Huntington Bancshares Incorporated — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results. Huntington is a regional bank holding company headquartered in Columbus, Ohio; its second-quarter comparisons reflect the FirstMerit acquisition.
Financial performance and position
- Q2 earnings: Net income was $271.7 million, or $0.23 per diluted share, versus $174.5 million, or $0.19 per share, a year earlier. Net income applicable to common shares was $252.9 million. FirstMerit-related expenses reduced Q2 earnings by about $32.7 million after tax, or $0.03 per share.
- Revenue and margin: Total revenue was $1.082 billion on a fully taxable-equivalent (FTE) basis, up 37% year over year. FTE net interest income was $756.6 million, up 47%; net interest margin increased 25 basis points to 3.31%. Purchase-accounting accretion contributed about 15 basis points to the quarterly margin.
- Fees and expenses: Noninterest income was $325.2 million, up 20%, primarily reflecting FirstMerit, customer growth, and higher card and payment income. Noninterest expense was $694.4 million, up 33%; adjusted noninterest expense, a non-GAAP measure, was $644.1 million, up 28%. The reported efficiency ratio was 62.9%.
- Credit: Q2 provision for credit losses was $25.0 million, roughly flat year over year. Net charge-offs were $36.0 million, or 0.21% of average loans, versus $16.8 million, or 0.13%, a year earlier; management’s long-term target was 0.35%–0.55%. Nonperforming assets were $415.2 million, down 9% from the prior quarter. Total allowance for credit losses was $753.4 million, or 1.11% of loans and leases.
- Six-month results: Net income was $479.8 million, up 39%; diluted EPS was $0.40 versus $0.39. FTE revenue was $2.136 billion, up 39%. The six-month provision for credit losses rose 78% to $92.6 million, and net charge-offs increased to $75.5 million from $25.3 million, reflecting FirstMerit and a large commercial recovery in the prior-year comparison.
- Balance sheet and funding: At June 30, total assets were $101.4 billion, loans and leases $68.1 billion, deposits $75.9 billion, short-term borrowings $4.6 billion, and long-term debt $8.5 billion. Shareholders’ equity was $10.7 billion. Core deposits were about 95% of total deposits; unpledged securities totaled $14.7 billion. The company reported compliance with its Modified Liquidity Coverage Ratio requirement.
- Capital: Consolidated CET1 ratio was 9.88%, Tier 1 risk-based ratio 11.24%, total risk-based ratio 13.33%, and Tier 1 leverage ratio 8.98%. Tangible common equity to tangible assets was 7.41%.
- Cash flows, six months: Operating activities provided $558.7 million; investing activities used $1.580 billion; financing activities provided $1.152 billion. Cash and cash equivalents increased $130.7 million to $1.515 billion. These are consolidated cash-flow measures and should be considered in the context of a bank’s balance-sheet funding flows.
Changes and management commentary
- Year-over-year growth in assets, loans, deposits, revenue, and expenses was substantially influenced by the FirstMerit acquisition. Management reported that the systems conversion was largely completed, with oversight continuing until converted systems are fully decommissioned.
- Q2 average earning assets increased 35% year over year; average loans and leases rose 30% and average securities 56%. Management cited Midwest manufacturing and infrastructure growth, business investment and hiring, and steady pipelines, and expected continued economic momentum.
- Management described overall credit performance as positive, with stable delinquencies and criticized loans and lower NPAs. It noted that C&I and CRE charge-offs may be volatile from quarter to quarter.
- The Federal Reserve raised no objection to the company’s 2017 capital plan. On July 19, the board authorized repurchases of up to $308 million of common stock through June 30, 2018, subject to the authorization, and declared a $0.08 quarterly common dividend. The plan included a 38% increase in the quarterly dividend to $0.11 beginning in Q4 2017.
Risks, contingencies, and unusual items
- Key disclosed risks include credit quality, interest-rate and securities-market movements, liquidity, regulatory and compliance matters, cybersecurity, and execution of the FirstMerit integration. Management’s interest-rate analysis showed the balance sheet was asset-sensitive; modeled NII at risk was positive 2.8% under a +100 bp scenario and positive 5.5% under +200 bp over 12 months.
- Management estimated reasonably possible legal losses, in excess of accruals, of up to $70 million at June 30; some matters could not be reasonably estimated. In the Cyberco litigation, an appellate court reversed part of a prior judgment and remanded the case. A FirstMerit overdraft-fee class-action settlement received final approval in June 2017.
- The company recorded $3.6 million of impairment on two Reg Diversified CDO securities after changing its intent to sell them before maturity. It also transferred approximately $1.0 billion of securities from available-for-sale to held-to-maturity; the filing said related OCI amortization was expected to have an immaterial net-income impact.
- No specific earnings or revenue forecast was provided in the supplied filing text. Forward-looking statements are subject to economic, rate, competitive, regulatory, and merger-integration risks.
Important facts for investors to verify
- How much of ongoing net interest income and margin depends on FirstMerit purchase accounting, and how quickly that contribution runs off.
- Whether revenue growth and expense reductions translate into durable operating leverage as integration costs and acquired costs normalize.
- Trends in consumer charge-offs, especially other consumer and acquired FirstMerit portfolios, and the adequacy of reserves as loans grow.
- Progress on integration, including full systems decommissioning, and the realization of expected merger benefits.
- Execution of the announced dividend increase and share repurchase plan, while maintaining regulatory capital and liquidity.
- Developments in the disclosed legal matters and valuation or credit performance of securities, including CDO holdings and mortgage servicing rights.