Business context and reporting period
Huntington Bancshares Incorporated is a regional bank holding company headquartered in Columbus, Ohio, operating more than 700 banking offices across six Midwestern states. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013.
Financial performance and position
| Metric | Q2 2013 | Comparison |
|---|---|---|
| Net income | $150.7 million; diluted EPS $0.17 | $152.7 million and $0.17 in Q2 2012; $151.8 million in Q1 2013 |
| Net interest income, FTE | $431.5 million | Down 1% year over year; up less than 1% sequentially |
| Net interest margin, FTE | 3.38% | 3.42% in Q2 2012 and 3.42% in Q1 2013 |
| Provision for credit losses | $24.7 million | Down 32% year over year and 16% sequentially |
| Net charge-offs | $34.8 million; 0.34% annualized of average loans | $84.2 million and 0.82% in Q2 2012; $51.7 million and 0.51% in Q1 2013 |
| Noninterest income | $248.7 million | Down 2% year over year and 1% sequentially |
| Noninterest expense | $445.9 million | Up less than 1% year over year and 1% sequentially; efficiency ratio 64.0% |
| Six-month net income | $302.4 million; diluted EPS $0.34 | $306.0 million and $0.33 for the first six months of 2012 |
| Six-month operating cash flow | $409.1 million | $560.8 million for the first six months of 2012 |
At June 30, 2013, total assets were $56.1 billion, loans and leases $41.7 billion, deposits $46.3 billion, and shareholders’ equity $5.8 billion. The allowance for credit losses was $777.3 million, or 1.86% of loans; nonaccrual loans were $363.5 million, or 0.87% of loans. The nonperforming assets ratio was 0.95%.
Consolidated regulatory capital ratios were 10.71% for Tier 1 common equity, 12.24% for Tier 1 risk-based capital, and 14.57% for total risk-based capital. Tangible common equity to tangible assets was 8.78%. Available liquidity included $10.7 billion of unused Federal Reserve and FHLB borrowing capacity. Core deposits comprised 95% of deposits. The parent company held $921 million in cash and cash equivalents.
Material changes versus comparable periods
- For the first six months, net interest income, FTE, increased 1%, while total revenue, FTE, declined 2% and noninterest income declined 7%. Lower loan-sale gains—particularly the absence of the prior-year automobile securitization gain—and lower other income were significant drivers.
- Six-month noninterest expense decreased 2%, despite higher personnel costs, largely reflecting lower other expense, including reduced automobile operating-lease costs and the prior-year $23.5 million litigation reserve addition.
- Credit metrics improved: Q2 nonaccrual loans fell 4% sequentially, and net charge-offs fell 33%. The allowance-to-loans ratio declined from 1.99% at year-end 2012 to 1.86%.
- Average C&I loans increased 6% year over year in Q2, while average CRE loans declined 17%. Period-end automobile loans increased to $5.8 billion from $4.6 billion at December 2012.
- Accumulated other comprehensive loss increased to $283.7 million from $150.8 million at year-end, mainly reflecting unrealized losses on available-for-sale securities and cash-flow hedges. The company repurchased 10.0 million shares in Q2 at an average $7.50 per share.
Outlook, risks and unusual items
- Management expected net interest income to grow modestly over the remainder of 2013, with loan growth partly offset by securities runoff and continuing margin pressure. It expected the 2013 net interest margin not to fall below the mid-3.30% range.
- Management expected noninterest income to be flat to slightly down versus 2012, excluding automobile loan sales and net mortgage-servicing-rights impacts. Q3 expenses were expected to rise modestly, and management remained committed to positive operating leverage in 2013.
- Management expected continued improvement in nonperforming assets, while noting quarterly volatility in credit-loss provisions. The projected 2013 effective tax rate was 25%–28%.
- The board approved freezing pension benefits effective December 31, 2013. Management expected a one-time, noncash, pretax gain of approximately $35 million, or $0.03 per share, in Q3 2013.
- Final Basel III rules were estimated to reduce the company’s Basel I Tier 1 common risk-based capital ratio by approximately 60 basis points. The company anticipated remaining above well-capitalized minimums and was evaluating mitigation options.
- Interest-rate exposure is mixed: management’s one-year earnings analysis indicated asset sensitivity, while economic-value analysis showed losses under rising-rate scenarios. The filing reports a 4.9% EVE decline at +100 basis points and a 10.6% decline at +200 basis points.
- Legal proceedings carry uncertainty. Management estimated reasonably possible losses in excess of accruals of $0–$130 million, and could not estimate a range for certain matters. In the Cyberco/Teleservices bankruptcy litigation, a bankruptcy court recommended a $71.8 million principal award plus interest; district-court review was pending. The company also disclosed IRS disputes that could materially affect results in the period of resolution, though management did not expect a material adverse effect on consolidated financial position.
- Other risks include economic and credit deterioration, interest-rate movements, competition, regulatory changes, mortgage repurchase claims, and litigation. The mortgage representation-and-warranty reserve was $28.0 million; management stated it could not estimate the reasonably possible loss range for that exposure.
Important facts for investors to verify
- Whether loan growth and deposit mix can offset continuing net interest margin pressure, and whether management’s mid-3.30% floor expectation is achieved.
- Whether improving credit indicators continue, particularly in residential mortgage and home-equity portfolios, where management expected elevated losses to persist.
- How the securities and cash-flow-hedge valuation losses affect capital, and whether the estimated Basel III capital impact remains accurate.
- Whether the expected $35 million pension-curtailment gain is recognized in Q3 as forecast, and how the benefit freeze affects future pension costs.
- The outcome and potential timing of the Cyberco/Teleservices litigation, other legal proceedings, IRS examinations, and mortgage repurchase claims.
- Liquidity and capital distribution constraints: the Bank could not pay a dividend to the parent at quarter-end without regulatory approval, and future dividends and repurchases remain subject to regulatory review and capital needs.