Business context and reporting period
Huntington Bancshares Incorporated is a regional bank holding company headquartered in Columbus, Ohio, with banking operations across six Midwestern states. This unaudited Form 10-Q covers the three months ended March 31, 2016; comparisons are primarily with Q1 2015 and, where noted, Q4 2015.
Financial performance and position
- Earnings: Net income was $171 million, up 3% year over year; diluted EPS rose to $0.20 from $0.19. Net income applicable to common shareholders was $163 million.
- Revenue and margin: GAAP net interest income was $503 million; FTE net interest income was $512 million, up 8%. Total FTE revenue was $754 million, up 7%. Net interest margin was 3.11%, down 4 basis points year over year but up 2 basis points sequentially.
- Fees and expenses: Noninterest income increased 4% to $242 million, including growth in equipment lease income, deposit service charges, and card processing. Noninterest expense increased 7% to $491 million; higher personnel and technology costs were partly offset by lower intangible amortization. The efficiency ratio was 64.6%, versus 63.5% a year earlier.
- Credit costs: Provision for credit losses was $28 million, up $7 million year over year. Net charge-offs were $9 million, or 0.07% annualized of average loans, versus 0.20% a year earlier; the quarter benefited from a large CRE recovery.
- Balance sheet and funding: At March 31, total assets were $72.6 billion, loans and leases $51.5 billion, and deposits $55.6 billion. Long-term debt was $7.9 billion and short-term borrowings $471 million. Average loans and leases grew 6% and average deposits 5% year over year. Core deposits funded 72% of total assets.
- Cash flow: Operating activities provided $192 million, investing activities used $1.589 billion, and financing activities provided $1.367 billion. Cash and due from banks ended at $816 million, down $31 million from year-end.
- Capital: CET1 was 9.73%, Tier 1 risk-based capital 10.99%, and total risk-based capital 13.17%. Tangible common equity to tangible assets was 7.89%. The company issued $400 million of Series D preferred stock in the quarter.
Material changes versus comparable periods
Higher average earning assets drove FTE net interest income growth, while increased funding costs—partly reflecting $4.1 billion of debt issued over five quarters—pressured the year-over-year margin. Loan growth included commercial and automobile lending; average securities also increased. Nonaccrual loans and leases rose to $499 million, or 0.97% of loans, from $364 million (0.76%) a year earlier, primarily due to a small number of commercial energy relationships. Commercial Banking net income fell 49% to $22 million as energy-related reserves and expenses rose. Retail and Business Banking and AFCRE earnings increased; Home Lending returned to a small profit.
Outlook, risks, and unusual items
- Outlook: Excluding significant items, net mortgage servicing rights activity, and the pending FirstMerit acquisition, management maintained its full-year 2016 goal of 4%–6% revenue growth and expected positive operating leverage to return gradually. Asset quality was expected to remain near current levels, with quarterly volatility; management expected charge-offs to remain below its long-term normalized range of 35–55 basis points, while credit costs gradually normalize as CRE recoveries diminish.
- FirstMerit transaction: The announced stock-and-cash acquisition was valued at approximately $3.4 billion, including about $836 million cash, and was expected to close in Q3 2016 subject to regulatory and shareholder approvals. The quarter included $6 million of related expense. Huntington said it would forgo remaining share-repurchase authorization; no shares were repurchased in Q1.
- Key risks: Energy-sector stress, economic and interest-rate uncertainty, funding costs, regulatory approvals and integration execution for FirstMerit, mortgage-servicing valuation sensitivity, and legal matters. Management disclosed that the Midwest economy remained generally supportive but cited global uncertainty and weakness in parts of the economy.
- Legal contingency: In the Cyberco/Teleservices matter, a district court judgment against Huntington was approximately $72 million plus interest; Huntington appealed and had increased reserves to fully accrue the judgment. Across current legal proceedings, management estimated reasonably possible losses in excess of accruals at $0–$60 million, while noting some matters could not be reasonably estimated.
- Other items: Q1 included $3.733 million of non-credit OTTI recognized in OCI, not earnings. The filing reported effective disclosure controls and no material quarterly change in internal controls over financial reporting.
Important facts for investors to verify
- Whether the rise in commercial nonaccruals and reserves, particularly in energy and coal exposures, continues or worsens.
- How much of the low Q1 charge-off rate reflects the large CRE recovery, and the pace at which credit costs normalize.
- Whether revenue growth and positive operating leverage are achievable amid margin pressure, higher funding costs, and increased expenses.
- FirstMerit approval, closing timing, cash and stock consideration, integration costs, and expected benefits.
- Capital and liquidity after the preferred issuance, debt growth, planned dividends, and the acquisition; assess cash flow alongside the bank’s funding sources.
- Developments in the Cyberco appeal and other litigation, including potential losses beyond recorded reserves.