Huntington Bancshares Incorporated — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Huntington is a regional bank holding company headquartered in Columbus, Ohio, with 727 branches across six Midwestern states. The filing compares results primarily with Q1 2013 and, for balance-sheet positions, December 31, 2013.
Financial performance and position
| Metric | Q1 2014 | Comparison |
|---|---|---|
| Net income | $149.1 million | Down from $153.3 million in Q1 2013 |
| Diluted EPS | $0.17 | Unchanged year over year |
| Net interest income, FTE | $443.4 million | Up 3% year over year |
| Total revenue, FTE | $691.9 million | Compared with $686.7 million in Q1 2013 |
| Net interest margin, FTE | 3.27% | Down 15 basis points year over year |
| Noninterest income | $248.5 million | Down 3% year over year |
| Noninterest expense | $460.1 million | Up 4% year over year; efficiency ratio was 66.4%, versus 62.9% |
| Provision for credit losses | $24.6 million | Down 17% year over year |
| Net charge-offs | $43.0 million; 0.40% annualized | Down from $51.7 million and 0.51% in Q1 2013 |
| Operating cash flow | $156.0 million | Down from $211.9 million in Q1 2013 |
| Cash and cash equivalents | $973.3 million | Down $27.9 million during the quarter |
| Total assets | $61.1 billion | Up from $59.5 billion at year-end 2013 |
| Loans and leases | $44.4 billion | Up from $43.1 billion at year-end 2013 |
| Deposits | $49.3 billion | Up from $47.5 billion at year-end 2013; core deposits were 94% of deposits |
| Debt and wholesale funding | $4.6 billion of short-term borrowings, FHLB advances, other long-term debt, and subordinated notes; $7.3 billion total wholesale funding | Funding mix shifted during the quarter |
| Capital | Tier 1 common risk-based ratio 10.60%; Tier 1 risk-based ratio 11.95%; total risk-based ratio 14.13%; tangible common equity to tangible assets 8.63% | Capital ratios were generally lower than at year-end 2013 |
Material changes and notable items
- Average loans grew 6% year over year, led by automobile lending, up 40%, and C&I lending, up 4%. Average CRE loans declined 7%. Average earning assets rose 8%, while margin pressure partially offset balance growth.
- Mortgage banking income fell 49% to $23.1 million, reflecting 41% lower origination volume, lower gain on sale, and a larger share of originations retained on the balance sheet. Securities gains rose to $17.0 million, partly reflecting portfolio repositioning for anticipated liquidity rules.
- Reported noninterest expense included merger costs, a $9.0 million litigation-reserve addition, and a $3.0 million goodwill impairment. Management cited approximately $21.6 million of significant items in its expense comparison; excluding significant items, expense declined year over year.
- On March 1, Huntington completed its $109.5 million stock-and-cash acquisition of Camco Financial, adding approximately $0.6 billion each of deposits and loans. The acquired portfolio contributed to higher reported nonperforming assets and criticized loans.
- Huntington repurchased 14.6 million shares in Q1 at a weighted-average price of $9.32, completing its prior $227 million program. The Federal Reserve did not object to a proposed program for up to $250 million of repurchases through Q1 2015.
Outlook, risks, and contingencies
- Outlook: Management expected moderate net interest income growth in 2014, with loan growth largely offset by continued net interest margin pressure. It anticipated modest increases in residential mortgage, home equity, and CRE balances; continued automobile growth; and C&I growth supported by a robust pipeline.
- Noninterest income, excluding MSR activity and securities gains, was expected to be slightly above seasonally low Q1 levels. A planned consumer checking-account change beginning in July was expected to reduce deposit service charges by approximately $6 million per quarter.
- Management expected noninterest expense to be slightly above Q1 levels, excluding significant items, citing Q2 seasonal marketing, a full quarter of Camco costs, and merit increases. It reaffirmed a commitment to positive operating leverage for full-year 2014, expected continued NPA improvement, and described NCOs as within its normalized 35–55 basis-point range. The expected tax rate for the remainder of 2014 was 25%–28%.
- Credit quality showed continued longer-term improvement, but NPAs increased 4% sequentially to $365.3 million, largely due to Camco. The allowance for credit losses was $691.3 million, or 1.56% of loans; coverage was 211% of nonaccrual loans. Management anticipated ongoing quarterly provision volatility and elevated mortgage and home-equity charge-offs.
- Liquidity: management said the Bank had sufficient liquidity for the foreseeable future. Core deposits funded 76% of total assets. Huntington issued $500 million of senior notes in February at a 2.20% fixed coupon, due 2019, and repositioned securities ahead of anticipated Liquidity Coverage Ratio requirements.
- Legal exposure: management estimated reasonably possible losses in excess of amounts accrued for current legal proceedings at up to approximately $125 million. It also disclosed a Cyberco/Teleservices bankruptcy matter with a recommended judgment of approximately $71.8 million principal plus interest; the district court was conducting de novo review. Management stated that the amount accrued was adequate, while noting unfavorable developments could be material in a particular period.
- Other risks highlighted include interest-rate and securities valuation sensitivity, mortgage servicing-rights valuation and repurchase exposure, regulatory and compliance changes, competition, and the outcome of litigation and tax examinations. The filing did not provide a clear estimate of the reasonably possible loss range for mortgage representations-and-warranties exposure.
- Subsequent events: Huntington announced an agreement to acquire 11 Michigan branches with approximately $450 million of deposits, expected to close in the second half of 2014. In April, the Bank also issued $750 million of additional senior notes, in fixed- and variable-rate tranches.
Important facts for investors to verify
- Whether loan growth can sustain net interest income as asset yields and net interest margin remain under pressure.
- Whether mortgage-banking revenue stabilizes and whether the planned checking-account change reduces fee income by the forecast amount.
- How credit trends develop, particularly in home equity and residential mortgage portfolios, and whether the allowance remains appropriate as loans and acquired Camco exposures grow.
- The effect of share repurchases, dividends, acquisition integration, and additional debt issuance on capital and funding costs.
- Developments in the Cyberco/Teleservices litigation, other legal matters, tax examinations, mortgage repurchase claims, and implementation of liquidity and capital regulations.