Huntington Bancshares Incorporated — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018; comparative results are for the quarter ended September 30, 2017 unless noted. Huntington is a regional bank holding company headquartered in Columbus, Ohio, with 970 branches and private-client offices across eight states.
Financial results and position
- Earnings: Net income was $378 million, versus $275 million; diluted EPS was $0.33, versus $0.23. Nine-month net income was $1.059 billion, up 40%, and diluted EPS was $0.90, up 43%.
- Revenue and margin: Q3 GAAP net interest income was $802 million, up $44 million (6%). On a fully taxable-equivalent (FTE) basis, it was $810 million, up $39 million (5%), with a 3.32% net interest margin, up 3 basis points. Noninterest income was $342 million, up 4%. Nine-month FTE revenue was $3.370 billion, up 4%.
- Credit costs and losses: Q3 provision for credit losses was $53 million, up $10 million. Net charge-offs were $29 million, or 0.16% of average loans, versus $43 million and 0.25% a year earlier. For the first nine months, provision was $175 million, up 29%, while net charge-offs declined to $95 million from $118 million.
- Expenses and profitability: Q3 noninterest expense was $651 million, down 4%; the prior-year quarter included $31 million in FirstMerit acquisition expenses, while the current quarter had no Significant Items. The efficiency ratio was 55.3%, compared with 60.5%. Return on average assets was 1.42%, versus 1.08%.
- Loans and deposits: Period-end loans and leases were $73.370 billion, up from $70.117 billion at year-end 2017. Deposits were $81.689 billion, up from $77.041 billion. Average loans and leases grew 7% year over year; average deposits grew 5%. Core deposits represented approximately 95% of period-end deposits.
- Cash flow and funding: Nine-month operating cash flow was $1.144 billion; investing activities used $1.977 billion and financing activities provided $612 million. Cash and cash equivalents ended at $1.299 billion, down from $1.520 billion at year-end 2017. Short-term borrowings were $1.348 billion, versus $5.056 billion at year-end; long-term debt was $9.385 billion, versus $9.206 billion.
- Capital and distributions: Consolidated CET1 ratio was 9.89% at quarter-end, down from 10.53% at June 30, 2018; total risk-based capital ratio was 13.36%. Huntington repurchased $691 million of common stock in Q3, including a $400 million accelerated share repurchase, and declared a $0.14 quarterly common dividend, up from $0.08 a year earlier.
- Equity and securities: Shareholders’ equity was $10.934 billion, versus $10.814 billion at year-end. Nine-month other comprehensive loss was $261 million, primarily reflecting unrealized losses on available-for-sale securities; AOCI loss stood at $790 million at quarter-end.
Material changes and management commentary
- Higher loan balances and yields supported net interest income: average earning assets increased 4% year over year, while loan yields rose 40 basis points. Funding costs rose 45 basis points; interest-bearing deposit costs rose 38 basis points.
- Loan growth was led by residential mortgages, RV and marine finance, auto, and commercial and industrial lending. Management attributed mortgage growth partly to expanded lending capacity and entry into the Chicago market, and RV/marine growth to expansion into 17 states.
- Reported expense declines largely reflect the absence of 2017 FirstMerit integration costs. On an adjusted basis, Q3 expense was broadly flat year over year ($651 million versus $649 million).
- Management described its footprint economies as performing well and said it was encouraged by the outlook for continued loan and deposit growth. The filing provides no specific numerical earnings or revenue guidance.
- Under the 2018 CCAR plan, the board authorized up to $1.068 billion in common-stock repurchases through Q2 2019 and a 27% increase in the quarterly dividend to $0.14, subject to board review and applicable conditions. At September 30, approximately $377 million remained under the repurchase authorization.
Risks, contingencies, and unusual items
- Management identifies credit, interest-rate and market, liquidity, operational, and compliance risks. It cautions that economic conditions, interest-rate changes, competition, regulatory developments, and execution of business strategies could cause actual results to differ from forward-looking statements.
- Credit quality remained strong by the company’s measures, but provision expense rose with portfolio growth and downgrades in commercial portfolios. Nonperforming assets were $403 million, or 0.55% of loans and leases; commercial nonaccrual exposure increased versus year-end, concentrated in a small number of C&I credits.
- The allowance for credit losses was $858 million, or 1.17% of loans and leases, versus $778 million and 1.11% at year-end 2017. Management cited loan growth and migration of acquired loans into the originated portfolio as drivers of the increase.
- Interest-rate sensitivity remained within board limits. The bank reported compliance with liquidity coverage requirements and said it believed liquidity was sufficient for foreseeable cash-flow obligations. Unpledged investment securities totaled $17.2 billion.
- Pending legal and regulatory matters are routinely monitored. For matters where a loss range could be estimated, management estimated possible losses of $0–$30 million above accrued liabilities; it said this range is not maximum exposure and an adverse outcome could materially affect a particular period’s results.
- Unusual or notable items included the 2018 conversion of Series A preferred stock into common shares, issuance of $500 million of Series E preferred stock, and the termination of $2.9 billion of interest-rate swaps in Q2; a related $149 million basis adjustment is being amortized over the remaining debt term. The 2017 comparison included FirstMerit acquisition costs.
Important facts for investors to verify
- Whether continued loan and deposit growth can offset rising deposit and wholesale funding costs and sustain net interest margin.
- How commercial credit downgrades, the C&I nonaccrual balance, and reserve coverage develop in subsequent quarters.
- Whether repurchases and the higher dividend remain consistent with capital ratios, regulatory requirements, and the board-authorized capital plan.
- The potential effects of unrealized securities losses and interest-rate changes on AOCI, capital, and reported earnings.
- Developments in pending legal and regulatory matters, including exposures not captured in the disclosed estimated loss range.