million compared with $17 million in the second quarter and $22 million in the third quarter of 2015, Steinour said the trend was more reflective of the Columbus, Ohio-based Huntington's remarkable record of recoveries on defaults over the past few quarters than any deterioration in the loan portfolio worth worrying over.
"We have had such strong recoveries that we were running very low chargeoffs," Steinour said. "We were running low-teen chargeoffs for a number of quarters. It ticked up this quarter, but we're not concerned about it. There are a handful of [problem] loans and our recoveries were lower. By all indications credit quality remains strong."
For the record, Huntington reported recoveries of $19.2 million in the third quarter, compared with $26.7 million in the second quarter and $44.7 million in the third quarter of 2015.
Huntington's uptick in net chargeoffs was mild compared with the upsurge Kansas City, Miss.-based UMB Financial reported Wednesday. The $19.7 billion-asset company saw its net chargeoffs soar by more than 700% from the year-ago period to $5.6 million. UMB reported recoveries of $59,000 in the second quarter.
Like Steinour, UMB Chairman and CEO Mariner Kemper noted his company has enjoyed a low level of net chargeoffs for several years. Kemper also said he expects results to return to the mean going forward.
"We've been able to manage growth and keep our chargeoffs low and that's our continued expectation," Kemper said Wednesday during a conference call with investors.
In a research note Wednesday, John Pancari, a senior managing director and senior equity analyst at Evercore ISI, wrote the jump in net chargeoffs at Huntington overshadowed strong expense control and better-than-expected growth in the net interest margin.
For its part, Huntington predicted predicted full-year net chargeoffs would still come in lower than their historical average of 35 to 55 basis points.
Huntington's acquisition of Akron, Ohio-based FirstMerit on Aug. 31 added earning assets totaling almost $24 billion to its balance sheet. Not surprisingly, revenue swelled as well, increasing 24% year over year to $938 million.
According to Steinour, that the deal-related increases masked solid gains generated by Huntington's existing businesses.
"The big news for us was our core performance," he said. "Core loans were up 8%. That's healthy."
Steinour said the company's bullpen of prospective borrowers remains stocked, reflective of strong economic growth in its Midwestern markets.
"We constantly hear from our customers that they can't get enough qualified labor," Steinour said. "They have backlogs and pipelines but just can't find the workers. We are production constrained and I would say that is true throughout our footprint…You see a massive amount of `Now Hiring' signs."
UMB's Kemper also reported strong loan demand and positive economic conditions. "We feel good about our pipeline [and] we feel good about activity levels," Kemper said.
Meanwhile, other banks have received questions about their chargeoff numbers during earnings season and sought to allay concerns.
TCF Financial in Wayzata, Minn., reported a modest three-basis point increase year over year in overall net chargeoffs to 0.26%. However, its auto chargeoffs rose noticeably.
The chargeoff ratio in consumer banking rose two basis points to 0.47%, primarily because of a 24-basis-point increase in auto finance to 0.86% that was offset by improvements in first mortgages and other consumer real estate loans. And the chargeoff ratio in TCF's wholesale lending rose 6 basis points to 0.10%.
When one analyst on TCF's earnings call flagged the increase in auto chargeoffs as well as a rise in auto delinquencies, CEO Craig Dahl and another executive attributed them to seasonal factors and the maturing of auto loans that TCF obtained in an acquisition five years ago; Dahl also said that the $21.1 billion-asset bank's rivals have experienced similar credit quality trends.
"Year to date net chargeoffs in auto are at 78 basis points, which is within our expected range," Dahl said earlier in the call. "In total our net chargeoffs continue to perform at the low end of our expected range."