Huntington Bancshares Incorporated — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Huntington is a regional bank holding company headquartered in Columbus, Ohio. Results reflect the FirstMerit acquisition, which substantially expanded the company’s balance sheet and operations.
Financial performance
| Metric | Q1 2017 | Prior-year comparable |
|---|---|---|
| Net income | $208.1 million | $171.3 million |
| Diluted earnings per share | $0.17 | $0.20 |
| Net interest income, FTE | $742.0 million | $512.2 million |
| Net interest margin | 3.30% | 3.11% |
| Noninterest income | $312.5 million | $241.9 million |
| Noninterest expense | $707.4 million | $491.1 million |
| Provision for credit losses | $67.6 million | $27.6 million |
| Net charge-offs | $39.4 million; 0.24% annualized | $8.6 million; 0.07% annualized |
FTE net interest income and margin are non-GAAP measures. The company reported total assets of $100.0 billion, loans and leases of $67.1 billion, deposits of $77.4 billion, short-term borrowings of $1.3 billion, and long-term debt of $9.3 billion at quarter-end. Operating cash flow was $395.8 million; investing cash flow was negative $737.1 million and financing cash flow was positive $265.4 million. Cash and cash equivalents declined $76.0 million to $1.31 billion.
Regulatory capital remained above well-capitalized standards: consolidated CET1 was 9.74%, Tier 1 risk-based capital 11.11%, and total risk-based capital 13.26%. Tangible common equity to tangible assets was 7.28%. Core deposits were 95% of deposits; unpledged investment securities totaled $15.1 billion, and Huntington reported compliance with its modified liquidity coverage ratio requirement.
Changes versus Q1 2016
- FTE net interest income rose 45%, primarily from FirstMerit-related growth in average earning assets and a 19-basis-point margin increase. Purchase accounting contributed to higher asset yields.
- Noninterest income increased 29%, largely reflecting the acquisition, higher deposit service charges, and mortgage banking activity. Noninterest expense increased 44%, also primarily reflecting the acquisition, including higher personnel, occupancy, data processing, and insurance costs.
- Net income increased, but diluted EPS declined from $0.20 to $0.17. Average diluted shares rose to 1.109 billion from 808 million, and preferred dividends increased.
- Provision expense rose 145%. Management attributed much of the year-over-year increase in net charge-offs to substantial commercial real estate recoveries in Q1 2016; the current-quarter charge-off rate remained below the company’s 0.35%–0.55% long-term target.
Outlook, risks, and unusual items
- Management described expectations for continued economic momentum, citing Midwest manufacturing and infrastructure activity, business investment, hiring, and pipeline growth. The filing provides no numerical earnings or revenue guidance.
- FirstMerit acquisition-related expenses were $73 million pre-tax, partly offset by $2 million of related noninterest income; the net after-tax impact was a $0.04-per-share reduction. Management said systems conversion was largely completed, with further integration oversight continuing.
- Credit indicators were mixed but described as generally positive: nonperforming assets declined 5% from year-end to $458 million, while the allowance for credit losses rose to $764 million, or 1.14% of loans and leases. The allowance increase reflected higher criticized/classified C&I assets, partly offset by improved consumer delinquencies.
- Management’s interest-rate analysis showed estimated net interest income increases of 3.0% under a +100-basis-point scenario and 5.9% under +200 basis points. Huntington identified interest rates, credit quality, liquidity and execution of the FirstMerit integration among relevant risks.
- Management estimated reasonably possible legal losses of up to $70 million beyond amounts accrued, while noting some matters could not be reasonably estimated. The Cyberco litigation judgment was reversed in part and remanded; other cited matters included an appealed mortgage-fee class action and a FirstMerit overdraft settlement awaiting final approval.
- The board declared a common dividend of $0.08 per share after quarter-end. The company reported no common share repurchases over the prior five quarters.
Important facts for investors to verify
- How much acquisition-driven revenue and balance-sheet growth will persist, and whether integration costs decline as expected.
- Why net income growth did not translate into higher diluted EPS, including the effects of share count and preferred dividends.
- Whether higher C&I criticized/classified assets lead to further reserve building or charge-offs; track delinquencies, nonperforming assets, and the allowance.
- How funding costs, deposit mix, and the company’s asset sensitivity respond to interest-rate changes.
- Developments in the disclosed litigation matters and any impact on reserves, capital, or earnings.