Huntington Bancshares Incorporated — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results. Huntington is a Midwest regional bank holding company operating in six states.
Financial performance and condition
| Metric | Q2 2015 | Comparison |
|---|---|---|
| Net income | $196.2 million; diluted EPS $0.23 | Net income $164.6 million and EPS $0.19 in Q2 2014 |
| Revenue, FTE | $780.4 million | Up 9% year over year |
| Net interest income, FTE | $498.6 million | Up 7%; average earning assets rose 10% to $62.6 billion |
| Net interest margin | 3.20% | Down 8 basis points year over year; up 5 basis points sequentially |
| Noninterest income | $281.8 million | Up 13% year over year |
| Noninterest expense | $491.8 million | Up 7% year over year; efficiency ratio 61.7%, versus 62.7% |
| Provision for credit losses | $20.4 million | Down 31% year over year |
| Net charge-offs | $25.4 million; 0.21% annualized of average loans | Down from $28.6 million and 0.25% in Q2 2014 |
| Balance sheet at June 30 | Assets $68.8 billion; loans and leases $48.8 billion; deposits $53.5 billion | Assets were $66.3 billion and loans $47.7 billion at December 31, 2014 |
| Debt and equity | Short-term borrowings $1.5 billion; long-term debt $5.9 billion; shareholders’ equity $6.5 billion | Long-term debt was $4.3 billion at year-end 2014 |
| Capital | Basel III CET1 9.65%; Tier 1 10.41%; total risk-based 12.62%; tangible common equity to tangible assets 7.91% | Capital ratios reflect share repurchases; Basel III reporting began in 2015 |
For the first six months, net income was $362.1 million, up 15%; diluted EPS was $0.42, up from $0.36. FTE revenue increased 6% to $1.49 billion. Provision for credit losses fell 24% to $41.0 million, while noninterest expense rose 3% reported and 6% excluding significant items.
Six-month cash flow from operating activities was $86.1 million, versus $382.6 million in 2014. Investing activities used $1.52 billion, compared with $3.35 billion used; financing activities provided $1.60 billion, compared with $3.18 billion. Cash and cash equivalents ended the period at $1.38 billion.
Material changes and key drivers
- Loan and lease balances increased $1.1 billion from year-end, including growth in C&I and residential mortgages. Average loans and leases rose 6% year over year; average deposits rose 9%, with core deposits up 8%.
- Huntington acquired Macquarie Equipment Finance on March 31 and rebranded it Huntington Technology Finance (HTF). The $457.8 million cash acquisition added about $1.1 billion of assets and $616.6 million of debt and other liabilities, including $155.8 million of goodwill.
- Fee income gains reflected mortgage banking, HTF equipment lease income, electronic banking, and a $5.3 million gain on the $750 million auto-loan securitization. Mortgage banking income also included a $6.7 million net MSR hedging benefit in Q2.
- Personnel expense increased 8% year over year, reflecting merit increases, benefits, and HTF employees. Technology-related data-processing costs also rose. The company said it continued to pace investment to support positive operating leverage.
- Credit trends were mixed: consumer metrics improved, but commercial credit was more volatile. Nonperforming assets were $396.0 million, down 1% sequentially but up 17% from year-end; C&I nonaccrual loans increased, and accruing troubled debt restructurings rose to $967.7 million.
Outlook, risks, and contingencies
- Management expected full-year 2015 positive operating leverage, including and excluding HTF, and noninterest expense growth of 2%–4% excluding significant items and HTF recurring expense. Reported quarterly expense was expected to remain near Q2 levels for the rest of 2015.
- Management expected asset quality near current levels, with NCOs within or below its long-term normalized range of 35–55 basis points. The expected effective tax rate for the remainder of 2015 was 24%–27%.
- Management described the Midwest economy as supportive of growth, while noting low energy prices could weigh on parts of eastern Ohio, western Pennsylvania, and West Virginia. It cited competition and asset-yield pressure as factors affecting margin.
- Liquidity was described as sufficient for foreseeable needs. Core deposits funded 73% of total assets and 103% of loans. Huntington expected to meet the Modified Liquidity Coverage Ratio requirements during the regulatory transition beginning in 2016.
- Legal proceedings included an estimated $0–$105 million range of reasonably possible losses in excess of accrued amounts. The Teleservices bankruptcy trustee matter included a bankruptcy-court recommendation of approximately $71.8 million plus interest; the district court had not ruled. Other matters included mortgage-related class actions. The filing says the range cannot be estimated for certain representation-and-warranty exposures.
- Other watch items include the Volcker Rule compliance attestation due by March 31, 2016; Basel III transition; interest-rate, credit, liquidity, operational, compliance, and cyber risks; and uncertain fair values for selected Level 3 securities and servicing assets. Management reported no material cyber losses to date.
- The board’s capital plan included potential repurchases of up to $366 million through Q2 2016 and a planned common dividend increase to $0.07 per share beginning Q4 2015, subject to the stated plan. Q2 repurchases were 8.8 million shares at an average $11.20; about $267 million remained authorized at quarter-end.
Most important facts for investors to verify
- Whether revenue growth and positive operating leverage persist after separating HTF contributions, the auto securitization gain, and MSR hedge effects.
- Whether the rising C&I nonaccruals and troubled debt restructurings translate into higher provisions or charge-offs, and whether the allowance remains adequate.
- Whether net interest margin stabilizes as asset pricing, funding costs, deposit mix, and interest rates change.
- Whether HTF integration, returns, and acquired lease and debt performance meet management’s expectations.
- Capital and liquidity levels, including the impact of buybacks and dividends and progress toward Modified LCR compliance.
- Developments in the Cyberco/Teleservices litigation, other mortgage-related proceedings, and the valuation and adequacy of legal and representation-and-warranty reserves.