HUNTINGTON BANCSHARES INC quarterly report, Q3 FY2017

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Huntington Bancshares Incorporated — Q3 2017 Form 10-Q

Reporting period: Three and nine months ended September 30, 2017. The interim financial statements are unaudited. Huntington is a regional bank holding company headquartered in Columbus, Ohio; reported comparisons were significantly affected by the FirstMerit acquisition.

Financial performance and condition

  • Q3 earnings: Net income was $274.6 million, or $0.23 diluted per share, versus $127.0 million, or $0.11 per share, in Q3 2016. Net income applicable to common shareholders was $255.7 million. Return on average assets was 1.08% and return on average tangible common equity was 14.1%.
  • Revenue and margin: FTE net interest income was $770.6 million, up 21% year over year; FTE total revenue was $1.101 billion, up 17%. Net interest margin was 3.29%, compared with 3.18% a year earlier and 3.31% in Q2 2017. The quarter’s NII included an estimated $27 million purchase-accounting benefit. Noninterest income was $330.1 million, up 9% year over year.
  • Credit costs: Provision for credit losses was $43.6 million, down $20.2 million year over year. Net charge-offs were $42.9 million, or 0.25% annualized of average loans, versus 0.26% in Q3 2016. Management said the rate remained below its long-term expectation of 0.35%–0.55%. The total allowance for credit losses was $754.1 million, or 1.10% of loans and leases.
  • Expenses: Reported noninterest expense was $680.4 million, down 4% year over year. Excluding acquisition-related Significant Items, adjusted noninterest expense was $649.7 million, up 17% year over year (a non-GAAP measure). The reported efficiency ratio was 60.5%, versus 75.0%.
  • Loans and deposits: Period-end loans and leases were $68.6 billion, up from $67.0 billion at December 31, 2016. Deposits were $78.4 billion, up from $75.6 billion; core deposits were 95% of total deposits. Average earning assets increased 17% year over year, primarily reflecting FirstMerit.
  • Capital and debt: At September 30, CET1 was 9.94%, Tier 1 risk-based capital was 11.30%, and total risk-based capital was 13.39%; tangible common equity to tangible assets was 7.42%. Long-term debt was $9.20 billion and short-term borrowings were $1.83 billion. Huntington repurchased $123 million of common stock in Q3 at an average $12.75 per share.
  • Cash flow and liquidity: For the first nine months, operating cash flow was $1.106 billion, investing cash flow was negative $2.702 billion, and financing cash flow was $1.405 billion. Cash and cash equivalents ended the period at $1.194 billion, compared with $1.385 billion at year-end 2016. The company reported $13.9 billion of unpledged investment securities and compliance with the Modified Liquidity Coverage Ratio requirement. Parent-company cash and cash equivalents were $1.9 billion.

Changes versus comparable periods

  • Q3 net income more than doubled year over year, while diluted EPS rose from $0.11 to $0.23. The comparison includes $158.7 million of FirstMerit-related expense in Q3 2016 versus $30.7 million in Q3 2017; the Q3 2017 after-tax impact was $20.0 million, or $0.02 per share.
  • Q3 FTE NII rose $135 million year over year, supported by 17% average earning-asset growth and an 11-basis-point increase in NIM. Funding costs rose, partly offsetting higher asset yields.
  • Reported expenses declined year over year largely because acquisition-related charges were lower; on an adjusted basis, expenses increased 17%. Q3 also included about $12 million of nonrecurring personnel, operational, and efficiency-improvement costs.
  • For the first nine months, net income was $754.4 million, up 60%; diluted EPS was $0.63, up from $0.50. FTE total revenue increased 31%, while reported noninterest expense increased 21%, with acquisition effects influencing both.
  • Nonperforming assets declined 20% from December 31, 2016, to $387.0 million; the NPA ratio improved to 0.56% from 0.72%. Nine-month net charge-offs increased to $118.4 million from $65.4 million, which management attributed principally to portfolio growth and a large commercial recovery in the prior-year period.

Outlook, commentary, risks, and unusual items

  • Outlook: No specific earnings or financial guidance is provided in the supplied filing text. Management expected consumer and business optimism to remain high in its footprint, citing strong labor markets and consumer spending, some inflationary pressures, steady consumer-loan growth, and commercial pipelines supporting growth amid competitive pricing and structures.
  • Capital plans: The Federal Reserve had no objection to the company’s 2017 capital plan. The board authorized up to $308 million of common-stock repurchases through Q2 2018. A quarterly common dividend of $0.11 was declared for payment in January 2018, up from $0.08 declared for Q3.
  • Acquisition and operating execution: FirstMerit integration and purchase accounting materially affect year-over-year comparisons. Systems conversion was largely completed, but integration oversight continued. The company announced consolidation of 38 full-service branches, 7 drive-through-only locations, and 3 corporate offices.
  • Credit and market risks: Consumer charge-offs rose sequentially, particularly in other consumer and RV/marine portfolios; management described the increase as expected or seasonal. Interest-rate sensitivity models showed an asset-sensitive balance sheet and exposure to changes in rates; MSR values may be affected by rates and prepayments. The securities portfolio included unrealized losses, and the company recognized $3.6 million of OTTI on two CDO securities in Q2 after changing its intent to sell, plus $0.1 million of Q3 municipal-securities OTTI.
  • Legal contingencies: Management estimated reasonably possible losses in excess of accruals for current legal proceedings of up to $65 million at September 30, 2017; for some matters it could not reasonably estimate possible loss. The Cyberco litigation had a prior $72 million judgment reversed in part and remanded, with further proceedings pending. Management stated accrued amounts were adequate based on information then available, while noting unfavorable outcomes could be material in a particular period.
  • Other risks: Forward-looking results depend on economic and interest-rate conditions, competition, regulation, and realization of anticipated FirstMerit merger benefits. Huntington reported no material cyber losses to date and said disclosure controls were effective.

Important facts for investors to verify

  • How much reported earnings and NIM depend on FirstMerit-related purchase accounting, and whether acquisition cost savings and integration benefits continue.
  • Whether adjusted expense growth, branch consolidation costs, and reported expense trends reconcile to ongoing operating leverage.
  • Trends in consumer credit performance—especially other consumer and RV/marine charge-offs—and whether the allowance remains appropriate as portfolios season.
  • Capital deployment against earnings and risk: the pace of authorized share repurchases, the higher common dividend, and regulatory capital ratios.
  • Developments in the Cyberco and other legal matters, including any change to the stated estimate of reasonably possible losses.
  • Interest-rate effects on funding costs, asset yields, securities values, and mortgage-servicing rights; also confirm liquidity and LCR compliance in subsequent filings.