Huntington Bancshares Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Balance-sheet comparisons are to December 31, 2012 unless noted. Huntington is a regional bank holding company headquartered in Columbus, Ohio, operating in six states and offering consumer and commercial banking, mortgage, auto finance, wealth management, and related services.
Financial results and position
| Metric | Q1 2013 | Comparison / context |
|---|---|---|
| Net income | $151.8 million | $153.3 million in Q1 2012; $167.3 million in Q4 2012 |
| Diluted EPS | $0.17 | $0.17 in Q1 2012; $0.19 in Q4 2012 |
| FTE net interest income | $430.1 million | Up $8.9 million year over year; down $9.4 million quarter over quarter |
| Net interest margin | 3.42% | 3.40% in Q1 2012; 3.45% in Q4 2012 |
| Total revenue, FTE | $682.3 million | Compared with $706.5 million in Q1 2012 and $737.2 million in Q4 2012 |
| Noninterest income | $252.2 million | Down $33.1 million year over year and $45.4 million quarter over quarter |
| Noninterest expense | $442.8 million | Down $19.9 million year over year and $27.8 million quarter over quarter |
| Efficiency ratio | 63.3% | 63.8% in Q1 2012; 62.3% in Q4 2012 |
| Net charge-offs | $51.7 million; 0.51% annualized | Down from $83.0 million and 0.85% in Q1 2012; $70.1 million and 0.69% in Q4 2012 |
| Operating cash flow | $211.9 million | $277.3 million in Q1 2012 |
| Cash and cash equivalents | $828.7 million | Down from $1.263 billion at year-end |
Total assets were $56.1 billion, loans and leases $41.3 billion, and deposits $46.9 billion. Shareholders’ equity was $5.9 billion. Period-end allowance for credit losses was $787.6 million, or 1.91% of loans and leases, and 207% of nonaccrual loans.
Consolidated capital ratios included Tier 1 common risk-based capital of 10.62%, Tier 1 risk-based capital of 12.16%, and total risk-based capital of 14.55%. Tangible common equity to tangible assets was 8.92%. Huntington repurchased 4.7 million shares during the quarter at an average $7.07 per share.
Core deposits funded 79% of total assets and 108% of total loans. Wholesale funding was $4.7 billion, and unused Federal Reserve and FHLB borrowing capacity was $11.8 billion. The parent company held $964.7 million in cash and cash equivalents. The Bank could not pay a dividend to the parent at quarter-end without regulatory approval; management said it did not expect to need Bank dividends in the near future.
Material changes versus comparable periods
- Year over year, FTE net interest income rose on higher average earning assets and a slightly higher margin. Average loans grew 4%, led by 14% growth in commercial and industrial loans; average core deposits increased 5%.
- Net income was broadly similar to Q1 2012, while revenue was lower, chiefly because loan-sale gains fell after the prior-year auto securitization. Q1 2012 also included an $11.4 million bargain purchase gain and a $23.5 million litigation-reserve addition.
- Quarter over quarter, net income declined from $167.3 million. Lower FTE net interest income, mortgage banking income, loan-sale gains, deposit service charges, and capital markets fees contributed; provision expense and noninterest expense also decreased.
- Credit measures improved from year-end: nonaccrual loans fell 7% to $380.3 million, or 0.92% of loans; nonperforming assets fell 7% to $415.5 million; and NCOs declined 26% to $51.7 million. CRE loans declined to $5.1 billion, while C&I and auto lending grew.
- Capital ratios improved from year-end despite repurchases and dividends. Core deposits increased, while total average core deposits were down 2% from Q4, partly reflecting a reduction in collateralized deposits.
Outlook, commentary, and key risks
- Management expected FTE net interest income to grow modestly during 2013, with loan growth partly offset by margin pressure; it did not expect 2013 NIM to fall below the mid-3.30% range.
- Management anticipated C&I growth, modest increases in residential mortgage and home equity balances, and CRE balances remaining around $5.0 billion. One auto-loan securitization was anticipated in the second half of 2013, subject to ongoing evaluation.
- Noninterest income, excluding potential auto loan sales and net MSR impacts, was expected to be near 2012 levels. Management expected revenue growth to outpace expense growth for positive operating leverage. Q2 expenses were expected to rise from Q1’s below-run-rate level, including from commissions, merit increases, marketing, and in-store expansion.
- Management expected continued credit improvement, but volatile quarterly NCOs, with normalized levels expected by year-end. The expected effective tax rate for the remainder of 2013 was 25%–28%.
- The February 2013 change to consumer transaction-account posting order affected service charges; the estimated full-year impact of $25 million–$30 million was included in prior 2013 guidance. Management cited lower-than-expected commercial customer transactions and competitive pressure on loan pricing and structure.
- The CFPB’s March 2013 indirect-auto-lending guidance may expose lenders to fair-lending liability related to dealer rate markups. Huntington said it was evaluating the guidance and its implications for its auto business.
- Legal proceedings include the Cyberco/Teleservices bankruptcy litigation. A bankruptcy court recommended a $71.8 million principal judgment plus interest against the Bank; the matter was under district-court review. Management disclosed an aggregate range of reasonably possible losses in excess of accrued amounts of $0–$130 million for current legal proceedings, and said certain matters could be material if resolved unfavorably.
- The IRS was examining 2010 and 2011 returns; proposed adjustments for 2006–2009 were under appeal. Management said an unfavorable resolution could materially affect results in the period, but did not expect a material adverse effect on consolidated financial position.
- Other exposures include residential mortgage repurchase claims, home-equity maturity and collateral risks, interest-rate and MSR valuation sensitivity, and proposed Basel III capital requirements. Management estimated the proposed rules could reduce its Basel I Tier 1 common ratio by about 150 basis points based on June 2012 balance-sheet composition.
The Federal Reserve did not object to the company’s capital plan. The plan provided for a quarterly common dividend increase to $0.05 per share beginning in Q2 and potential repurchases of up to $227 million through Q1 2014. Management said organic growth remained its capital-allocation priority.
Most important facts for investors to verify
- Whether margin pressure, loan growth, and deposit mix deliver the projected modest net interest income growth and mid-3.30% NIM floor.
- Whether credit improvement continues, particularly in home equity, residential mortgage, and noncore CRE, and whether the declining allowance remains adequate.
- The realized revenue impact of the posting-order change, commercial transaction activity, mortgage slowdown, and any second-half auto securitization.
- Developments in the CFPB indirect-auto guidance and the potential exposure from Cyberco/Teleservices and other legal proceedings, including losses above accrued reserves.
- Capital and liquidity implications of planned dividends and repurchases, Basel III rulemaking, and the Bank’s restriction on dividends to the parent without regulatory approval.