HUNTINGTON BANCSHARES INC annual report, FY2017

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Business context and reporting period

Huntington Bancshares Incorporated is a Columbus, Ohio-based regional bank holding company, operating through The Huntington National Bank. This Form 10-K covers the year ended December 31, 2017; fourth-quarter comparisons are also summarized. The company operates across eight Midwestern states and reports four business segments: Consumer and Business Banking, Commercial Banking, Vehicle Finance, and Regional Banking and The Huntington Private Client Group.

Year-over-year comparisons reflect the full-year contribution of FirstMerit, acquired in August 2016, as well as acquisition-related integration costs. The company reported that FirstMerit systems conversion was complete.

Financial performance and condition

  • FY 2017 earnings: Net income was $1.186 billion, up 67% from $712 million in 2016. Net income applicable to common shares was $1.110 billion; diluted EPS was $1.00, up 43% from $0.70.
  • Revenue and margin: GAAP net interest income rose 27% to $3.002 billion. Fully taxable-equivalent (FTE) net interest income was $3.052 billion, and FTE total revenue was $4.359 billion, up 22%. Net interest margin increased 14 basis points to 3.30%, reflecting higher earning-asset yields and a larger benefit from noninterest-bearing funding, partly offset by higher funding costs.
  • Fees and expenses: Noninterest income increased 14% to $1.307 billion. Noninterest expense rose 13% to $2.714 billion, including $154 million of FirstMerit-related costs. The efficiency ratio improved to 60.9% from 66.8%.
  • Credit costs and quality: Provision for credit losses was $201 million, up 5%, mainly due to loan growth. Net charge-offs increased to $159 million, or 0.23% of average loans, from $109 million, or 0.19%. Nonperforming assets fell 19% to $389 million; nonaccrual loans were $349 million, or 0.50% of loans. The allowance for credit losses was $778 million, equal to 1.11% of loans and leases.
  • Balance sheet and funding: Total assets were $104.2 billion, up from $99.7 billion; loans and leases were $70.1 billion, up 5%. Deposits were $77.0 billion, and core deposits represented 96% of deposits. Total long-term debt was $9.2 billion and short-term borrowings were $5.1 billion. Shareholders’ equity was $10.8 billion.
  • Capital and liquidity: Consolidated CET1 was 10.01%, Tier 1 risk-based capital 11.34%, total risk-based capital 13.39%, and Tier 1 leverage 9.09%; all exceeded applicable well-capitalized standards. Unpledged investment securities totaled $14.1 billion. Management said the Bank had sufficient liquidity to meet LCR requirements and foreseeable cash needs.
  • Cash flow: Operating activities provided $1.954 billion; investing activities used $4.866 billion; financing activities provided $3.047 billion. Cash and cash equivalents ended the year at $1.520 billion.

Fourth quarter

Fourth-quarter net income was $432 million, compared with $239 million a year earlier; diluted EPS was $0.37 versus $0.20. GAAP net interest income was $770 million, provision for credit losses $65 million, noninterest income $340 million, and noninterest expense $633 million. The quarter included a $123 million tax benefit from federal tax reform; the effective tax rate was negative 4.8%. FTE NIM was 3.30%, compared with 3.25% in fourth-quarter 2016.

Material changes versus the prior comparable period

  • Growth in net interest income and fee income reflected FirstMerit’s full-year contribution, loan and deposit growth, and improved net interest margin. Average loans and leases grew 18% and average deposits 21% year over year.
  • Net income and EPS benefited from a $123 million federal tax-reform benefit, equivalent to $0.11 per diluted share. FirstMerit-related expenses reduced 2017 earnings by an estimated $0.09 per share, versus $0.20 per share in 2016.
  • Expenses increased with the acquired business, including personnel, occupancy, deposit insurance, and intangible amortization. Reported fourth-quarter expenses were lower than the prior-year quarter, which had significant acquisition-related costs; adjusted expenses were up 1%.
  • Credit trends were mixed: NPAs declined, while net charge-offs rose, principally from consumer lending growth and higher other-consumer losses. Commercial Banking’s provision declined as energy-related credits improved and net charge-offs fell.
  • Common dividends declared rose to $0.35 per share for 2017 from $0.29. The quarterly dividend increased to $0.11 beginning in fourth-quarter 2017. Huntington repurchased $260 million of common stock during 2017.

Outlook, commentary, risks, and unusual items

Management expressed optimism for 2018, citing improving economic conditions, strong labor markets, federal tax reform, and expected further Federal Reserve rate increases. It reported healthy consumer and business sentiment, steady consumer loan growth, encouraging commercial loan growth near year-end, and good commercial pipelines. No specific full-year 2018 earnings or revenue guidance is provided in the supplied filing text.

  • Tax reform: The 2017 results include a $123 million net tax benefit from the Tax Cuts and Jobs Act, mainly from revaluing deferred tax balances. The filing describes certain tax accounting estimates as provisional and subject to further analysis and guidance.
  • Interest-rate exposure: Management described the balance sheet as asset-sensitive; its modeled 12-month net interest income increased 2.5% under a gradual 100-basis-point rise and 4.8% under a 200-basis-point rise. Actual results depend on customer behavior, funding costs, and market conditions. The filing also identifies uncertainty around LIBOR’s expected transition after 2021.
  • Principal risks: Credit deterioration, economic weakness in manufacturing-oriented markets, competition and deposit pricing, cybersecurity and third-party system failures, regulatory and consumer-compliance requirements, liquidity and capital-market access, and litigation could affect results. The company also cautions that interest-rate changes may affect securities values, mortgage servicing rights, earnings, and capital.
  • Legal contingencies: Management estimated an aggregate possible loss range of $0 to $55 million in excess of accrued liabilities for matters where a range could be estimated; it said this is not a maximum exposure. Cyberco litigation and a West Virginia mortgage-fee class action had settlements agreed in principle after year-end, subject to further steps or approval.
  • Capital returns: The Federal Reserve did not object to the 2017 capital plan. The plan included common dividends of $0.11 quarterly and authorization for up to $308 million of common-stock repurchases through June 30, 2018, subject to Board authorization.
  • Controls and audit: Management and the independent auditor concluded internal control over financial reporting was effective as of year-end; the auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

  1. Separate the recurring earnings trend from the $123 million tax benefit and FirstMerit acquisition costs; assess whether expense savings and revenue growth persist.
  2. Track consumer charge-offs, particularly auto and other consumer lending, against loan growth, delinquency trends, and the $778 million allowance.
  3. Monitor deposit pricing and funding costs as rates rise, and compare actual NIM performance with management’s rate-sensitivity scenarios.
  4. Review capital and liquidity after planned dividends and repurchases, including debt maturities, regulatory requirements, and reliance on Bank dividends to fund the parent company.
  5. Follow the final accounting for tax-reform estimates and the outcomes and costs of the Cyberco and Powell settlements and other legal matters.